Corporate Profile

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Corporate Profile
Honda Motor Co., Ltd. Annual Report 2006
This annual report is printed on 100% recycled paper using soy ink with no volatile organic
content. Furthermore, a waterless printing process was used to prevent toxic emissions.
Printed in Japan
Annual Report 2006
Year Ended March 31, 2006
Honda Motor Co., Ltd.
Corporate Profile
Honda Motor Co., Ltd., operates under the basic principles of
“Respect for the Individual” and “The Three Joys”—commonly
expressed as The Joy of Buying, The Joy of Selling and The
Joy of Creating. Respect for the Individual” reflects our desire
to respect the unique character and ability of each individual
person, trusting each other as equal partners in order to do our
best in every situation. Based on this foundation of Respect for
the Individual, “The Three Joys” expresses our belief and desire
(Cover)
The eighth-generation four-door Civic has enjoyed
overwhelming support since going on sale in North
America in September 2005.
that each person working in, or coming into contact with our
company, directly or through our products, should share a
sense of joy through that experience.
In line with these basic principles, since its establishment in
1948, Honda Motor Co., Ltd., has remained on the leading
edge by creating new value by providing products of the
highest quality at a reasonable price, for worldwide customer
satisfaction. In addition, the Company has conducted its
activities with a commitment to protecting the environment and
enhancing safety in a mobile society.
The Company has grown to become the world’s largest
motorcycle manufacturer and one of the leading automakers.
With a global network of 454* subsidiaries and affiliates
accounted for under the equity method, Honda develops,
manufactures and markets a wide variety of products ranging
from small general-purpose engines and scooters to specialty
sports cars, to earn the Company an outstanding reputation
from customers worldwide.
*As of March 31, 2006
Contents
1
Financial Highlights
2
To Our Shareholders
9
Review of Operations
– Motorcycle Business
– Automobile Business
– Financial Services Business
– Power Product & Other Businesses
23
Honda’s Business in China
32
Environment and Safety
37
Preparing for the Future
38
Risk Factors
40
Corporate Governance
46
Board of Directors, Corporate Auditors
and Operating Officers
49
Financial Section
106
Corporate Information
108
Honda’s History
109
Investor Information
Caution with Respect to Forward-Looking Statements
This annual report 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.
Financial Highlights
Financial Data
Honda Motor Co., Ltd., and Subsidiaries
Years ended or at March 31
Net sales and other operating revenue
Operating income
Income before income taxes and equity in income of affiliates
Equity in income of affiliates
Net income
Per common share (Basic)
Per American depositary share
Cash dividends paid during the period
Per common share
Per American depositary share
Stockholders’ equity
Per common share
Per American depositary share
Total assets
Depreciation
Capital expenditures
Yen
U.S. dollars
(millions except
per share amounts)
(millions except
per share amounts)
2004
2005
2006
¥8,162,600
600,144
641,927
75,151
464,338
486.91
243.45
33,541
35
17.5
2,874,400
3,054.90
1,527.45
8,328,768
213,445
287,741
¥8,650,105
630,920
656,805
96,057
486,197
520.68
260.34
47,797
51
25.5
3,289,294
3,556.49
1,778.24
9,316,970
225,752
373,980
¥9,907,996
868,905
814,617
99,605
597,033
648.67
324.33
71,061
77
38.5
4,125,750
4,518.53
2,259.26
10,571,681
262,225
457,841
2006
$84,345
7,397
6,935
847
5,082
5.52
2.76
605
0.66
0.33
35,122
38.47
19.23
89,995
2,232
3,898
On April 26, 2006, the Board of Directors declared a two-for-one stock split of the Company’s common stock. All shareholders of record on June 30, 2006 will receive one
additional share of common stock for each share on July 1, 2006. Information pertaining to shares and earnings per share has not been restated in the accompanying
consolidated financial statements and notes to the consolidated financial statements to reflect this split. This information will be presented effective after the stock split is made.
Operating Data
Years ended March 31
Unit Sales Breakdown
Japan
North America
Europe
Asia
Other Regions
Total
Years ended March 31
Automobiles
(Thousands)
(Thousands)
2006
2004
2005
2006
2004
2005
2006
403
656
299
7,017
831
9,206
378
643
338
8,192
931
10,482
368
615
353
7,907
1,028
10,271
716
1,558
231
341
137
2,983
712
1,575
267
512
176
3,242
696
1,682
291
521
201
3,391
477
2,363
1,261
619
327
5,047
432
2,514
1,309
712
333
5,300
487
2,827
1,477
717
368
5,876
Automobile Business
Financial Services Business
Yen (millions)
Yen (millions)
2005
2004
2006
¥1,397,237 ¥1,463,531 ¥1,447,388
3,900,755 3,923,930 4,722,354
717,360
516,108
597,467
731,833
532,552
661,471
385,759
245,372
317,236
¥6,592,024 ¥6,963,635 ¥8,004,694
Years ended March 31
Net Income and
Return on Equity (ROE)
(%)
20
450
15
5,000
5.0
300
10
0
0
02
03
04
05
06
Net Sales and
Other Operating Revenue
Operating Margin
2005
2006
¥118,010 ¥118,252 ¥126,507
107,440 106,824 123,779
73,861
64,154
66,030
27,626
25,790
24,930
18,848
16,196
16,939
¥331,590 ¥332,975 ¥370,621
Years ended or at March 31
Yen (billions)
600
7.5
2.5
Yen (millions)
2004
2006
Total Assets, Stockholders’ Equity and
Stockholders’ Equity per Common Share
7,500
2,500
2005
Power Product & Other Businesses
¥ 20,043 ¥ 20,017 ¥ 21,140
212,522 222,494 267,485
10,108
7,448
8,827
1,966
899
1,441
6,170
1,784
2,962
¥242,696 ¥255,741 ¥306,869
Years ended or at March 31
(%)
10.0
Yen (billions)
10,000
(Thousands)
2005
2004
Net Sales and Other Operating Revenue
and Operating Margin
Power Products
2004
Motorcycle Business
Yen (millions)
Net Sales
2004
2005
Breakdown
2006
¥ 93,203 ¥ 97,405 ¥ 99,009
Japan
349,741
321,828
North America 322,213
208,092
182,400
198,471
Europe
324,026
242,370
289,169
Asia
244,944
190,881
Other Regions 156,104
¥996,290 ¥1,097,754 ¥1,225,812
Total
Motorcycles
150
Yen (billions)
12,500
(Yen)
5,000
10,000
4,000
7,500
3,000
5,000
2,000
2,500
1,000
5
0
0
02
03
04
Net Income
ROE
05
06
0
0
02
03
04
05
06
Total Assets
Stockholders’ Equity
Stockholders’ Equity per
Common Share
Throughout this annual report, the United States dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of
¥117.47=U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on March 31, 2006.
1
To Our Shareholders
Takeo Fukui
President and Chief Executive Officer
The Year in Review
Fiscal 2006, which ended March 31, 2006, was the first year of Honda’s new mid-term business
plan, launched in April 2005. During the year, we strengthened our position in each business and
region and enhanced local operations. Seeking to lead the world in “creating new value for the
customer,” we harnessed our resources in an effort to further pursue the creation of advanced
technologies and products that represent the uniqueness of Honda.
Environment
Honda’s operating environment in fiscal 2006 was characterized by growing concern about soaring crude oil prices in various world regions. The U.S. economy was strong, benefiting from rising
personal consumption and improved employment numbers, and the European economy posted a
moderate recovery. Economies in Asia continued to record strong growth, especially in China and
India. In Japan, the economy recovered modestly, supported by increasing personal consumption
and capital expenditures and a turnaround in exports.
In this operating environment, Honda strove to solidify its corporate foundation in order to meet
the needs of customers and society more swiftly and accurately. With respect to R&D, we actively
developed technologies aimed at enhancing safety and minimizing environmental impact, as well
as advanced technologies designed to boost the attractiveness of our products. On the production side, we strengthened our manufacturing foundation and expanded capacity at our Asian
production facilities and affiliates accounted for under the equity method. We also started construction of a new transmission plant in the United States and a production facility in Asia. Regarding sales, we aggressively launched products offering new levels of value and delivered offerings
with global appeal. Also, we worked to consolidate our automobile sales channels in Japan,
upgraded our product lineup and strengthened our sales system.
Motorcycle Business
In fiscal 2006, we continued supplying attractive products to the rapidly growing Asian motorcycle
market. This enabled us to expand sales, especially in India and Indonesia. To address rising
demand, we increased production capacity at our manufacturing subsidiaries and affiliates
accounted for under the equity method in those countries.
We also reported higher sales in Brazil, where the market continues to grow. Sales in other
regions were also favorable.
2
Amid ongoing expansion of our global operations, we sought to improve our production technologies and our ability to efficiently launch new models. At the same time, we advanced the skills
of our technicians and strengthened our domestic production systems, with a view toward
launching our advanced technologies globally.
We continued our aggressive pursuit of safety-enhancing and environmentally friendly
technologies with highlights of the period including the launch in Asia of a small-size motorcycle
equipped with Honda’s original programmed fuel injection (PGM-FI)*1 technology. We also
succeeded in developing the world’s first mass-produced motorcycle with an airbag protection
system. In these and other ways, we used multiple technologies, accumulated from our
experience in automobiles, to make better and safer motorcycles.
Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) in
fiscal 2006 amounted to 10,271,000 units*2, down 2.0% from the previous year.
In another highlight, cumulative motorcycle production reached 150 million units in fiscal 2006,
57 years since the launch of the Dream Type D*3 in 1949.
Automobile Business
In the automobile segment, we undertook a full model change of the Civic in various regions
around the world, launching models that meet specific local needs. These included dedicated
models for the North American and European markets. Increasingly concerned about rising
gasoline prices and environmental issues, more customers are demanding fuel-efficient products.
As a result, the new Civic received overwhelming support.
Fiscal 2006 saw healthy sales of the Civic and other passenger cars in North America. Sales of
light truck models in the region were also strong, mainly boosted by the launch of the Ridgeline in
March 2005.
In Asia, where the market continues to grow, sales in China, India and other major markets
increased, enabling us to broaden our business in the region. In response, we increased the
production capacity of manufacturing subsidiaries and affiliates accounted for under the equity
method.
In the domestic market, which remained challenging, we upgraded our product lineup and
deployed information technology to strengthen our sales and service systems. Seeking to maximize
customer satisfaction and enjoyment, in March 2006 we integrated our three sales channels—
Primo, Clio and Verno—into a single Honda channel, through which all Honda-brand automobiles
can now be purchased.
Unit sales of automobiles rose 4.6%, to 3,391,000 units,
Power Product Business
In the power product segment, we reported solid sales in North America of generators and engines
supplied on an OEM*4 basis for use in pressure washers. In Europe, sales of engines supplied on
an OEM basis for use in lawnmowers increased. Sales were also boosted by our supply to various
regions of highly cost-competitive products made in Asia.
During the year, Honda began sales of the iGX engine* 5, boasting world-class environmental
*1: Programmed fuel injection (PGM-FI)
This original Honda system is designed to enhance fuel efficiency and lower emissions. It employs various sensors to monitor engine operating status and a
computer to calculate the optimal amounts of fuel required. The system then delivers those amounts to the engine cylinders. Honda adapted its PGM-FI system,
originally developed for automobiles, to motorcycles by reducing the number of parts to make it more compact and less expensive.
*2: Of the unit sales of Honda-brand motorcycle products that are manufactured and sold by overseas affiliates accounted for under the equity method, those to
which parts for manufacturing were not supplied from Honda or its subsidiaries are not included in unit sales. If those products, which amounted to approximately 2.6 million units, had been added, total unit sales would have increased 12% from last fiscal year.
*3: Dream Type D: This was Honda’s first originally-developed motorcycle, marking a notable departure from previous models, which had been based on bicycle frames.
*4: OEM (Original equipment manufacturer)
OEM refers to a manufacturer of products and components supplied for sale under a third-party brand.
*5: iGX engine
The world’s first (i) engine to incorporate electronic engine speed control technology by using the STR GOVERNOR, an electronic governor(ii) that requires no battery.
(i) According to a Honda survey
(ii) STR GOVERNOR (electronic governor)
This system allows the electronic control unit (ECU) to constantly monitor throttle opening and engine speed, electronically regulating the throttle opening to
maintain a constant engine speed even under changing engine load conditions.
STR: Self-Tuning Regulator
GOVERNOR: A device that regulates engine speed, maintaining a constant engine speed, regardless of load fluctuations
3
To Our Shareholders
performance, in major global markets. We also strove to expand sales of our compact, home-use
cogeneration system.*6
As a result, unit sales of power products rose 10.9% compared with the preceding term, to
5,876,000 units.
Due to the factors described above, consolidated net sales in fiscal 2006 reached ¥9,907.9 billion,
up 14.5% from the previous year. Net income rose 22.8%, to ¥597.0 billion.*7
Future Initiatives
Fiscal 2007: Key Initiatives by Business Segment
Looking at the global economy, the U.S. and Asian economies are expected to grow steadily, and
Japan and Europe are also expected to maintain moderate economic recoveries.
However, due to a number of uncertainties including global political and economic factors,
rising prices for oil and raw materials, and currency fluctuations, we expect that the global
environment surrounding Honda will remain very challenging.
It is under these circumstances that Honda will strengthen its corporate structure quickly and
flexibly to meet the requirements of our customers and society, as well as changes in the business
environment. Also, in order to improve the competitiveness of its products, Honda will strive to
enhance its R&D structure and its production and sales abilities. Further, Honda will continue striving
to earn even more trust and understanding from society through its Companywide activities.
Motorcycle Business
Although it is likely that the motorcycle business will continue to be affected by high gasoline
prices, as well as interest rate hikes in some regions, we anticipate ongoing growth in regions
where motorcycles are an important part of people’s lives and an essential mode of transportation.
Through such moves as equipping scooters with AT*8, Honda is meeting increasingly diverse
customer needs with products that are competitively priced, with the goal of increasing sales.
From an environmental perspective, we are equipping more models with PGM-FI and other
features that provide superior environmental performance. To meet the expected increase in sales,
we are raising production capacity at our affiliates accounted for under the equity method in India
and China, as well as consolidated subsidiaries in the Philippines and Pakistan.
In other regions, against the backdrop of a robust economy, we expect the Brazilian market to
continue expanding, and are working to strengthen our model lineup as well as expand sales of
our mainstay models in this country. Besides Brazil, in mid-2006 we plan to begin production in
Argentina to meet demand in this expanding market.
In North America, in mid-2006 we will launch new ATV models that are tailored to customer
needs and introduce an entry-level motocross bike. Such efforts should enhance sales in this
region.
From the standpoint of safety, from mid-2006 we will offer the first motorcycles equipped
with airbags, and will remain aggressive in our efforts to develop other safety initiatives.
As a result of these activities, we plan to sell 10,840,000 units*9 in fiscal 2007, deepening
Honda’s involvement in the motorcycle business, where the Company got its start.
*6: Compact, home-use cogeneration system
Honda has combined its original electromagnetic inverter technologies with the world’s smallest(i) natural gas engine (GE160V) in an efficient layout to create
a small, lightweight generation unit. Due to its compactness, the unit can be installed in the home and boasts an overall energy efficiency of 85%. It also emits
approximately 30% less carbon dioxide than conventional natural gas-powered generators or hot-water heating units using natural gas.(ii)
i: A Honda development, the reciprocal gas engine
ii: Data from Honda test results. Data compares electric power from natural gas-powered generation with hot-water heating units that use natural gas.
*7: Net income was boosted by a ¥138.0 billion gain on the return of the substitutional portion of the Employees’ Pension Funds to the Japanese government,
which was accounted for at the operating income stage.
*8: AT is an acronym for “automatic transmission.”
*9: Of the unit sales forecasts for Honda-brand motorcycle products that are manufactured and sold by overseas affiliates accounted for under the equity method,
those to which parts for manufacturing were not supplied from Honda or its subsidiaries are not included in unit sales. If those products, which amounted to
approximately 3.36 million units, had been added, total unit sales of forecasts would have increased 10.3% from last fiscal year.
4
Automobile Business
Taking into consideration such factors as high gasoline prices and higher interest rates, in calendar
2006, we expect overall United States demand for automobiles to total approximately 16.5 million
units.
Honda will further enhance its model lineup that features superior environmental and safety
performance. In addition to launching a new entry-premium SUV (sport utility vehicle), the Acura
RDX, the Honda CR-V and the Acura MDX will undergo full model changes, and we will further
expand our lineup of light truck models, which offer superb fuel economy and driving performance.
In the passenger car segment, we will work to expand sales of the new Civic, which went on sale
in 2005, and the Fit, for which sales launched from Canada in March 2006. In May 2006, we
expanded local production by beginning operations at a new AT plant in the state of Georgia, in
the United States.
We expect the Asian markets to continue delivering high levels of growth. To meet this burgeoning demand and increase sales, we will expand our sales and service networks within each
country in this region. We will work to accelerate sales of the new Civic, which went on sale in
China in April 2006. In addition to boosting production capacity at an affiliate accounted for under
the equity method, we will also begin operations at a new powertrain plant in China in early 2007
as part of our efforts to increase local production. To meet as broad a range of market needs as
possible, in 2006 we will launch a progression of Acura-brand vehicles, such as the Acura RL and
the Acura TL. In addition to the Accord and the City, production of the Civic will begin in India, and
this model will go on sale there in July 2006. We have accelerated our initially planned expansion
to 100,000 units by three years, to 2007. In Vietnam, a new plant with an annual production
capacity of 10,000 units will begin manufacturing and selling the Civic in mid-2006.
In other regions, we anticipate sales to continue growing in South America as these economies
expand. To meet rising demand in Brazil, we will expand annual production capacity to 80,000
units in early 2007, rising to 100,000 units in 2008.
Despite an extremely competitive environment in Europe, the new Civic, five-door model
(for the European market) has fared well since its launch at the beginning of 2006. We will add
a three-door model within 2006, aiming to boost sales in this market as we augment our lineup.
In anticipation of rapid expansion in the Ukrainian market, we have established a new subsidiary to
strengthen our sales efforts there and round out our sales structure for the European region.
Japan remains an intensely difficult market, and in 2006 demand is expected to remain at the
previous year’s level. To better focus on enhancing the lifetime satisfaction of customers, we will
bring our core Honda brand to the forefront, strengthening our sales and service system and
making the Honda channel*10 easier for customers to access.
Through these activities, we are planning sales of 3,720,000 units in fiscal 2007. Our aim, while
continuing to develop our business globally, is to create new value for our customers.
Power Product Business
From the time we manufactured our first general-purpose engines in 1953, we have steadily
enhanced our product portfolio. As a result, in May 2006 our cumulative global output of power
products reached 70 million units. In fiscal 2007, we will focus on supplying cost-competitive
general-purpose engines from Asia to other regions as we work to expand sales of generators and
general-purpose engines in North America and Asia.
Taking into account growing worldwide awareness of environmental and energy-related issues,
in the second half of 2006 we plan to extend sales of our compact, home-use cogeneration
system from Japan to include the United States.
Through these efforts, we plan to sell 5,880,000 units in fiscal 2007. We will meet increasingly
diverse customer needs by offering products with superior environmental and safety performance,
which will also accelerate the expansion of Honda’s power product business.
*10: Honda channel
In line with the integration of the Honda channel, the current Primo, Clio and Verno channel dealers will all be renamed “Honda Cars.”
5
To Our Shareholders
Preparing for the Next Leap Forward
Honda believes that an even stronger spirit of
innovation and creativity is essential to its goal of
stepping up the pace of its effort to become
number one in “creating new value” for
customers throughout the world. Although the
environment in which Honda operates is likely to
grow increasingly challenging, to take our next
leap forward Honda will accelerate its efforts to
bolster “at the spot” activity, strengthening the
core characteristics that make Honda unique
and achieve further growth.
More specifically, I will discuss Honda’s
medium- to long-term vision, which identifies
three themes—“Establishing advanced manufacturing systems and capabilities,” “Strengthening the foundation for overseas growth” and
“Strengthening our commitment to reduce Honda’s environmental footprint”.
Establishing advanced manufacturing systems and capabilities
We will strengthen our production and R&D systems in Japan to support the development of our
overseas business, and build innovative manufacturing systems that help create new value.
Addressing production in Japan, we are building a leading-edge automobile plant that will allow
integrated production of everything from engines to entire automobiles. Our new plant in Japan will
employ a high-quality and highly efficient production system featuring the most advanced technology, and strengthen our global production network by taking on the leader function for Honda
facilities throughout the world.
So that each of our engineers will set their sights as high as possible, in April 2006 we
reorganized our R&D operations in Japan. We are also building a new R&D center to enhance the
development of next-generation vehicles and to upgrade our R&D structure, which serves as the
starting point of manufacturing.
By improving our production and R&D systems in these ways, we will continue to provide
products that exceed our customers’ expectations. As a result, we will hone further our ability to
“create new value.”
Strengthening the foundation for overseas growth
We are constructing a new automobile plant in the United States and
an automobile engine plant in Canada to strengthen our business in
North America. We are also setting our sights on Asia and South
America, which in recent years have experienced remarkable growth.
To benefit from this growth, we are expanding our local production
capacity in these regions.
These measures are designed to take Honda’s worldwide
sales to more than 18 million motorcycles, more than 4.5 million
automobiles and more than 7 million power products by 2010.
Strengthening our commitment to reduce Honda’s
environmental footprint
A Company that
Society Wants to Exist
Value Creation
Creating new
value for
our customers
Glocalization
Honda regards environmental issues as one of the most important
management issues, based on the direction of our “Commitment
for the future”. To demonstrate this awareness, we are working
6
Expanding
local operations
Commitment
for the Future
Developing
safety and
environmental
solutions
aggressively on reducing the burden that we place on the environment. Global warming is an
environmental issue that we are addressing through concerted efforts at our facilities throughout
the entire world, and we consider it important to accelerate these initiatives even further.
Based on this belief, we are working to develop manufacturing plants that generate as little
CO2 as possible and to become a manufacturer of products that emit minimal levels of CO2. To
these ends, we have set voluntary CO2 reduction goals. To achieve these goals from a product
standpoint, we are aggressively pursuing a host of advanced environmental technologies,
including a new dedicated hybrid vehicle, a new clean diesel engine with emissions as low as
those of gasoline engines and a new fuel cell vehicle. From a manufacturing standpoint, we are
Preparing for Honda’s Next Leap Forward
Establishing Advanced Manufacturing Systems
and Capabilities
By strengthening the areas of production and R&D in
Japan that support the future growth of overseas operations, Honda will establish advanced manufacturing
systems and capabilities to create new value.
Strengthening our Commitment to
Reduce Environmental Footprint
Strengthening the Foundation for
Overseas Growth
Focusing on strengthening its business foundation in North
America and on business expansion in such growth areas
as Asia and South America
Continue pursuing more proactive efforts to reduce its
environmental load with the main focus on CO2 reduction
Reduction of CO2 Emissions—Setting Voluntary
Goals (Compared to the level of 2000)
Strengthening North American Operations
Strengthening Japan Production
■ Building a new automobile plant
● New automobile plant to be built in Yorii, Saitama
· Production capacity: approximately 200,000 units/year
(Production capacity in Japan once operational:
approximately 1.5 million units/year)
· Scheduled start of operations: 2010
· Related investment: approximately ¥70 billion
· Work force: approximately 2,200 associates
● Renovation of Sayama plant as a leading-edge
manufacturing facility
(After new plant begins operations)
■ Strengthening AT production
● Strengthen AT manufacturing system at
Hamamatsu Plant
Strengthening R&D Capabilities
■ Establishing new R&D center
● New R&D center to be built in Sakura, Tochigi
· Scheduled start of operations: 2009
· Related investment: approximately ¥17 billion
■ Building a new automobile plant in the U.S.*11
● Construction planned near Greensburg, Indiana
· Production capacity: approximately 200,000 units/year
(Production capacity in North America once
operational: approximately 1.6 million units/year)
· Scheduled start of operations: 2008
· Related investment: approximately US$550 million
· New employment: approximately 2,000 associates
(once operating at full scale)
■ Building a new automobile engine plant in Canada
● Construction planned adjoining existing auto plant
· Production capacity: approximately 200,000 units/year
· Scheduled start of operations: 2008
· Related investment: approximately US$140 million
· New employment: approximately 340 associates
■ Reduce worldwide CO2 levels by 2010
● Emission volume (per unit) when using products* 12
· Motorcycles: 10% reduction
· Automobiles: 10% reduction
· Power products: 10% reduction
● Emission volume (per unit) when manufacturing
products* 13
· Motorcycles: 20% reduction
· Automobiles: 10% reduction
· Power products: 20% reduction
Product Strategy
■ New dedicated hybrid vehicle
· Additional improvements to fuel-efficient technologies and expected 2009 launch of vehicles with
price significantly lower than the current Civic
Hybrid
· Anticipated annual worldwide sales of 200,000
units/year (100,000 designated for North America)
■ New clean diesel engines
· Within three years, introduce new four-cylinder
clean diesel engines that meets Tier2 BIN5*14 U.S.
exhaust emission standard
· Also start developing a clean V6 diesel engine
■ Motorcycles
· By the end of 2010, install the majority of motorcycle models for sale worldwide with PGM-FI
· Introduce new engine technologies, such as
super-low friction engines and VCM system for
motorcycles
■ New fuel cell vehicle
· Develop working prototype vehicle based on the
FCX concept model in the second half of 2006,
and launch within the next three years
■ Solar cell
· Begin sales in Japan of solar cell panels in the
second half of 2006
· Establish a production line at Kumamoto plant
capable of 27.5 megawatts/year and begin mass
production in 2007
Expanding Business in Growing Markets
■ Motorcycle business in Asia
· India: Increase production capacity
to 5.2 million units/year in 2007
· Also planning to raise production capacity in the
Philippines and Pakistan
· Raise production capacity in Asia (excluding China)
to 14 million units/year in 2007 (addition of 6 million
units/year over three-year period)
■ Automobile business in Asia
· India: Production capacity of 100,000 units/year
by the end of 2007
■ Automobile business in China
● Second plant at Guangzhou Honda to begin
operations in second half of 2006
· Production capacity: approximately 120,000 units/year
(Production capacity in China once operational:
approximately 530,000 units/year)
■ Automobile business in South America
· Brazil: Production capacity of 100,000 units/year
by 2008
▼
Honda’s Expected Global Sales in 2010
Motorcycles: more than 18 million
Automobiles: more than 4.5 million
Power products: more than 7 million
*11: Reflects information distributed in the United States in a press release dated June 28, 2006
*12: For motorcycles and automobiles, units are g/km; for power products, kg/hour
*13: For motorcycles, automobiles and power products, units are kg/unit
*14: Tier2 BIN5
This standard for exhaust emissions was established in the United States by the Environmental Protection Agency based on the U.S. Clean Air Act and went
into effect in 2004. Regulation value of NOx for emission category BIN5: 0.07g/mile
7
To Our Shareholders
installing cogeneration systems and accelerating efforts to reduce environmental load from each
of our plants.
As a leading company that creates mobility products, reducing CO2 emissions is a top concern
for Honda. Accordingly, we are prioritizing our global environmental initiatives. By strengthening the
foundation for overseas growth and creating the innovative manufacturing systems as I described
earlier, we expect to succeed in our goal of providing products that exceed customers’ expectations.
Dividends per Share
Returning Profits to Shareholders
Years ended March 31
(Yen)
(%)
(plan)
Honda strives to carry out its operations from a global perspective and to
120
2.0
increase its corporate value. With respect to the redistribution of profits to
100
*
our shareholders, which we consider to be one of the most important
management issues, Honda’s basic policy for dividends is to make
80
distributions after taking into account our long-term consolidated earnings
performance. Honda will also acquire its own shares at the optimal timing
60
1.0
with the goal of improving efficiency of the Company’s capital structure.
40
The present goal is to maintain a shareholder return ratio (i.e. the ratio of the
total of the dividend payment and the repurchase of Company shares to
20
consolidated net income) of approximately 30%. Retained earnings will be
allocated toward financing R&D activities that are essential for the future
0
0
02 03 04 05 06
07
growth of Honda and capital expenditures and investment programs that will
expand operations for the purpose of improving business results and
Dividends per share (before stock split)
strengthening Honda’s financial condition.
Dividend yield
*Calculation based on share price on March 31, 2006
The recent enactment of the new Company Law in Japan lifts restrictions
on the number of dividend payments a company can make each year. With
this in mind, Honda is considering a flexible shareholder return policy, such as quarterly dividend
payments. We will continue striving to meet the expectations of all shareholders.
Based on these policies, Honda decided on a fiscal 2006 year-end cash dividend of ¥60 per
share, bringing total cash dividends for the year to ¥100, when adding the ¥40 interim dividend.
In fiscal 2007, we plan to pay interim and year-end dividends of ¥30 each, for total cash dividends for
the year of ¥60 per share. To make Honda shares more accessible to investors, we will implement a
two-for-one stock split on July 1, 2006. Had the stock split not been carried out, dividends would
have been equal to ¥60 per share for both interim and year-end dividends, which would have been
an increase of ¥20 per share for the interim dividend and, as a result, an increase of ¥20 per share
for the year, to ¥120.
In Closing
Honda’s overriding quest is to become a company that society wants to exist around the world. To
this end, we will further hone our ability to create advanced technologies and products to lead the
global industry in terms of providing people with enjoyment and inspiration. We look forward to the
continued understanding and support of shareholders and other investors as we embrace the
challenges of the future.
June 23, 2006
Takeo Fukui
President and Chief Executive Officer
8
Review of Operations
MOTORCYCLE BUSINESS
AUTOMOBILE BUSINESS
FINANCIAL SERVICES BUSINESS
POWER PRODUCT & OTHER BUSINESSES
9
Forza
This 250cc scooter is equipped with the Honda S-Matic
(electronically controlled belt converter)* 1, an automatic
transmission that provides the same level of driving
performance and operability as a manual transmission.
*1: Honda S-Matic (electronically controlled belt converter) Transmission
Basing gear selection on travel conditions, the transmission has two
automatic modes—D Mode which is intended for use in urban areas
and S Mode which is designed for suburban riding—as well as a
seven speed manual mode and an auto-shift mode
MOTORCYCLE BUSINESS
Fiscal 2006 Results
Unit Sales
Years ended March 31
Thousands
Japan
North America
Europe
Asia
Other Regions
Total
% change
2006
368
615
353
7,907
1,028
10,271
2005
378
643
338
8,192
931
10,482
Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and
personal watercraft (PWC) in fiscal 2006 amounted to 10,271,000
units, down 2.0% from the previous fiscal year. The decline stemmed
mainly from a decrease in sales of motorcycle parts for local production
at Asian affiliates accounted for under the equity method. These figures
do not include sales of Honda-brand motorcycle products that are
manufactured and sold by affiliates accounted for under the equity
method in India and China, those with respect to which parts for
manufacturing were not supplied from Honda or such subsidiaries,
which increased dramatically, to approximately 2.6 million units.
Despite the decline in unit sales, net sales of motorcycles climbed
11.7%, to ¥1,225.8 billion, benefiting from the appreciation of the U.S.
dollar and other major currencies against the yen and a change in our
mix of models. Operating income jumped 64.4%, to ¥113.9 billion
(including a ¥15.3 billion gain on the return of the substitutional portion
of the Employees’ Pension Funds to the Japanese government). The
operating margin was 9.3%. The operating income figure does not
include earnings from affiliates accounted for under the equity method
in Indonesia, India and China. However, their earnings are included in
Honda’s consolidated net income results.
(2.6)%
(4.4)
4.4
(3.5)
10.4
(2.0)%
Net Sales
Years ended March 31
Yen (millions)
2005
¥ 97,405
321,828
198,471
289,169
190,881
¥1,097,754
Japan
North America
Europe
Asia
Other Regions
Total
% change
2006
¥ 99,009
349,741
208,092
324,026
244,944
¥1,225,812
1.6%
8.7
4.8
12.1
28.3
11.7%
Unit Sales
Net Sales
Years ended March 31
(Thousands)
Years ended March 31
Yen (billions)
12,500
1,225
1,250
1,097
10,482 10,271
10,000
1,000
9,206
947
978
996
02
03
04
Super Cub 50 (street version),
the 50 millionth Super Cub
(for the Japanese market)
Built for getting around town, the
street version is slightly different
from the commercial-use Cub
8,080
7,500
750
6,095
5,000
500
2,500
250
0
0
02
03
04
Japan
North America
Europe
05
06
Asia
Other Regions
Japan
North America
Europe
05
06
Asia
Other Regions
10
FourTrax Rincon
The first Honda ATV with Programmed Fuel Injection (PGM-FI)*2,
the FourTrax Rincon offers improved fuel efficiency.
*2: Programmed Fuel Injection (PGM-FI)
This original Honda system is designed to enhance fuel efficiency and lower
emissions. It employs various sensors to monitor engine operating status and
a computer to calculate the optimal amounts of fuel required. The system
then delivers the appropriate amount of fuel to the engine cylinders.
mini-size motorcycles, we enjoyed firm sales of the Forza series due
to strong demand centered on customers in their 30s. The first-class
and second-class motor-driven cycle categories faced declines in
sales of the Today and the Crea Scoopy models, although sales of
the Zoomer scooter was favorable.
At the end of December 2005, cumulative production of the
Super Cub series reached 50 million units. Launched in 1958, Super
Cub motorcycles are now produced in 13 countries and sold in more
than 160 countries around the world.
Japan
North America
In Japan, unit sales declined 2.6%, to 368,000 units. Sales of smallsize two-wheeled motor vehicles (over 251cc) increased, supported
by strong demand for sport bikes, as did sales of mini-size twowheeled motor vehicles (126cc–250cc), which benefited from healthy
sales of scooters. However, sales of first-class motor-driven cycles
(up to 50cc) and second-class motor-driven cycles (51cc–125cc) fell,
due to a dip in market demand, and affected overall unit sales.
In the small-size motorcycle category, the CB1300 Super Bol d’Or
and the CB400 Super Bol d’Or—featuring a newly designed half-cowl
for improved riding stability—generated strong sales. With respect to
In North America, unit sales declined 4.4%, to 615,000 units.
We recorded healthy sales of the VTX1300 series of cruisers
and two models unveiled at the end of the previous fiscal year: the
CRF450X off-road model and the CBR600RR sport model. Overall
sales of off-road vehicles were down, however, due to soaring fuel
prices. As a result, unit sales of motorcycles fell 4.0%, to 332,000
units.
The ATV category benefited from firm sales of the FourTrax Rincon,
which underwent a full model change in October 2005, and the
TRX90, which is now equipped with a convenient electric starter for
ease of starting. However, as was the case for motorcycles, high
gasoline prices affected sales of small and medium-size utility ATV
sales, leading to a 4.7% overall decline in combined ATV and PWC
sales in North America, to 283,000 units.
VTX1300R
This retro-style cruiser is fitted with
a liquid-cooled, V-twin engine.
Zoomer
The Zoomer is a naked 50cc scooter
designed for fun-loving riders.
11
CBF1000
This easy-to-handle touring sport bike uses the engine
derived from the phenomenal CBR1000RR, which provides
comfortable operating performance at both low and high
rpms, and is fitted with an adjustable seat and windshield for
riding comfort.
MOTORCYCLE BUSINESS
Europe
Asia
In Europe, unit sales rose 4.4%, to 353,000 units.
We enjoyed strong sales of the SH125i and the SH150i scooters
and the CB600F Hornet, a naked sport bike that underwent a minor
model change. Also popular was the Deauville touring bike, which
underwent a full model change in February 2006. We released the
Forza series of large scooters in April 2005, which have been well
received in Japan, and in February 2006 we unveiled the CBF1000
touring sport bike, equipped with an engine based on the one
powering the CBR1000RR. Both models have proven popular among
European customers. In these ways, we delivered products that met
the needs of customers in the intensely competitive market for
commuter vehicles and in the growing niche for large scooters.
In Asia, demand for motorcycles as an essential mode of transportation
has continued to grow. Total of unit sales of completed products of
Honda and its consolidated subsidiaries, and unit sales of parts for
local production at Honda’s affiliates accounted for under the equity
method, declined 3.5%, to 7,907,000 units.
Honda is working hard to expand local businesses in the region
through its active promotion of local procurement of parts used in
overseas production. This strategy has resulted in a sharp increase in
Honda-brand motorcycle products that are manufactured and sold by
affiliates accounted for under the equity method in India and China,
those with respect to which parts for manufacturing were not supplied
from Honda or such subsidiaries, which increased dramatically to
approximately 2.6 million units.
In India, we enjoyed healthy sales of core models made by our
affiliate, Hero Honda Motors Limited (HHML). These included two
models—the Super Splendor, which went on sale at the end of the
previous fiscal year, and the Glamour, which was launched in June
2005—as well as the CD Deluxe. In
January 2006, HHML launched its
first scooter, the Pleasure. Honda
Motorcycle and Scooter India Private
Limited (HMSI), a consolidated
subsidiary, recorded strong sales of
the Unicorn, its first motorcycle, and
the Activa scooter. Unit sales of
completed products of Honda and its
consolidated subsidiaries, and unit
sales of parts for local production at
Honda’s affiliates accounted for under
the equity method in India, totaled
1,934,000 units, down 865,000 from
the previous fiscal year. However, these
figures exclude sales of Honda-brand
motorcycle products that are
SH150i
This stylish 150cc scooter features
fuel efficiency and excellent
environmental characteristics.
Pleasure
This fashionable 100cc
scooter was designed for
the female market
(made by HHML).
12
Supra X 125
A newly designed 125cc Cub
model
(made by AHJ)
Storm
A 125cc motorcycle at an
affordable price
(made by Sundiro Honda)
CG125 FAN
An affordably priced
motorcycle, launched in
March 2005.
Click
Honda’s first scooter for the Asian
market fitted with a Hydraulic
Combined Braking System.
(made in Thailand)
However, this figure does not include sales of Honda-brand motorcycle
products that are manufactured and sold by affiliates accounted for
under the equity method in China, those with respect to which parts for
manufacturing were not supplied from Honda or such subsidiaries,
which rose more than 200,000 units from the preceding fiscal year, to
around 970,000.
manufactured and sold by affiliates accounted for under the equity
method in India, those with respect to which parts for manufacturing
were not supplied from Honda or such subsidiaries, which increased
by more than 1,200,000 units, to approximately 1,630,000.
In Indonesia, P.T. Astra Honda Motors (AHJ), an affiliate accounted
for under the equity method, posted healthy sales of its Supra series,
keyed to the Supra X 125, which went on sale in June 2005, and the
Supra Fit, which underwent a full model change in August 2005. Also
popular was the Supra X 125 PGM-FI, which was added to the lineup in
December 2005 and features PGM-FI for superior fuel economy and
drivability. In September 2005, production began at a third new plant,
boosting our annual capacity by 1 million units, to 3 million. In Indonesia,
unit sales of completed products of Honda and its consolidated subsidiaries, and unit sales of parts for local production at Honda’s affiliates
accounted for under the equity method, grew 18.0%, to 2,672,000 units.
In Thailand, we enjoyed robust sales of the Wave 125, which
underwent a minor model change, and the Wave 100, following a full
model change in April 2005. In February 2006, we launched the Click
scooter with the first automatic transmission developed for the Asian
market. In Thailand, unit sales of completed products of Honda and its
consolidated subsidiaries grew 1.7%, to 1,514,000 units.
In China, Sundiro Honda, an affiliate accounted for under the equity
method, posted solid sales of the Storm, released in April 2005, and the
Wiz, unveiled in June 2005. Another affiliate accounted for under the
equity method, Wuyang-Honda, recorded strong sales of the SCR100,
the GL125 and other core scooter models. Due to market confusion
stemming from the adoption of Euro2*3 emission standards, as well as
suppression of purchases following the announcement of an upcoming
reduction in consumption tax, unit sales of completed products of
Honda and its consolidated subsidiaries, and unit sales of parts for local
production at Honda’s affiliates accounted for under the equity method
in China fell 97,000 units from the previous fiscal year, to 336,000 units.
Other Regions
In other regions—covering Latin America, the Middle & Near East and
Africa and Oceania—unit sales grew 10.4%, to 1,028,000 units.
In Brazil, where economic performance was stable, Honda
posted solid sales of core models, including the CG150 TITAN and the
CG125 FAN. Following a full model, change in September 2005, the
Biz 125, created for young people and women, also enjoyed popularity.
In the Middle & Near East and Africa, we enjoyed robust sales of
the Chinese-made CGL125 and the Japanese-made XL125.
Outlook for Fiscal 2007
In the fiscal year ending March 2007, we project that unit sales of
motorcycles, ATVs and PWC will rise 5.5%, to 10,840,000 units.
We also forecast a significant increase in the number of Honda-brand
motorcycle products that are manufactured and sold by affiliates
accounted for under the equity method in India and China, those with
respect to which parts for manufacturing are not supplied from Honda
or such subsidiaries. Based on local sales projections, we estimate that
sales of such motorcycles will surge to approximately 3,360,000 units.
In Japan, we estimate that unit sales in fiscal 2007 will reach 370,000
units. We look forward to strong sales of the Chinese-made Today
scooter, as well as the CB series, including the CBR400 Super Four,
now featuring improved handling in low-revolution mode. We also
anticipate higher sales of the CBR1000RR, after the overall weight for
this model was reduced from the previous generation to achieve quicker
acceleration and nimbler handling.
In North America, we have succeeded in developing the world’s
first production motorcycle airbag system. The new system is being
*3: Euro2 (motorcycles)
Stringent exhaust emission regulations for motorcycles implemented in Europe from 2003.
China began implementing Euro2 regulations for all models from 2005, and Indonesia and
Brazil are also implementing these regulations. (Even more stringent Euro3 emission
regulations are being implemented in Europe in 2006.)
13
Shine
The Shine is fitted with 125cc engine.
(made by HMSI)
CBF150
Fitted with a newly developed 150cc
engine, this motorcycle achieves superior
fuel economy and excellent power
efficiency.
(made by Sundiro Honda)
FourTrax Rancher
An all-around ATV with an air-cooled,
vertically mounted engine
PS125i
Featuring a refined, casual design and
two-tone color, this 125cc scooter
offers advanced environmental
performance and fuel economy.
MOTORCYCLE BUSINESS
introduced on the new GoldWing scheduled for release in mid-2006.
We will strive to boost sales of ATVs in the region. In addition to the
FourTrax Rancher, we will introduce new models to meet the needs of
all customers, from beginners to experienced riders. For fiscal 2007, we
are targeting regional sales of 650,000 units for motorcycles, ATVs and
PWC, up 5.7%.
In Europe, we will continue providing vehicles that satisfy the needs
of customers. These include the PS125i and the PS150i, launched at
the end of the previous fiscal year, and the CBF1000 naked sport bike.
For fiscal 2007, we are targeting European sales of 340,000 units.
In Asia, we project overall unit sales to grow 5.0%, to 8,300,000
units. Sales of Honda-brand motorcycle products that are manufactured
and sold by affiliates accounted for under the equity method in India
and China, those with respect to which parts for manufacturing are not
supplied from Honda or such subsidiaries, are forecast to increase
substantially, to approximately 3,360,000 units.
In India, we will target increased sales of models made by our
affiliate, HHML—notably the Glamour, the first model in India with PGM-Fl
to be added to Honda’s lineup, and the core CD Deluxe. We will also
work to boost sales of models made by our subsidiary, HMSI. These
include the Shine motorcycle, which was launched in April 2006, and
offers an ideal balance between fuel efficiency, performance, design and
price. To meet projected sales growth, HHML will increase its production
capacity by expanding existing facilities. By the end of calendar 2006, we
expect our annual production capacity in India to reach 3,900,000 units.
In Indonesia, where motorcycles are an essential mode of
transportation, we expect the financial environment to remain difficult
for some time. AHJ, our affiliate, will continue offering models that meet
customer needs and will focus on boosting sales, especially of the
Supra X 125, the Supra Fit and other models in the Supra series.
In Thailand, we will seek to expand sales of the Click scooter, which
was launched at the end of the previous fiscal year to respond to demand
from young people for automatic transmission models. In June 2006,
we will unveil the Air Blade, an innovatively designed scooter with an
automatic transmission. In these ways, we will work to deliver attractive
products that swiftly address the diversifying needs of customers.
In China, Sundiro Honda, one of our affiliates, will unveil the CBF150
in July 2006, an advanced motorcycle with excellent operating performance aimed at affluent younger riders. Another affiliate, Wuyang-Honda,
plans to introduce a new model with PGM-FI that is very friendly to the
environment. On the production side, Wuyang-Honda completed its
relocation to a new production facility in February 2006. The new facility
has been fully revamped as an environmentally friendly Green Factory,
with annual production capacity increasing from 600,000 to 1,000,000
units. The facility also features improved production efficiency and has
the flexibility for further expansion in the future.
Unit sales in other regions are expected to rise 14.8%, to 1,180,000
units. In Brazil, where the market continues to expand, we will target
further increases in sales of core models, such as the CG150 TITAN,
the CG125 FAN and the Biz 125. For the growing Argentinean market,
in mid-2006, we plan to begin manufacturing the C105 Biz locally, based
on Honda’s commitment to “build products close to the customer.” We
will also unveil new models to satisfy the diversifying needs of customers.
In the Middle & Near East and Africa, we plan to boost sales of core
models, centering on the Chinese-made CGL125.
GoldWing
New GoldWing model with airbag deployed
14
Step Wagon
This new model features a low-floor and lower-center-ofgravity platform, achieving a user-friendly body size with
ample interior space and riding comfort. In addition, it is
equipped with top-level safety and environmental features.
AUTOMOBILE BUSINESS
Fiscal Year 2006 Results
Unit Sales
Years ended March 31
Thousands
Japan
North America
Europe
Asia
Other Regions
Total
% change
2006
696
1,682
291
521
201
3,391
2005
712
1,575
267
512
176
3,242
In fiscal year 2006, unit sales of automobiles rose 4.6%, to 3,391,000
units, mainly due to strong sales of completed vehicles in North
America. Net sales in the automobile segment increased 14.9%, to
¥8,004.6 billion, due to favorable exchange rates and higher unit
sales mainly in North America and Europe.
Operating income jumped 38.9%, to ¥628.3 billion (including a
¥115.9 billion gain on the return of the substitutional portion of the
Employees’ Pension Funds to the Japanese government), and the
operating margin was 7.9%. It should be noted that this figure for
operating income does not include income from affiliates in China
and other countries. However, such income of these companies is
reflected in the Company’s net income.
(2.2)%
6.8
9.0
1.8
14.2
4.6 %
Net Sales
Years ended March 31
Yen (millions)
2005
¥1,463,531
3,923,930
597,467
661,471
317,236
¥6,963,635
Japan
North America
Europe
Asia
Other Regions
Total
% change
2006
¥1,447,388
4,722,354
717,360
731,833
385,759
¥
¥8,004,694
(1.1)%
20.3
20.1
10.6
21.6
14.9 %
Unit Sales
Net Sales
Years ended March 31
(Thousands)
Years ended March 31
Yen (billions)
4,000
Japan
Total automobile demand in Japan in calendar year 2005 remained
largely unchanged, at around 5,860,000 units. For Honda, unit sales
in fiscal year 2006 edged down 2.2%, to 696,000 units, due to lower
sales of Fit, Elysion and Odyssey models. This was despite the
10,000
3,242
3,391
2,888 2,983
3,000
8,004
7,500
2,666
5,929
2,000
5,000
1,000
2,500
0
6,440 6,592
6,963
0
02
03
04
Japan
North America
Europe
05
06
Asia
Other Regions
02
03
04
Japan
North America
Europe
05
06
Zest
The combination of roomy cabin space, a low floor, luggage space with a wide
door and strong driving performance make this new minicar a comfortable
vehicle for families with active daily lives. (for the Japanese market)
Asia
Other Regions
15
Civic
Achieving both driving performance and fuel
economy with a newly developed 1.8-litter i-VTEC
engine, this model receives high acclaim for its
advanced safety features and advanced styling,
which are standard equipment. (for the North
American market)
AUTOMOBILE BUSINESS
launch of the all-new Airwave station wagon and the Zest, as well
as higher sales of the Step Wagon, which underwent a full model
change.
In April 2005, we introduced the all new Airwave station wagon,
featuring high utility in a compact body. In May, we released the new
Step Wagon, after lowering the vehicle’s floor level and center-ofgravity and providing a more user-friendly body size, more internal
space and sedan-like driving performance and comfort. In
September 2005, we launched the new Civic, featuring an innovative,
monoform design and more ample interior space. In March 2006, we
began sales of the new Zest minicar, incorporating low-floor design
technology for greater cabin room, occupant access and storage
space.
In addition to these and other products with new levels of value,
we enhanced marketing efficiency by deploying advanced information
technologies while strengthening our sales and service capabilities. In
these ways, Honda strove to maximize the lifetime satisfaction of its
existing customers in Japan, now totaling around 9.0 million.
North America
In calendar year 2005, automobile demand in the United States
remained high, at around 16.99 million units.
In the passenger car segment, we reported an increase in unit
sales of the new Civic model, which offers excellent safety features
and superb fuel economy. Sales of the Acura TSX, a sport sedan,
were also strong. In the light truck segment, the all-new Ridgeline, a
next-generation truck launched in March 2005, experienced strong
demand, as did the Pilot, a mid-size SUV, and the Odyssey mini-van.
As a result, overall sales in North America grew 6.8%, to 1,682,000
units.
In October, we launched a new Brazilian-made Fit model in
Mexico. Further north, we unveiled the Acura CSX, an Acura-brand
entry model designed specifically for the Canadian market.
Odyssey
Equipped with a new engine to provide
improved performance and superior fuel
efficiency, as well as advanced safety features,
the new Odyssey sets a new benchmark for
minivans. (for the North American market)
Ridgeline
The Ridgeline employs a monocoque body for
superior driving performance and riding comfort,
and innovative Honda technologies and
equipment add value to this next-generation
truck. (for the North American market)
16
Five-Door Civic
Offering sporty and sophisticated styling and
fun-to-drive maneuverability, the five-door
Civic provides a more spacious cabin and
variety of seating arrangements (for the
European market)
In January 2006, we received “North American Car of the Year”
and “North American Truck of the Year” awards for the Civic and the
Ridgeline, marking the first time in history that the same manufacturer
has won both categories in the same year. In addition, Honda
vehicles were selected as Top Picks in five of the 10 automobile
categories rated by U.S. Consumer Reports magazine for 2006
models. These rankings reflect excellent feedback on our introduction
of models in the passenger car and light truck categories that offer
excellent fuel performance and safety features.
well-received sporty and sophisticated design, and the FR-V series,
which benefited from the addition in August 2005 of a version with
the Honda-developed i-CTDi*1 diesel engine, and continued robust
sales of the Jazz. To meet growing demand for diesel-powered
vehicles in the region and to strengthen our manufacturing system,
Honda of the U.K. Manufacturing Limited began assembly of diesel
engines. We included a diesel model in the new five-door Civic line,
and the Accord, CR-V and FR-V are also available with Hondadeveloped diesel engines. In these ways, we enhanced our
competitiveness in the extremely challenging European market.
Europe
*1: i-CTDi
This is a proprietary diesel engine developed by Honda that optimizes combustion through
the adoption of a high-pressure fuel injection system, combined with a newly developed
emission treatment system. The i-CTDi is also compliant with Euro 4 emission standards for
2005.
In Europe, overall automobile demand remained almost unchanged
in calendar year 2005, at around 17.66 million units. Nevertheless,
Honda’s unit sales in fiscal 2006 climbed 9.0%, to 291,000 units.
This was due mainly to increased sales of the five-door Civic,
released in January 2006, after a full model change that resulted in a
FR-V (diesel)
This minivan has an easy-to-handle compact body and six independent seats in two rows
of three to enhance in-vehicle communication. (for the European market)
Jazz
This model creates new value through the combination of spacious cabin, a host of
seating arrangements and innovative and unique styling, as well as world-leading fuel
economy and brisk driving performance. (for the European market)
17
(Page 18)
Upper left: Odyssey
This multi-utility vehicle seats many passengers
comfortably with the drivability and comfort of
a passenger car meeting the needs of various
customers. (for the Chinese market)
Lower left: Fit
Developed with a global small platform as
its base, this compact model provides fuel
economy at the top of its class, and has a
roomy interior and good safety features.
(for the Central and South American
markets)
Below: City ZX
The City ZX combines advanced safety
characteristics, a comfortable interior and
a sporty design in a leading-edge sedan.
(for the Asian market)
(Page 19)
Upper left: Acura RDX
The combination of a turbo engine and Super-Handling All
Wheel Drive (SH-AWD) makes the Acura RDX a model with
good fuel economy in an entry-premium SUV. (for the North
American market)
Lower left: Civic Type R concept
This three-door model features a high-performance engine
and bold and emotional styling. (for the European market)
Upper right: Fit
This model is popular because of its good utility and an
engine that achieves good drivability as well as fuel
economy. (for the North American market)
Lower right: Civic
Strong marks for good driving performance, economy,
environmental performance and interior comfort give the
Civic an appealingly high level of quality. (for the Chinese
market)
AUTOMOBILE BUSINESS
Asia
Outlook for Fiscal 2007
In Asia, total unit sales of automobiles and automobile parts sold by
Honda and its subsidiaries and affiliates edged up 1.8%, to 521,000 units.
In China, the passenger car market expanded considerably, with
demand reaching around 3.20 million units in calendar 2005.
Guangzhou Honda, an affiliate accounted for under the equity
method, recorded healthy sales of the popular Accord and Odyssey
models. Another equity-method affiliate, Dongfeng Honda, enjoyed
strong sales of the CR-V. Total unit sales in China of completed
vehicles by Honda and its subsidiaries, as well as sales of component parts sets for production to equity-method affiliates amounted
to 263,000 units, on par with the preceding term.
In February 2006, Dongfeng Honda expanded its capacity to
120,000 vehicles per year, in an effort to meet rapidly expanding
Chinese demand. Further, in June 2005, Honda Automobile China
became the first passenger car maker in China to export vehicles to
Europe from a plant that specializes in the production of export
models. In these ways, Honda will continue using its accumulated
China-related expertise to deliver top-level products in terms of both
improved quality and cost.
Demand continued to expand in other Asian markets, with major
increases in sales of the City in Pakistan, India and elsewhere. Sales
were also up in Taiwan, contributing to strong sales in the Asian
region. In terms of manufacturing and R&D, we expanded manufacturing capacity at our plant in India and established an R&D facility in
Thailand. These are a few examples of Honda’s efforts to strengthen
its systems to respond swiftly to diversifying local needs.
For fiscal 2007, we expect total unit sales of Honda automobiles to
rise 9.7% year-on-year, to 3,720,000 units.
In Japan, we launched the new Zest passenger minicar in March
2006. Going forward, we will target further sales increases by
strengthening our line-up. For example, we will undertake full model
changes for the Stream in mid-2006, followed by the CR-V in the
latter half of calendar 2006. In the area of sales and service, too, we
will continue striving to maximize lifetime customer satisfaction
through various initiatives, including our strategy of integrating our
domestic sales channels.
As a result, we project unit sales in fiscal 2007 to increase 3.4%,
to 720,000 units.
In North America, we will launch the Acura RDX, an entrypremium SUV under the Acura brand, in mid-2006. Also within the
Acura lineup, we will undertake a full model change of the Acura
MDX, a premium SUV. The Honda CR-V, our compact SUV, will
undergo a full model change. In the light truck segment, we will further strengthen and upgrade our lineup, with an emphasis on both
performance and fuel efficiency.
In the passenger car segment, too, we will continue broadening
our offerings to meet growing demand for fuel efficient models. For
example, in addition to the Civic, which underwent a full model
change in September 2005, we began sales of the Fit in April 2006.
In these ways, we will target further sales growth in North America by
introducing highly attractive models in both the light truck and
passenger car segments.
This year marks the 20th anniversary since the birth of the Acura
brand in the United States. In fiscal 2006, annual unit sales of Acura
vehicles in the United States surpassed 200,000 units. To enhance
the Acura brand, in mid-2007 we will complete construction of the
new Acura Design Center in California to advance the brand identity.
On the production side, we will upgrade our Marysville, Ohio,
auto plant, which produces the Accord passenger car, making it
Other Regions
Unit sales in other regions grew 14.2%, to 201,000 units, due mainly
to increased sales in South America, Oceania and the Middle East.
In Brazil, sales of the locally produced Fit increased. In Australia
and the Gulf states, we posted healthy sales of the Accord, Civic and
other models.
18
more responsive to changes in demand. In the year ahead, we will
begin production of the Acura RDX light truck in the same facility. In
May 2006, we started operating a new transmission assembly plant
in Georgia. We will continue to boost the local content of Honda
vehicles made in North America.
For fiscal 2007, we project unit sales in North America of
1,760,000 units, up 4.6%.
In Europe, we plan to follow the five-door Civic by launching a
three-door version in late 2006. In mid-2006, we will introduce the
Legend sedan to the European market, and in late 2006, we will
introduce a CR-V that has undergone a full model change.
In July 2006, a new company in the Ukraine, a market which is
expecting huge expansion will begin operations, further enhancing
our sales capacity.
To address increasing demand for diesel-powered vehicles in
Europe, we will expand local production capabilities.
We project a 10.0% rise in unit sales in Europe, to 320,000 units.
In Asia, we expect unit sales in fiscal 2007 to jump 33.4%, to
695,000 units.
In the Chinese passenger car market, we believe market demand
could easily reach 3.5 to 3.7 million units. In fiscal 2007, we will
respond to booming demand for the existing models made by affiliate
Guangzhou Honda and Dongfeng Honda by further strengthening
these companies’ sales networks. We will also expand the annual
production capacity of Guangzhou Honda from 240,000 to 360,000
units in the latter half of calendar 2006. This will bring our total annual
production capacity in China to 530,000 units, after adding the
annual production capacity of Dongfeng Honda and including the
production at the consolidated subsidiary Honda Automobile China.
In addition to boosting production of completed vehicles, we will
strengthen our local manufacturing capabilities with respect to
powertrains. For example, we expect to begin producing automobile
powertrains at Honda Auto Parts in the first half of calendar 2007.
We will also develop the Acura brand in China, with successive
rollouts of the Acura RL and Acura TL scheduled from mid-2006.
Elsewhere in Asia, we will increase production capacity to meet
growing demand. In India, for example, we will begin making Civic
models in July 2006 as a footboard for annual capacity of 100,000
units by 2010. In addition, annual production capacity in Pakistan will
be doubled from 25,000 to 50,000 units during fiscal 2007, and in
Vietnam we will start making automobiles at the rate of 10,000 units
per year. These vehicles will go on sale from mid-2006.
In other regions, we project unit sales of 225,000 units, up
11.9% from fiscal 2007. This takes into account rising sales of the
Civic in Brazil and Australia. In Brazil, where gasoline prices are
soaring, we will also start making and selling flex-fuel vehicles*2 in
calendar 2006.
*2: Flex-fuel vehicles
Vehicles that are designed to operate on gasoline, ethanol or a mixture of the two fuels
19
FINANCIAL SERVICES BUSINESS
Fiscal 2006 Results
Finance Subsidiaries–Receivables, Net
Years ended March 31
Yen (millions)
2006
¥3,139,591
1,700,914
¥4,840,505
2005
¥2,753,266
1,396,104
¥4,149,370
Non-current
Current
Total
% change
Net Sales
Finance Subsidiaries–
Receivables, Net
Years ended March 31
Yen (billions)
Years ended March 31
Yen (billions)
400
5,000
310
300
240
245
Honda offers a variety of financial services to its customers and
dealers, with the aim of supporting sales of Honda motorcycles
and automobiles. These services are provided through financial subsidiaries in the United States, Japan, Canada, the United Kingdom,
Germany, Brazil and Thailand. In fiscal 2006, net sales of our financial
services business, including intersegment sales within Honda, rose
20.0%, to ¥310.9 billion, due mainly to firm demand for automobiles
in North America, as well as positive currency translation effects.
Operating income edged up 0.8%, to ¥90.5 billion, benefiting from a
higher loan balance accompanying expansion of our business, as
well as a reduction in selling, general and administrative expenses,
which outweighed the negative effects of increased funding costs.
14.0%
21.8
16.7%
4,840
4,149
4,000
3,641
3,327
259
3,000
209
2,803
Outlook for Fiscal 2007
200
2,000
100
In fiscal 2007, we look forward to further expansion of our financial
services business, which helps support sales in other business
segments. Our forecast is based on expectations of renewed
growth in our core operations, especially the automobile business.
1,000
0
0
02
03
04
05
06
02
03
04
Non-current
05
06
Current
The finance subsidiaries–receivables category above includes items that have been
reclassified as trade receivables and other assets. For more detailed information, refer to
Note 3 to the consolidated financial statements, Finance Subsidiaries–Receivables
and Securitizations.
20
EU2000i
Lightweight, compact and conveniently
portable, this generator can simultaneously
power such devices as a personal
computer, television, coffee pot and
refrigerator for long periods of time.
POWER PRODUCT & OTHER BUSINESSES
Fiscal 2006 Results
Unit Sales
Years ended March 31
Thousands
2006
487
2,827
1,477
717
368
5,876
2005
432
2,514
1,309
712
333
5,300
Japan
North America
Europe
Asia
Other Regions
Total
% change
12.7%
12.5
12.8
0.7
10.5
10.9%
Unit Sales
Net Sales
Years ended March 31
(Thousands)
Years ended March 31
Yen (billions)
5,876
6,000
5,047
4,500
Japan
400
326
300
In Japan, unit sales of power products rose 12.7%, to 487,000 units,
due largely to increases in sales of the GX series of general-purpose
engines supplied to pump and generator manufacturers on an OEM*1
basis, as well as increased sales of imported engines made by Honda
in Thailand and China.
382
5,300
4,584
In fiscal 2006, unit sales of power products rose 10.9%, to 5,876,000
units, due mainly to increased sales of general-purpose engines in
North America. Net sales from power product & other businesses,
including intersegment sales within Honda, climbed 11.6%, to ¥382.5
billion, due to the increase in unit sales of power products. Operating
income soared 86.3%, to ¥35.9 billion (including a ¥6.7 billion gain on
the return of the substitutional portion of the Employees’ Pension Funds
to the Japanese government), and the operating margin was 9.4%.
341
342
293
3,926
3,000
200
1,500
100
North America
In North America, unit sales grew 12.5%, to 2,827,000 units. Increased
demand for generators provided a strong boost to sales of both
completed products and engines supplied on an OEM basis. Within
the engine category, robust sales of large-scale models in the GX
series, and within the completed products category, sales of inverter
generators for camping that Honda created as a new market, as well
as large-scale generators, have contributed to increased unit sales.
0
0
02
03
04
Japan
North America
Europe
05
06
02
03
04
05
06
Asia
Other Regions
Europe
HRX537
This push lawn mower combines four
functions into a single unit: collecting grass
clippings in the rear bag, discharging
clippings out the back, mulching finely
chopped clippings to the lawn surface and
shredding leaves.
Unit sales in Europe grew 12.8%, to 1,477,000 units, bolstered by
strong demand for GCV135 and GCV160 engines for lawn mower use,
as well as the GX series for use in construction machines and tillers.
Among completed products, the new HRX push lawn mower generated
a considerable sales increase, encouraged by favorable weather.
*1: OEM (Original equipment manufacturer)
OEM refers to a manufacturer of products and components supplied for sale under a thirdparty brand.
21
Compact, home-use cogeneration system
(ECO WILL)
The technologies incorporated in Honda’s
cogeneration units have won the Company a
number of awards throughout the world,
including the Global Warming Prevention Activity
Award of the Minister of the Environment in
2005. At the left is Honda’s compact home
cogeneration unit.
(provided by Osaka Gas Co., Ltd.)
iGX440
This single-cylinder, general-purpose
engine uses the world’s first engine speed
governor that incorporates electronic
control technology that requires no
battery.
Monpal ML200
Developed on the concept of a
slim and easy-to-turn smart
package, this scooter has a
compact overall length, making
the front fender easily visible
from the driver seat.
POWER PRODUCT & OTHER BUSINESSES
Asia
Outlook for Fiscal 2007
In Asia, unit sales remained mostly unchanged, at 717,000 units. In
April 2005, we restructured the operations of Jialing-Honda Motor Co.,
Ltd., a company in China that previously manufactured and sold power
products and motorcycles. The company subsequently restarted its
operations, concentrating solely on power products. This measure
enabled us to better utilize our cost-competitive advantage, providing
a solid boost to sales of products made in China and Thailand.
In fiscal 2007, we expect unit sales of power products to remain
largely unchanged, at 5.88 million units.
In Japan, we expect growth in sales of general-purpose OEM
engines for use in medium-size generators and pumps used in the
Middle and Near East, as this market recovers. In addition, we will
promote further proliferation of our compact, home-use cogeneration
system in cooperation with suppliers of city gas and propane gas.
As the first automaker to embark on the solar cell business, we
are working to reduce CO2 emission levels through the production
and sales of clean energy resources not derived from fossil fuels.
Overseas, we will work to increase sales in North America of
our inverter-equipped mobile generator for camping, and large
generators.
In fall 2006, American Honda Motor Co., Inc., plans to begin supplying cogeneration units to Climate Energy LLC, a subsidiary of ECR
International, Inc., for incorporation into heating units made by Climate
Energy that are to be sold in the northeastern United States. In preparation, Climate Energy has monitored the performance of the heating
systems through a test program since the second half of 2005.
In the engine category, we will continue seeking to increase
worldwide sales of the GX series, utilizing the cost-competitive
advantage of making these products in Thailand and China.
Other Regions
In other regions, unit sales climbed 10.5%, to 368,000 units. In
Brazil, sales were robust for locally made GX series engines, which
became more price-competitive as a result of further reductions in
component procurement costs.
In Australia, we posted higher sales of green products, including
the environmentally friendly HRU series of push lawn mowers and the
UMK series of brush cutters.
During the year, Honda introduced the iGX440 advanced
general-purpose engine. Highly friendly to the environment, the
iGX440 features the world’s first electronic governor*2, which
regulates engine speed and thus improves responsiveness to varying
engine loads. In Japan, we incorporated the iGX440 into the newly
launched HSM1590i, a mid-size hybrid snowblower featuring
a gasoline engine for removing snow and an electric motor for travel
motion. The combination of the two power units facilitates switching
between work modes and enhances user-friendliness. The new
product has received a favorable response from customers.
In March 2006, we unveiled the Monpal ML200, a stylish fourwheel scooter with a comfortable ride and high maneuvering stability.
It is the first commercially available vehicle to feature visibility
enhancement design, adapted from the Honda ASV*3-3 advanced
safety research vehicle.
Meanwhile, diffusion of our compact, home-use cogeneration
system*4 increased in Japan. In fiscal 2006, sales increased strongly
in line with growing worldwide environmental awareness. In January
2006, Tokyo Gas Co., Ltd., became a new distributor of this system.
*2: Electronic governor (STR GOVERNOR)
This system allows the electronic control unit (ECU) to constantly monitor throttle opening
and engine speed, electronically regulating the throttle opening to maintain a constant
engine speed even under changing engine load conditions.
STR: Self-Tuning Regulator
GOVERNOR: A device that regulates engine speed, maintaining a constant engine speed,
regardless of load fluctuations
*3: ASV (Advanced Safety Vehicle)
Japan’s Ministry of Land, Infrastructure and Transport promotes this project for the development of advanced safety vehicles, which all manufacturers of automobiles and motorcycles
join voluntarily. The first phase of this project, ASV-1 (April 1991–March 1996), studied technical possibilities. ASV-2 (April 1996–March 2001) involved R&D on practical applications, while
ASV-3 (April 2001–March 2006) used technology to inter-vehicle communication technologies.
In September 2005, Honda succeeded in the creation of its Honda ASV-3. Using inter-vehicle
communication technologies to avoid collisions by determining distances between vehicles,
this vehicle provides features to alert the driver, attempt to avoid collisions, reduce the force of
a collision, and provide post-collision assistance.
*4: Compact, home-use cogeneration system
Honda has combined its original electromagnetic inverter technologies with the world’s
smallest(i) natural gas engine (GE160V) in an efficient layout to create a small, lightweight
generation unit. Due to its compactness, the unit can be installed in the home and boasts an
overall energy efficiency of 85%. It also emits approximately 30% less carbon dioxide than
conventional natural gas-powered generators or hot-water heating units using natural gas.(ii)
i: A Honda development, the reciprocal gas engine
ii: Data from Honda test results. Data compares electric power from natural gas-powered
generation with hot-water heating units that use natural gas.
22
Honda’s Business
in China
In recent years, China’s economy has grown remarkably and consistently. In 2005, the country had gross domestic product
(GDP) of more than $2.2 trillion*1, making it the fourth largest economy in the world. The economy’s expansion, combined
with its increasing liberalization, has prompted the growth of China’s automobile market. In 2005, automobile sales totaled
5.76 million,*2 including commercial vehicles, surpassing France and Germany and approaching the size of the Japanese
market. Given its rapidly growing global importance, the world’s leading automakers have come to regard the Chinese
market as vital, and the competitive battles among top manufacturers have grown in intensity. China also accounts for the
world’s largest motorcycle market, with 2005 sales of 13.14 million units*2, and demand for general-purpose engines as
power sources for generators and pumps is increasing rapidly.
Honda’s first full-fledged entry into business in China came in 1982, when it began local production of motorcycles
through a technical collaboration agreement. In 1999, Honda began selling its first locally manufactured automobile, the
Accord. Since that time, Honda has expanded auto operations in China tremendously, with marketing strategies tailored to
local needs. In 2005, continued strong sales of such core models as the Accord and the CR-V demonstrated the strong
position Honda holds in the Chinese automobile market.
This special feature examines the development of the Chinese market, focusing particularly on automobiles, and looks at
how Honda has been able to establish such a position. We will look at the country’s rapid motorization, including appropriate
strategies for environmental and safety issues. We will also introduce some Honda initiatives in the Chinese market that are
designed to maximize the joy of customers, maintain our growth curve and contribute positively to Chinese society.
(Sources) *1: JETRO *2: China Association of Automobile Manufacturers
(Photos) above left: GCCR
Above right: EM5000 generator
Below: Accord
23
Honda’s Business in China
State of the Automobile Industry in China
Openness Policy Fostering Rapid Growth in the
Automobile Market
to become even more severe.
When automobiles first began to circulate in China, most
automobiles were official vehicles owned by the government or corporations, but gradually demand from wealthy individuals emerged
for medium-sized luxury vehicles of 2,000cc and larger. The next
sources of demand were executives of major companies and twoincome couples who owned homes in the suburbs. This progression
increased demand for entry midsize vehicles, with the customer
base expected to continue broadening.
However, urban roadways and other infrastructure has fallen
woefully short of the demand placed on it by the rapid increase in
motorization. This has had a negative impact on the environment
and caused an increase in traffic accidents, bringing environmental
and safety issues to the forefront.
The way these concerns are addressed is the key to determining
the future development of auto industry in China.
China joined the World Trade Organization in 2001. This move had
far-reaching effects for the automobile market, bringing down customs duties and inviting an influx of foreign-capitalized firms. Driven
by a wave of investment that expanded existing factories and
constructed new ones and the entry of new competitors in China,
Chinese automobile production and sales levels skyrocketed. In
2002, passenger car sales surged 54% from the previous year*3,
then rose another 71% in 2003. In 2004, concerns that the economy
might be overheating caused the government to tighten monetary
policy, rein in investment and institute other macroeconomic controls, causing purchases of official vehicles owned by the government or corporations to decline. With auto loans more difficult to
obtain and with price reductions anticipated, consumers held back
on purchases, and as a result automobile sales grew only 16% in
2004. Fueled by an expanding customer base and a flurry of new
car launches, with a focus on low-priced models, the market
expanded 28% in 2005, exceeding the previous year’s growth.
To cultivate the domestic automobile industry, the Chinese
government imposed various protectionist measures, such as levying
stiff duties on vehicle imports. Further, to foster a strong and internationally competitive group of domestic automakers, the Chinese
government considered consolidating the rampantly growing number
of small and medium-sized automakers. To remain in the competition, automakers were compelled to continue making substantial
capital investments. While the Chinese market has grown significantly
faster than the rest of the world, this also led manufacturers to
accelerate production faster than the rise in market demand, making
overcapacity a concern. Further, numerous companies that had been
unable to enter the market directly because of various restrictions
entered through joint venture collaborations. This situation, along with
the emergence of local Chinese manufacturers, caused competition
(Source) *3: China Association of Automobile Manufacturers
Rapidly increasing motorization in Beijing
Transition of the Chinese Passenger Car Market
Forecast Passenger Car Demand and Supply Capacity
Passenger car unit sales
Year-on-year increase
(Thousands)
171
5,000
Demand
Supply capacity
(%)
(Thousands)
175
10,000
10,000
9,200
154
4
8,300
150
4,000
126
1
116
3,196
3,000
2,502
2,156
2,000
1,262
1,000
0
6,800
125
6,000
100
75
4,000
5,700
3,370
5,230
3,660
4,190
4,650
50
2,000
817
2001
8,000
128
25
2002
2003
2004
2005 (Year)
Source: China Association of Automobile Manufacturers
0
0
24
2006
2007
2008
2009
2010 (Year)
Souce: Xinhua
Honda’s Business in China
Honda’s Development of the Chinese Automobile Market
Guangzhou Passenger Car Project Launches Local
Automobile Production and Sales
decided to introduce the new Accord as the first locally manufactured Honda automobile, at that time the newest model on sale in
the United States, the world’s largest automobile market. At that
time, three versions of the Accord were being produced to meet
specifications in Japan, the United States and Europe. We decided
to base the Accord manufactured in China on the U.S. model
because many Chinese customers were aware of the U.S. market
and recognized the Accord’s high brand image, had a strong desire
for a sense of luxury in an automobile and were most familiar with
the size of the U.S. Accord. We also offered such options as leather
seats, a sunroof and high-end audio systems.
Honda first entered the Chinese market in 1982, when it formed a
technical collaboration with a local company and began manufacturing motorcycles. In 1992, Honda formed a joint venture to produce
motorcycles and, in 1994, began manufacturing power products
through another joint venture with a local firm.
Honda’s first step into the automobile market came in 1994,
when we established Dongfeng Honda Auto Parts Co., Ltd. to
produce automobile engine parts and chassis components for sale
in Southeast Asia and Japan.
Because of the way Honda’s operations developed, we were
able to gain a good understanding of Chinese business practices
and systems through the motorcycle business. Our initiative in
automobile parts served as another steppingstone toward the
eventual development of a business involving finished automobiles.
In 1997, Honda signed a basic agreement to collaborate with
Guangzhou Auto Group Corp., and Dongfeng Motor Group Co.,
Ltd., as a joint venture partner in the Guangzhou Passenger Car
Project. This project culminated in the fulfillment of Honda’s objective
to begin the manufacturing and sales of automobiles in China. With
Guangzhou Auto Group Corp. we formed Guangzhou Honda
Automobile Co., Ltd. (Guangzhou Honda), as a joint venture to
manufacture and sell automobiles. At the same time, Honda and the
Dongfeng Motor Group Co., Ltd. established the joint venture
Dongfeng Honda Engine Co., Ltd. (Dongfeng Honda Engine) to
manufacture automobile engines and transmissions. Established in
1998, both joint ventures commenced operations in 1999, making
Honda the first Japanese automobile manufacturer to begin fullfledged local production and sales in China.
Guangzhou Honda Extends Its Model Lineup and
Expands Production Capacity
From the time the Accord first went on sale in 1999, customers were
so enamored of the sense of luxury it offered that sales substantially
exceeded our initial projections. By 2001, annual production of the
Accord had already risen to 50,000 units. In April 2002, we also
began producing the Odyssey, a multi-utility vehicle (MUV) that
accommodated several passengers, offered the same operating
performance and comfort as a passenger car and was suited for a
variety of uses, such as for business during the week and for family
trips on weekends. In 2003, we expanded our annual production
capacity to 120,000 units, and in September of that year we began
producing our third model in China, the Fit Saloon. This model was
designed to meet demand for entry midsize vehicles with engines
ranging from 1,000cc to 1,500cc, for which demand was emerging
in line with the country’s rapid economic growth. In 2004, we again
expanded annual production capacity, this time to 240,000 units,
and in September of that year we introduced the Fit to meet the
individualistic lifestyles of customers in their 20s and 30s.
As a result, Guangzhou Honda has expanded production at a
rate unparalleled by Honda elsewhere in the world. In the second
Establishing the Accord Brand in China’s
Passenger Car Market
When it came time for
Guangzhou Honda to decide
which model to launch first, the
most important consideration was
to assure that the vehicle
matched the values of the target
customers.
Ceremony to commemorate first locally
manufactured Accord rolling off the
At that time, the driving force
production line
of China’s passenger car market
was the growing class of entrepreneurs who were riding China’s
wave of economic expansion. Many of these people had frequent
opportunities to travel overseas on business, and were aware of the
global auto market, which raised their expectations for product
value. To establish a solid base for the Honda brand in China’s passenger car market, Honda believed it was important to introduce our
newest model that met the same quality, safety and drivability standards as vehicles sold in other parts of the world. On this basis, we
Honda Sales Results and Plans by Model
(Thousands)
350
CR-V*1
Fit
Fit Saloon*2
Odyssey
Accord
300
250
200
150
*1: CR-V
V manufactured by Dongfeng
Honda Automobile Co., Ltd.
*2: Fit Saloon name changed to
the Cityy on sale from April 2006
100
50
0
2000
2001
2002
2003
2004
2005
2006 (Year)
(Planned)
25
half of 2006, a second factory is scheduled to begin operations,
adding another 120,000 units in annual production capacity. This
capacity, added to that of the first plant, will raise total annual production capacity to 360,000 units. We expect to increase Dongfeng
Honda Engine’s production capacity to keep pace.
production system. As a result, now the system is flexible enough
to manufacture everything from compact passenger cars to large
MUVs on the same line. We have also worked to increase the local
parts procurement ratio. Consequently, the Fit and the City are
made from about 90% locally sourced parts, which improves cost
competitiveness.
In October 2005, Honda Motor (China) Investment Co., Ltd., set
up Honda Auto Parts Manufacturing Co., Ltd. (Honda Auto Parts) as
The Basics of Building a Production System—
“Small Born” Approach
Guangzhou Honda followed Honda’s concept of starting small and
growing along with demand, beginning with annual production of
30,000 units and expanding its capacity while keeping a keen eye on
market movements. When Guangzhou Honda was established, it
took over a plant from a previous manufacturer, but the facility was
unsuited to Honda’s production methods and nearly everything in the
facility needed repair or maintenance. To overcome these obstacles,
Guangzhou Honda and Dongfeng Honda Engine set up a special
project team of members from Honda’s development, manufacturing, quality control, purchasing and sales departments. This team
brought in broad-ranging Honda technology and expertise, which
it used to build new production and sales systems. From the
beginning, Honda targeted a global standard for quality. Even when
increasing production capacity, the dedicated efforts of the associates enabled these companies to achieve quality levels on par with
production in a mature market.
To enhance its production line, the plant employed Honda’s line
management expertise to increase production yields from existing
facilities while constantly maintaining a focus on cost reductions.
Modeling its operations on the Saitama factory in Japan, which
produces the Accord, the company worked to strengthen its
Honda Engineering China Co., Ltd.
Providing Local Production Technology Support and Enhancing Cost
Competitiveness
To meet production increases and launch new products in a timely manner,
in August 2004 we established Honda Engineering Co., Ltd. (EG China), as
a wholly owned subsidiary. EG China works to advance and improve the
equipment used in mass production, thereby increasing capacity utilization
rates and raising production capacity at a lower cost. The company also
produces high-precision stamping dies and provides other local support. In
December 2005, EG China started operations at a die production plant, with
the goal of speeding the introduction of new models and reducing costs.
Guangzhou Honda operates highly efficient and flexible production lines, like those at other Honda manufacturing facilities in Japan, Europe and the United States.
26
a wholly owned subsidiary, and this company will begin making
automobile powertrain components in the first half of 2007.
This move will increase our local production capacity for
powertrain components, including transmissions, drive shafts and
engine parts for automobiles. By increasing local procurement we
expect to further reduce costs and improve competitiveness.
Building China’s First Four-Part Integrated Dealer
Network
One factor behind Guangzhou Honda’s successful advancement is its
four-part integrated dealer network, which combines sales, after-sales
service, parts supply and customer feedback. This sort of sales
system, commonplace in Japan, Europe and the U.S., was
unprecedented in China when we entered the market, and eliciting
the understanding of government-related institutions was no simple
task. Before Honda entered the Chinese automobile market, sales
locations generally had no after-sales service functions, making
customers dependent on separate repair shops. Not all these repair
shops had sufficient knowledge or the necessary parts for repairs,
so that a not-insignificant number of customers were left with an
insecure feeling after having purchased a vehicle. In line with its
belief in “The Joy of Buying,” Honda worked to ensure customer
convenience by introducing in China the four-part integrated dealer
network that was in place in Japan and the United States. The fourpart integrated dealer network that met customers’ needs was
extremely well-received, and this later became the industry standard
with competitors following suit.
The dealer function that is most important to Guangzhou Honda
is after-sales service. To increase service quality, the company
introduced contests in which service engineers selected from
dealerships around the country are invited to compete with each
other by demonstrating their repair techniques. This method has
contributed greatly to improving service skills. Body repair capabilities
have been added at all locations, a move that has improved customer
satisfaction and contributed greatly to expanding sales. Guangzhou
Honda maintains after-sales service parts warehouses in Beijing and
Shanghai, so that parts can quickly be provided to dealers. In the
event of a customer complaint, feedback is transmitted to
Guangzhou Honda, providing quick access to market information.
Rather than treating automobiles as one-off product sales, we
provide a full after-sales service system, supported by a maintenance
and repair parts supply network and a customer feedback system.
These systems provide customers peace of mind when driving their
cars, and plays a role in helping our customers in China develop a
comfortable relationship with their cars. Showing that it has taken to
heart Honda’s belief in “The Joy of Buying,” Guangzhou Honda has
succeeded in developing its network of dealers from approximately
30 locations in 1999 to a number expected to exceed 250 by the
end of 2006.
Dongfeng Honda dealership (Wuhan)
Dongfeng Honda Established as a New Stronghold
in the Chinese Automobile Market
In July 2003, Honda established Dongfeng Honda
Automobile Co., Ltd. (Dongfeng
Honda), as a new local production and sales joint venture in
the city of Wuhan, Hubei
Province. Beginning with an
existing vehicle factory that had
Ceremony to celebrate the first CR-V off the
once manufactured commercial
line at Dongfeng Honda
minibuses, the facility’s welding,
painting and vehicle assembly lines were renovated, and a new
finished vehicle inspection line was installed. Advanced robots were
introduced to the welding line to allow for highly flexible welding
processes. This approach to the construction of an advanced
production line reflects Honda’s belief in manufacturing system
innovation. The elapsed time from Dongfeng Honda’s establishment
to the start of production was only about six months, and a facility
expansion to bring annual production capacity up to 120,000 units
was completed in only one year from the start of construction. Each
of these projects was completed from six months to a year more
quickly than is typical for projects of this scale. In April 2004,
Dongfeng Honda began production with the CR-V, one of our core
models. In April 2006, the company also began manufacturing
and sales of the Civic, which is sold in more than 160 countries
throughout the world. Similar to Guangzhou Honda, Dongfeng
Honda has introduced a four-part integrated dealer network.
Comprising approximately 70 locations at the end of 2005, this
network is projected to expand to more than 140 dealers by the
end of 2006.
27
Jazz automobiles aboard a car carrier bound for Europe (June 2005)
Dongfeng Honda, which now has an annual production capacity of 120,000 units,
introduced the new Civic in March 2006.
First Automaker in China to Begin Auto Exports
to Europe
Future Initiatives—Expand Production Capacity
and Introduce the Acura Brand
In September 2003, Honda established Honda Automobile (China)
Co., Ltd. (Honda Automobile China) to specialize in the production of
automobiles for export. Drawing upon the production expertise, procurement network and economies of scale it has developed through
its existing operations of Guangzhou Honda and Dongfeng Honda
Engine, the new company was designed to take advantage of
increasing competitiveness in both quality and cost, becoming the
first Chinese passenger car manufacturer to concentrate on fullfledged export sales. Honda Motor Co., Ltd. and Honda Motor
(China) Investment Co., Ltd., together own a 65% stake in Honda
Automobile China, with the remaining shareholdings split between
Guangzhou Automobile Group Company Limited, and a joint venture
company of Dongfeng Motor Group Co., Ltd. In April 2005, Honda
Automobile China began mass production of the Jazz, a compact
passenger car. Shipments to Europe began with Germany in June
2005. In 2005, the company exported 9,696 units, and this number
is projected to increase to 25,000 in 2006.
In fall of 2006, Guangzhou Honda expects to begin operating a
second plant, which will have an annual production capacity of
120,000 units. When added to the first plant, the company will have
a capacity of 360,000 units per year. Further, Dongfeng Honda has
an annual production capacity of 120,000 units, and Honda
Automobile China 50,000 units. Combining this output, Honda
should have the capacity to produce 530,000 units per year in
China by the end of 2006. Through such expansions in production
capacity, we will respond to the long term growth in market needs.
To respond to increasingly diverse customer needs, in 2006 we
plan to introduce the Acura brand in China—which is already well
received in the North American market. Launching the brand will
speak to Honda’s commitment to its business in China by demonstrating the willingness to introduce its strength and resources extensively. Honda Motor (China) Investment Co., Ltd., will import and sell
these vehicles, and plans to establish its own dealer network. By
accentuating “The Joy of Driving” through this brand, which has
excellent performance characteristics, Honda plans to differentiate
itself in the marketplace.
28
Honda’s Business in China
Establishing the Optimum Management Structure for
Local Operations
Strengthening Our Operating Structure in the
Motorcycle and Power Products Businesses
Further Enhancing Regional Headquarters
Functions
In addition to Wuyang-Honda Motors (Guangzhou) Co., Ltd.
(Wuyang-Honda), in 2001 Honda established Sundiro Honda
Motorcycle Co., Ltd. (Sundiro Honda), as a new joint venture for the
manufacture and sales of motorcycles. In 2002, Sundiro Honda
began producing and exporting to Japan an affordable small-size
scooter, the Today. In 2003, Honda established Honda Motorcycle
R&D China Co., Ltd., in Shanghai to conduct research and development on motorcycles with the goal of rapidly developing products
that are designed for the Chinese market. Honda has strengthened
its motorcycle production operations, with both Sundiro Honda and
Wuyang-Honda relocating their plants in order to improve production
efficiency. Sundiro Honda began operations at a new plant in 2005,
as did Wuyang-Honda in 2006.
In the Chinese power products business, Honda has a twocompany structure, with Jialing-Honda Motors Co., Ltd. (Jialing
Honda) manufacturing general-purpose engines, lawn mowers and
pumps, and Honda Mindong Generator Co., Ltd. (Mindong Honda)
focusing on generators. Mindong Honda began exporting generators
in 2003.
Since 1994, Honda has employed a matrix management structure
that combines a regional headquarters with a business segment
headquarters. Honda is currently developing its business in China
through joint ventures and subsidiaries in the motorcycle, automobile
and power products businesses. To manage the rapid growth of its
businesses in this market, Honda established its sixth pillar of
regional operations, for China, in April 2003. This move was intended
to foster a management structure that was more deeply rooted in
the local environment, in order to respond rapidly and optimally to
the demands of this quickly growing market from a local perspective.
To further strengthen our regional headquarters function in China, in
January 2004, we established Honda Motor (China) Investment Co.,
Ltd. As a wholly owned Honda subsidiary, this company develops
comprehensive business strategies for Honda’s businesses in China
and acts as its representative in such areas as government and
industrial affairs, corporate communications and intellectual property
management. In spring 2005, we established the Shanghai branch
of Honda Motor (China) Investment Co., Ltd., to strengthen its function as the regional headquarters for Honda’s motorcycle business
in China. This branch supports Honda’s overall motorcycle business
in China in marketing, service, quality and purchasing.
Honda’s Expanding Business in China
■ Sales
■ Manufacturing and sales
■ Manufactur
■ Research a
■ Regional h
ction
*1: Affiliate accoun
under the equit
*2: Consolidated s
iary
Beijing
Tianjin
Chongqing
Wuhan
Shangh
Guangzhou Huizhou
ou
● Beijing
■ Honda Motor (China) Investment Co., Ltd.*2 (independently capitalized)
● Tianjin
■ Sundiro Honda Motorcycle Co., Ltd.*1 Tianjin Factory (motorcycles, joint
venture)
● Chongqing
■ Jialing-Honda Motors Co., Ltd.*2 (power products, joint venture)
● Wuhan
■ Dongfeng Honda Automobile Co., Ltd.*1 (automobiles, joint venture)
● Shanghai
■ Sundiro Honda Motorcycle Co., Ltd.*1 Shanghai Factory (motorcycles, joint
venture)
■ Honda Motorcycle R&D China Co., Ltd.*2 (motorcycles, R&D, independently
capitalized)
■ Honda Motor (China) Investment Co., Ltd., Shanghai Branch
● Guangzhou
■ Wuyang-Honda Motors (Guangzhou) Co., Ltd.*1 (motorcycles, joint venture)
■ Guangzhou Honda Automobile Co., Ltd.*1 (automobiles, joint venture)
■ Honda Automobile (China) Co., Ltd.*2 (production of automobiles for export,
joint venture)
■ Dongfeng Honda Engine Co., Ltd.*1 (automobile engines and transmissions,
joint venture)
■ Honda Engineering China Co., Ltd.*2
(Advancement and innovation of mass-production facilities, die production,
independently capitalized)
■ Honda Auto Parts Manufacturing Co., Ltd.*2
(automobile transmission and engine parts, independently capitalized, slated
to begin production in 2007)
■ Honda Motor (China) Investment Co., Ltd., Guangzhou Branch
● Hong Kong
■ Honda Motor (China) Co., Ltd.*2
(motorcycle and automobile import/export, independently capitalized)
● Huizhou
■ Dongfeng Honda Auto Parts Co., Ltd.*2 (automobile parts)
● Fuzhou
■ Honda Mindong Generator Co., Ltd.*2 (power products, joint venture)
● Hainan
■ Sundiro Honda Motorcycle Co., Ltd.*1 Hainan Factory (motorcycles, joint
venture)
Mainland China only
29
Honda’s Business in China
Addressing Environmental and Safety Issues, and
Contributing to Society
Stepping up Efforts to Reduce the Environmental
Burden of Factories and Products
Improving Traffic Manners through Safety
Awareness Activities
In China as well as other locations, Honda employs the “Green
Factory” approach that considers both the global environment and
work environment. From an environmental perspective, we employ a
water-based paint system which will reduce emissions of hazardous
substances such as volatile organic compounds to one-tenth of the
current level compared to conventional paints. We purify wastewater
from our plants, promote recycling and work to improve the efficiency of our production processes, reducing our consumption of
electric power, gas and water.
Our products clear the most stringent global environmental standards when they are launched. For automobiles, some models that
are on sale now already meet the Euro4 level emission standards.*4
Our motorcycles also feature excellent environmental performance
and energy-saving features, such as China’s first programmed fuel
injection (PGM-FI) system. In summer 2006, we will launch a small
scooter that meets the Euro3*4 emission standards.
In line with the growing number of motorcycle riders, traffic accidents
in China are on the rise. To counter this trend, since 2003 Honda
has trained safety instructors and has been dedicated to safety
promotion activities at dealerships. In February 2006, WuyangHonda decided to begin activities to promote motorcycle safety
riding with the Zeng Cheng local government. The construction of
this “model traffic city” will be supported to improve motorcycle
driving skills and the attitudes for traffic safety in its residents.
To promote automobile safety, we began traffic field surveys
and analyses, determined educational methods based on traffic
conditions, and near miss or actual accidents in 2005, then held
workshops for our associates.
*4: Based on Honda’s internal test data
Competition between instructors at Wuyang-Honda, Sundiro Honda and Jialing-Honda
Second Auto Plant at Guangzhou Honda
To reduce emissions of volatile organic compounds, water-based paints are used for the
middle and top coats of paint. Paint is sprayed on with a special water-based paint gun to
improve coating efficiency.
Contributing to Society through Desert
Afforestation
In 2000, Honda began afforestation activities in the Korchin Desert,
in the Inner Mongolia Autonomous Region of China, in cooperation
with the Japanese NPO, Desert Planting Volunteer Association. In
addition to providing monetary support, Honda takes an active role
in planning activities, such as volunteer tree-planting tours twice a
year.
30
Honda’s Business in China
Becoming A Company that Chinese Society Wants to Exist
The scale of China’s automobile market is increasing rapidly, but
ample room remains for increases in the number of automobile
owners, and we expect market growth to continue. Honda will work
to expand its business in China, and do so in a way that allows for
the flexible response to future changes in the market environment.
At the same time, we will continue to maximize the joy of our
customers, address environmental and safety issues, and contribute
to society. Through these activities, Honda’s goal is to become a
company that Chinese society wants to exist in China.
Honda’s Business in China
Year
1982
Business Development
Production of motorcycles begins through technical collaboration
with China Jialing Industrial Co., Ltd.
Wuyang-Honda Motors (Guangzhou) Co., Ltd.*1 established
China Tianjin Honda Motors Co., Ltd.*1 established
Jialing-Honda Motors Co., Ltd.*1 established
Guangzhou
Tianjin
Chongqing
Manufacturing and sales of motorcycles
Manufacturing and sales of motorcycles
Manufacturing and sales of motorcycles
Honda Motor (China) Co., Ltd.*2 established in Hong Kong
Honda Mindong Generator Co., Ltd.*2 established
Dongfeng Honda Auto Parts Co., Ltd.*1 established
Hong Kong
Fujian Province
Huizhou
1998
Guangzhou Honda Automobile Co., Ltd.*1 established
Dongfeng Honda Engine Co., Ltd.*1 established
Guangzhou
Guangzhou
Import sales of motorcycles and automobiles
Manufacturing and sales of compact generators
Manufacturing of automobile engine parts and
undercarriage components
Manufacturing and sales of automobiles
Manufacturing of automobile engines and transmissions
1999
2001
2002
Accord production begins at Guangzhou Honda Automobile Co., Ltd.
Sundiro Honda Motorcycle Co., Ltd.*1 established
Honda Motorcycle R&D China Co., Ltd.*2 established
Odyssey production begins at Guangzhou Honda Automobile Co., Ltd.
Sundiro Honda Motorcycle Co., Ltd., begins exporting Today scooters
to Japan
Tianjin
Shanghai
Manufacturing and sales of motorcycles
Motorcycle research and development
Chongqing
Manufacturing and sales of motorcycles and power products
Wuhan
Guangzhou
Manufacturing and sales of automobiles
Automobile production and export
Beijing
Functions as Honda’s regional headquarters in China,
conducts Honda-related investment activities in China
Guangzhou
Advancement and reform of mass-production facilities,
support for new model launches, and production of dies
Chongqing
Manufacturing and sales of power products
Foshan
Manufacturing of automobile transmissions and engine parts
1992
1993
1994
2003
2004
Location
Chongqing
Jialing-Honda Motors Co., Ltd., begins production of general-purpose
engines
Dongfeng Honda Automobile Co., Ltd.*1 established
Honda Automobile (China) Co., Ltd.*2 established
Fit Saloon production begins at Guangzhou Honda Automobile Co., Ltd.
Honda Motor (China) Investment Co., Ltd.*2 established
CR-V production begins at Dongfeng Honda Automobile Co., Ltd.
Honda Engineering China Co., Ltd.*2 established
2005
2006
Fit production begins at Guangzhou Honda Automobile Co., Ltd.
Honda Automobile (China) Co., Ltd., begins exporting Jazz compact
car to Europe
Jialing-Honda Motors Co., Ltd., changes its scope of business to
concentrate on the power product business
Honda Auto Parts Manufacturing Co., Ltd.*2 established
Civic production begins at Dongfeng Honda Automobile Co., Ltd.
*1: Affiliate accounted for under the equity method
*2: Consolidated subsidiary
31
Function
Environment and Safety
Honda leases FCX fuel cell vehicle to world’s first individual customer (the Spallinos), June 2005
Honda proactively employs advanced environmental and safety technologies, reflecting its commitment not only to
comply with regulations but also to pass on the “joy of mobility” to future generations.
Environmental Initiatives
From the earliest days of the company, Honda has worked assiduously to address the environmental challenges of
each era. As the environmental preservation movement gained momentum, and particularly in the 1990s when global
concerns about the environment were accelerating, Honda stepped up its implementation of environmental structures
and systems. In 1992, we established the “Honda Environment Statement,” which clarifies our position on
environmental conservation, and we have increased our environmental activities since that time.
Based on this statement, in 1999 Honda announced for fiscal 2006, the year ended in March 2006, targets for the
improvement of cleaner exhaust gas and higher fuel economy. During the fiscal year, we continued working toward
these objectives, and as of March 2006, we had achieved all of our targets on schedule.
Seeking to address the global warming issue, Honda is the first automaker in the world to announce for fiscal
2011, the year ending in March 2011, global CO2 reduction targets for its products and production activities.
In the future as well, Honda will continue to provide our customers with products that employ advanced
environmental technologies, share joy with our customers, consider our own impact on the global environment and
make every effort to address these challenges. Through our contact with more than 20 million customers worldwide,
we are determined to take on an even greater level of responsibility for the global environment.
32
Environment and Safety
■ Progress toward Fiscal 2006 Targets for the Improvement of Cleaner Exhaust Gas and Higher Fuel Economy
Motorcycles
Target
Progress
Cleaner Exhaust Gas
To reduce total emissions of hydrocarbon (HC) (total for
Japan, the United States, Europe and Thailand) to
approximately one-third for new vehicles
(compared with fiscal 1996 level)
Target has been achieved consistently since fiscal 2001.
In fiscal 2006, total HC emissions (total for Japan, the
United States, Europe and Thailand) were reduced to
23.1% (less than one-fourth).
(compared with fiscal 1996 level)
Fuel Economy
Improvement
To improve average fuel economy (total average for
Japan, the United States, Europe and Thailand) by
approximately 30% (compared with fiscal 1996 level)
Target has been achieved consistently since fiscal 2004.
In fiscal 2006, average fuel economy (total average for
Japan, the United States, Europe and Thailand) was
improved by 33.1%. (compared with fiscal 1996 level)
Automobiles
Target
Progress
Cleaner Exhaust Gas
To reduce total emissions of HC and nitrogen oxide (NOx)
by approximately 75% for new vehicles in Japan.
(compared with fiscal 1996 level)
Target has been achieved consistently since fiscal 2004.
Total HC emission level in fiscal 2006:
Reduced approximately 88.1% (compared with fiscal 1996 level).
Total NOx emission level in fiscal 2006:
Reduced approximately 88.1%. (compared with fiscal 1996 level)
Fuel Economy
Improvement
To achieve the 2010 fuel efficiency standards of Japan for
all weight categories
To improve the average fuel economy in Japan for
gasoline-powered passenger vehicles by approximately
25%. (compared with fiscal 1996 level)
The 2010 fuel efficiency standards of Japan were attained
in all weight categories.
In fiscal 2006, the average fuel economy in Japan was
improved by approximately 31.1%.
(compared with fiscal 1996 level)
Power Products
Target
Progress
Cleaner Exhaust Gas
To reduce average emissions (average emission levels
worldwide) of HC and NOx by approximately 30% for new
products. (compared with fiscal 1996 level)
Target has been achieved consistently since fiscal 2002.
In fiscal 2006, emissions were reduced by approximately 39%.
(compared with fiscal 1996 level)
Fuel Economy
Improvement
To improve worldwide average fuel economy by approximately
30%. (compared with fiscal 1996 level)
In fiscal 2006, worldwide average fuel economy was improved
by approximately 31%. (compared with fiscal 1996 level)
■ Working to Achieve Fiscal 2011 Global CO2 Reduction Targets for Its Products and Production Activties
Honda’s goal is to become a company that manufactures products that produce the lowest level of CO 2 emissions at plants
that also create the lowest CO2 emissions. We have established new targets to reduce CO2 emissions from our products and
production activities worldwide.
CO2 reduction target for products: Average level of CO2 emitted by Honda products worldwide
CO2 reduction target for production activities: Average amount of CO2 emitted per unit produced
Motorcycles
By the end of fiscal 2011, we will expand the use of programmed fuel injection (PGM-FI) systems, which improve fuel efficiency, and
introduce new engine technologies, such as super-low friction engines and the Variable Cylinder Management system.
● PGM-FI: install on the majority of models for sale worldwide
● Super-low friction engine: improve fuel efficiency by approximately 13%, compared with the current level
● Variable Cylinder Management system: improve fuel efficiency by approximately 30%, compared with the current level
Target
CO 2 reduction target
for products
Reduce CO2 emissions by 10% (g/km) compared to the level of fiscal 2001, for more than 90% of products sold
worldwide, including Japan, North America, Europe, Thailand, India, China, Indonesia, Vietnam, Brazil, the Philippines,
Malaysia and Pakistan.
CO 2 reduction target
for production activities
Reduce CO2 emissions by 20% (per unit produced), compared to the level of fiscal 2001, including nearly 100% of
Honda motorcycle assembly plants in Japan and other countries.
33
Environment and Safety
Automobiles
Hybrid technology is an important component of our efforts to reduce CO2 emissions. In the future, Honda also will introduce
advanced gasoline and clean diesel engines. By making the most of environmental technologies and employing them
appropriately to maximize their effects, our goal is to accelerate the global reduction of CO2 emissions.
● Gasoline vehicles: improve fuel efficiency, through such technologies as advanced VTEC and the Variable Cylinder
Management system.
● Hybrid vehicles: Honda is developing a new dedicated hybrid vehicle that will achieve further advancement of fuel efficiency
with a reduction in cost. We plan to introduce this hybrid vehicle in 2009.
● Diesel vehicles: Honda is developing a new super-clean 4-cylinder diesel engine, which Honda plans to introduce to market
within the next three years.
● Fuel cell vehicles: Honda is stepping up the development of a fuel cell vehicle featuring the ultimate in clean performance,
emitting no CO2 or other harmful substances during operation. Honda plans to begin sales of this new fuel cell vehicle
within three years.
Target
CO2 reduction target
for products
Reduce CO2 emissions by 10% (g/km) compared to the level of fiscal 2001, for more than 90% of products sold
worldwide, including Japan, North America, Europe, Asia, the Pacific, China, and Cenral & South America.
CO2 reduction target
for production activities
Reduce CO2 emissions by 10% (per unit produced), compared to the level of fiscal 2001, including nearly 100% of
Honda automobile assembly plants in Japan and other countries.
Power Products
We plan to reduce CO2 emissions by improving the combustion characteristics of all of our engines. We are the first
automaker to begin the mass production of solar cells, contributing to the reduction of CO2 emissions by developing the
manufacture and sale of clean energy sources that do not use fossil fuels.
Target
CO2 reduction target
for products
Reduce CO2 emissions by 10% (kg/hour of operation) compared to the level of fiscal 2001, including all products sold
worldwide except outboard.
CO2 reduction target
for production activities
Reduce CO2 emissions by 20% (per unit produced), compared to the level of fiscal 2001, including nearly 100% of
Honda power product assembly plants in Japan and other countries.
■ Honda’s Advanced Environmental Initiatives Overseas
Honda’s mission is to operate manufacturing facilities throughout the world
that place as little burden on the environment as possible as they manufacture
products with superior environmental performance. Following is a look at the
environmental performance of automobiles in our major regions.
Through our unique technologies, Honda introduces products that
demonstrate environmental performance that exceeds the regulations
established in each region for the reduction of emissions and improvement
of fuel efficiency. We are willing to contribute to the achievement of a
sustainable mobility society by meeting people’s mobility needs while
minimizing the environmental impacts caused by our products. In the
product domain, we are implementing measures based on the following
three approaches.
1. Further improvements in the reduction of emissions from internal
combustion engines and improvement of fuel efficiency
2. Evolution of hybrid vehicles
3. Promotion of alternative fuel-powered vehicles
Corporate Average Fuel Economy (the United States)
(miles/gallon)
34
32
30
28
26
24
22
1. Further Improvements in the Reduction of Emissions
from Internal Combustion Engines and Improvement of
Fuel Efficiency
● North America (the United States)
In the United States, Honda always provides the market with low emission
34
20
0
2001
2002
2003
2004
2005 (Model year)
Honda
Honda
Industryy average
g
Industryy average
(passenger vehicles)
(light trucks)
(light trucks)
Note: Corporate Average Fuel Economy (CAFE) figures for 2005 include some
vehicles that are reported at mid-year, so final numbers may differ slightly.
Environment and Safety
vehicles that perform more highly than required by emissions regulations. We have introduced the first gasoline-powered low
emission vehicles (LEVs), ultra low emission vehicles (ULEVs) and super ultra low emission vehicles (SULEVs) in the market. At
present, nearly all Honda and Acura branded vehicles meet or exceed the Tier2 BIN5*1 exhaust gas standard (NOx: 0.07 g/mile).
● Europe
In Europe, since the introduction of the 2001 Civic (with some local variations) Honda has ensured that all models meet the
Euro4*2 emission standard when they undergo full model changes. By introducing fuel-efficient, hybrid and diesel models,
we are steadily reducing CO2 emissions. This is the case for diesel vehicles in particular. Since the Accord equipped with a
Honda-developed 2.2L diesel engine went on sale in December 2003, we equipped the CR-V and the FR-V with this engine.
In January 2006, we also began offering the new Civic with this engine. We also released the CR-V equipped with a diesel
particulate filter (DPF)*3 to achieve higher fuel efficiency and cleaner exhaust.
● Asia
In Thailand, Honda’s locally produced Jazz has already achieved the Euro4 emission standard to be implemented in the future.
Since the introduction of the Jazz, all models introduced in Thailand have achieved the Euro4 emission standard. In addition,
Honda has already achieved the Euro3*2 emission standard implemented in Beijing, China, for all models sold in the market
since December 2005.
2. Evolution of Hybrid Vehicles
In November 1999, Honda released the Insight, the first hybrid vehicle equipped with the Honda integrated motor assist (IMA)
system, achieving the world’s highest fuel economy among mass-produced gasoline-powered vehicles. In December 2001,
we introduced the Civic Hybrid, and in December 2004 we began sales in North America of the Accord Hybrid, adopting
Honda’s Variable Cylinder Management system for its V6 engine. Further, in November 2005, we began sales of an all-new
Civic Hybrid, equipped with the new 3-Stage i-VTEC + IMA Honda Hybrid System. In the future, Honda is developing a new
dedicated hybrid vehicle suitable for family use in major automobile markets in the world. With this new dedicated hybrid
vehicle, Honda will achieve further advancement of fuel efficient technologies and a reduction in cost. We plan to contribute to
the reduction of CO2 emissions by delivering hybrid vehicles that are priced affordably enough to be adopted by more
customers throughout the world.
3. Promotion of Alternative Fuel-Powered Vehicles
● North America (the United States)
In order to promote use of vehicles powered by alternative fuels, Honda leased 19 FCX fuel cell vehicles in North America
(a total of 30 leases of the FCX in Japan and the United States). One of the vehicles was leased to the world’s first private
owner of a fuel cell vehicle. In Torrance, California, we are converting natural gas to hydrogen to power fuel cell vehicles.
We are in the process of testing hydrogen fueling stations, such as the Home Energy Station, which provides hydrogen to
generate heat and electric power in homes. We are trying to expand sales of the Civic GX, our natural gas-powered vehicle
by promoting it together with the introduction of an affordable home refueling appliance for natural gas-powered vehicles.
Honda is thus playing a leading role in the promotion of alternative fuel-powered vehicles.
● Other Regions (Brazil)
In Brazil, where ethanol produced from sugar cane is used as fuel, since the mid-1980s Honda has offered motorcycles and
automobiles that run on a combination of ethanol and gasoline. The percentage of ethanol used in fuels in Brazil is increasing,
with a 100% ethanol fuel, called E100, now available. To meet this challenge, Honda is developing a flex-fuel vehicle that
operates on any gasoline-ethanol mixture. This vehicle is expected to go on sale in 2006.
*1: Tier2 BIN5
This standard for exhaust emissions was established in the United States by the Environmental Protection Agency based on the U.S. Clean Air Act and went into effect in 2004.
Regulation value of NOx for emission category BIN5: 0.07g/mile
*2: Euro3/Euro4
Emission regulations implemented in Europe from 2005. Although China and many Asian countries have introduced European regulations, at present they only comply with Euro3
standards. Euro4 is a stringent level that Thailand is considering adopting from 2008.
*3: Diesel particulate filter (DPF)
This ceramic filter attracts and strains out black smoke and other particulate matter from the exhaust of diesel vehicles, cleaning their emissions.
Note: For further details on Honda’s environmental activities, please refer to the Honda Environmental Annual Report 2006.
URL: http://world.honda.com/environment/2006report/
35
Environment and Safety
Safety Initiatives
As a manufacturer of mobility products, Honda is committed to making products that provide high levels of safety,
not only for drivers and passengers but also for pedestrians. At the same time, we engage in activities that
promote safe driving and actively work to solve issues related to traffic systems. We will continue to promote “Hand
Delivery of Safety,” our key phrase for safety promotion activities to create greater harmony between people and
vehicles to establish a safer and more comfortable mobility society.
■ Safety Technologies
Honda will develop safety technologies for accident prediction
and prevention, technologies to reduce injuries to passengers
and pedestrians from car accidents, and technologies for
enhancing compatibility, while expanding our lineup of products
incorporating such technologies.
Honda has developed the world’s first production motorcycle
airbag system. The new system, which can help lessen the
severity of injuries caused by frontal collisions, is to be made
available on the new GoldWing motorcycle scheduled for release
GoldWing
in mid-2006 in the United States.
Honda has developed Honda ASV-3, Advanced Safety
Vehicle equipped to exchange positional information with other
vehicles using Inter-Vehicle Communication technology. This was
a central objective of the five-year (April 2001-March 2006) ASV
(Advanced Safety Vehicle)-3 Project* 4 led by the Ministry of Land,
Infrastructure and Transport. Additionally, Honda ASV-3 vehicles
feature several new advanced safety technologies developed by
Honda, including a system that uses cameras and millimeter wave
Honda ASV-3
radar to provide drivers with information on approaching vehicles and
obstacles on the road; a system that offers driver support through
steering and brake assist; and an emergency response system
designed to aid in rescue efforts in the event of an accident. Honda plans to conduct further research and development of
technologies deployed in the ASV-3 research vehicles with a view to implementing them in mass production vehicles.
■ Promoting Safer Driving
Honda intends to enhance its contribution to traffic safety in mobility societies, including Asian countries. Honda also intends
to remain active in a variety of traffic safety programs, including advanced driving and motorcycle training provided by local
dealerships.
Driving and riding safety promotions modeled on Honda’s activities in Japan were operated by 26 corporations in 20
countries. These promotions are modified to reflect the various driving and riding conditions and licensing systems of each
country. In 2005, Russia began this promotion.
For motorcycles, in Turkey we have completed a new motorcycle training course and provided training for police,
companies and individual riders. A Honda motorcycle dealership in Pakistan employs riding advisors, who conduct one-day
schools and provide safety advice. In these ways, we are working to expand our Asia-focused safety activities.
For automobiles, we have introduced in Russia the framework of the Rainbow Dealer System practiced by Honda car
dealerships in Japan, and in April 2006, we began training Safety Coordinators who will provide safety advice to customers at
Honda dealerships. In such ways, we propagate Honda’s philosophy to Russian drivers. As the number of automobiles in
China continues to increase, Guangzhou Honda, our affiliate, has begun educating its employees as role models for safe
driving.
By listening closely to opinions from our customers and broader society, Honda is seeking to extend its safety
developments further in the future.
*4: ASV (Advanced Safety Vehicle)-3 Project
The third phase of a project that Japan’s Ministry of Land, Infrastructure and Transport began in 1991 to promote the development of advanced safety vehicles, which manufacturers of
automobiles and motorcycles join voluntarily
36
Preparing for the Future
Preparing for the Future
4. Product Quality
Responding to increasing consumer demand, Honda
will upgrade its quality control through enhancing the
functions of and coordination among the development,
purchasing, production, sales and service departments.
As for the global economy, the U.S. and Asian
economies are expected to grow steadily, and Japan
and Europe are also expected to maintain their
moderate economic recovery. However, the global
environment in which Honda’s management operates
still lacks transparency because of global political and
economic uncertainty, fluctuations in oil and raw material
prices, and currency movements. As a result, we expect
to see continued severe situations.
It is under these circumstances that Honda will
strengthen its corporate structure quickly and flexibly
to meet the requirements of our customers and society
and the changes in its business environment. Also, in
order to improve the competitiveness of its products,
Honda will endeavor to enhance its R&D, production
and sales ability. Furthermore, Honda will continue
striving to earn even more trust and understanding from
society through Companywide activities. Honda
recognizes that further enhancing the following specific
areas is essential to its success:
5. Safety Technologies
Honda will develop safety technologies for accident
prediction and prevention, technologies to reduce
injuries to passengers and pedestrians from car
accidents, and technologies for reducing aggressivity,
as well as expand its line-up of products incorporating
such technologies. Honda intends to enhance its
contribution to traffic safety in motorized societies,
including Asian countries. Honda also intends to remain
active in a variety of traffic safety programs, including
advanced driving and motorcycling training schemes
provided by local dealerships.
6. The Environment
Honda will step up its efforts to create better, clean,
fuel-efficient engine technologies and to improve further
the recyclability throughout its product lines. Honda will
also advance alternative fuel technologies, including fuel
cells and solar cells. In addition, Honda will continue its
efforts to minimize environmental impact, as measured
by the Life Cycle Assessment*, in all of its business
fields, including production, logistics and sales.
1. Research and Development
Along with efforts to develop even more effective safety
and environmental technologies, Honda will enhance the
creativity in its advanced technology and products, and
will create and swiftly introduce new value-added
products that meet specific needs in various markets
around the world. Honda will also continue efforts in the
research of future technologies, including the
advancement of advanced humanoid robots and
compact business jets and their engines.
*Life Cycle Assessment: A comprehensive system for quantifying the
impact Honda’s products have on the environment at the different
stages in their life cycles, from material procurement and energy
consumption to waste disposal.
7. Continuing to Increase Society’s Trust in and
Understanding toward Honda
2. Production Efficiency
Honda will establish efficient and flexible production
systems and expand production capacity at its global
production bases, with the aim of increasing its
capability of supplying high-quality products.
In addition to continuing to provide products
incorporating Honda’s advanced safety and
environmental technologies, Honda will continue striving
to earn even more trust and understanding from society
by, among other things, undertaking activities for
corporate governance, compliance, and risk
management and contributing to society.
3. Sales Efficiency
Honda will continue to make efforts to expand product
lines through the innovative use of IT and to upgrade
sales and service structure, in order to further satisfy
its customers.
Through these Companywide activities, we will strive to
materialize Honda’s visions of “Value Creation (Creating
New Value for our Customers),” “Glocalization (Expanding
Regional Operations),” and “Commitment for the Future
(Developing Safety and Environmental Solutions),” with
the aim of sharing joy with Honda’s customers, thus
becoming a company that society wants to exist.
37
Risk Factors
Relating to Honda’s Industry
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 from Japan and generates a
substantial portion of its revenues in currencies other than
the yen, Honda’s results of operations would be adversely
affected by an appreciation of the yen against other
currencies, particularly the U.S. dollar.
1. 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
continued economic slowdown, recession or sustained
loss of consumer confidence in these markets, which may
be caused by rising fuel prices or other factors, could
trigger a decline in demand for automobiles, motorcycles
and power products that may adversely affect Honda’s
results of operations.
2. 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 risk, Honda uses derivative financial instruments
to reduce the substantial effects of currency fluctuations
and interest rate exposure on its cash flow 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 also is 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.
2. Prices for automobiles, motorcycles and power
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 many
factors, including increasingly fierce competition, shortterm fluctuations in demand from underlying economic
conditions, changes in import regulations, shortages of
certain supplies, high material prices and sales incentives
by Honda or other manufacturers or dealers. There can be
no assurance that such price volatility will not continue or
intensify or that price volatility will not occur in markets that
to date have not experienced such volatility. Overcapacity
within the industry has increased and will likely continue to
increase if the economic downturn continues in Honda’s
major markets or worldwide, leading, potentially, to further
increased price pressure. Price volatility in any or all of
Honda’s markets could adversely affect Honda’s results of
operations in a particular period.
General Risks Relating to
Honda’s Business
Legal and Regulatory Risks
1. The automobile, motorcycle and power product
industries are subject to extensive environmental
and other governmental regulation
Currency and Interest Rate Risks
1. Honda’s operations are subject to currency
fluctuations
Regulations regarding vehicle emission levels, fuel
economy, noise, 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. The costs to comply with
these regulations can be significant to Honda’s operations.
Honda has manufacturing operations throughout the
world, including Japan, and exports products and
components to various countries. Honda purchases
materials and parts, and sells its products in foreign
currencies. Therefore, currency fluctuations may affect
Honda’s pricing of products sold and materials
38
Risk Factors
2. Honda is reliant on the protection and
preservation of its intellectual property
3. Honda conducts its operations in various regions
of the world
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 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 breach of some or a large
group of Honda’s intellectual property rights, would have
an adverse effect on Honda’s operations.
Honda conducts its businesses worldwide and in several
countries 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.
4. Honda may be adversely affected by wars,
use of force by foreign countries, terrorism,
multinational conflicts, natural disasters,
epidemics and labor strikes
Risks Relating to Honda’s Operations
1. Honda’s financial services business conducts
business under highly competitive conditions
in an industry with inherent risks
Honda conducts its businesses worldwide, and its
operations may variously be subject to wars, use of force
by foreign countries, terrorism, multinational conflicts,
natural disasters, epidemics, labor strikes and other
events beyond its control which may delay or disrupt
Honda’s local operations in the affected regions, including
the purchase of raw materials and parts, the manufacture,
sales and distribution of products and the provision of
services. Delays or disruptions in one region may in turn
affect our global operations. If such delay or disruption
occurs and continues for a long period of time, Honda’s
business, financial condition or results of operations may
be adversely affected.
Honda’s financial services business offers customers
various financing plans designed to increase the opportunity for sales of its products. However, customers can
also obtain financing for the lease or purchase of Honda’s
products through a variety of other sources that compete
with its financing services, including commercial banks
and finance and leasing companies. The financial services
offered by us also involve risks relating to residual value,
credit risk and cost of capital. Competition for customers
and/or these risks that are specific to the financing
business may affect Honda’s results of operations in
the future.
2. Honda relies on various suppliers for the
provision of certain raw materials and
components
Honda purchases raw materials, and certain components
and parts, from numerous external suppliers, and relies on
some key suppliers for some items and the raw materials
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 supply 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.
39
Corporate Governance
Basic Stance
regional and local levels and the supervision by the Board
of Directors. The term of office of each director is limited to
one year, and the amount of remuneration payable to them
is determined according to a standard that reflects their
performance in the Company. Our goal in doing this is to
maximize the flexibility with which our directors respond to
changes in the operating environment.
With respect to business execution, Honda has
established a system for operating its organizational units
that reflects its fundamental corporate philosophy. For
example, separate headquarters have been set up for
each region, business and function, and a general manager from the Board of Directors or an operating officer
has been assigned to each headquarters and main
division. In addition, the Management Council deliberates
important matters concerning management, and regional
Based on its fundamental corporate philosophy, the
Company is working to enhance corporate governance as
one of its most important management issues. Our aim is
to have our customers and society, as well as our shareholders and investors, place even greater trust in us and
to ensure that Honda is “a company that society wants
to exist.”
To ensure objective control of the Company’s management, outside directors and corporate auditors are
appointed to the Board of Directors and the Board of
Corporate Auditors, which are responsible for the supervision and auditing of the Company. Honda has also
introduced an operating officer system, aimed at strengthening both the execution of business operations at the
Management Organization of the Company’s Corporate Governance
for Decision-Making, Execution, Supervision and Others
Board of Auditors
(Outside Auditors
6 auditors
3 auditors)
Board of Directors
(Outside Directors
20 directors
2 directors)
Executive Council
President & C.E.O.
Business Ethics Committee 6 officers
10 directors
Business Ethics Improvement
Proposal Line
Compliance Officer
Honda Driving Safety Promotion Center
Corporate Planning Division
New Business Development
and Planning Office
Aero Engine Business
Planning Office
Quality Innovation Center
Risk Management Officer
Regional Sales
Operations
(Japan)
Regional Operations
(North America)
Regional Operations
(Latin America)
Regional Operations
(Europe, the Middle &
Near East and Africa)
Regional Operations
(Asia and Oceania)
Regional Operations
(China)
Regional Operating
Board
(Japan)
Regional Operating
Board
(North America)
Regional Operating
Board
(Latin America)
Regional Operating
Board
(Europe, the Middle &
Near East and Africa)
Regional Operating
Board
(Asia and Oceania)
Regional Operating
Board
(China)
Certification & Regulation
Compliance Division
IT Division
Motorcycle Operations
Automobile Operations
Power Product Operations
Customer Service Operations
Production Operations
Domestic Factories
Purchasing Operations
Business Support Operations
Business Management Operations
Corporate Project
Quality Audit & Compliance Division
Audit Office
Corporate Auditors Office
28 staff
2 staff
Honda R&D Co., Ltd.
Honda Engineering Co., Ltd.
(As of June 23, 2006)
40
Corporate Governance
Board of Corporate Auditors
operating councils deliberate important matters
concerning management of their respective regions. The
result is a system that functions effectively and efficiently,
and addresses the needs of customers and societies
around the world in a swift and appropriate manner.
With respect to internal control, each division within
the Company is working autonomously to reinforce legal
and ethical compliance and risk management. The task
of the Audit Office is to carry out effective audits of the
performance of each division’s business.
To enhance even further the trust and understanding
shareholders and investors have in it, Honda’s basic policy
emphasizes the appropriate disclosure of company information, such as by disclosing financial results on a quarterly basis and timely and accurately giving public notice
of and disclosing its management strategies. Honda will
continue raising its level of transparency in the future.
The Board of Corporate Auditors consists of six corporate
auditors, including three outside corporate auditors. In
accordance with the Company’s auditing standards,
auditing policies, apportionment of responsibilities and
other such matters as determined by the Board of
Corporate Auditors, each corporate auditor audits the
directors’ execution of duties. Corporate Auditors
accomplish these audits through various means, including
attending meetings of the Board of Directors and inspecting the state of the Company’s assets and liabilities. In
addition, a Corporate Auditors’ Office was established to
provide direct support to the Board of Corporate Auditors.
In the year under review, the Board of Corporate
Auditors met 14 times.
The Board of Corporate Auditors has certified Shinichi
Sakamoto, a corporate auditor of the Company, as an
“audit committee financial expert,” as set out in the rules
of the Securities and Exchange Commission pursuant to
Section 407 of the U.S. Sarbanes-Oxley Act of 2002.
In the year under review, meetings between the
Company’s corporate auditors and its independent
auditor were held on five occasions. At those meetings,
the independent auditor provided the corporate auditors
with explanations and reports on accounting audit plans
and results, and opinions were exchanged.
The corporate auditors coordinate closely with the
Audit Office, which is responsible for internal audits, with
respect to audit policies and schedules. In the year under
review, corporate auditors and the Audit Office, either
independently or in collaboration, conducted business
audits of a total of 128 companies among Honda’s
domestic and overseas subsidiaries and affiliates.
Current State of the Company’s
Management Structure
(1) Management Organization
Board of Directors
The Board of Directors consists of 20 directors, including
two outside directors, and determines important items that
are related to business execution or that are designated by
law and supervises business execution. In June 2005, the
Company introduced an operating officer system aiming at
strengthening its business execution and improving flexibility in decision-making at the Board of Directors. The Company also plans to increase the number of outside directors
to strengthen the supervisory functions of the Board of
Directors.
In the year under review, the Board of Directors met
nine times.
Outside Corporate Auditors
The Company has appointed outside corporate auditors
to receive audits of its corporate activities from a broadranging and advanced viewpoint based on extensive
experience and a high level of insight in corporate
management and as a legal specialist.
The outside corporate auditors attend meetings of the
Board of Directors, asking questions and offering opinions
as necessary. The Board of Directors also provides items
of business and other information as necessary to the
outside corporate auditors.
There is no particular relationship between the Company and its outside corporate auditor, Koukei Higuchi.
There is no particular relationship between the
Company and its outside corporate auditor, Kuniyasu
Yamada. Mr. Yamada serves as President and Director
of MTB Apple Planning, Co., Ltd. There is no particular
relationship between MTB Apple Planning, Co., Ltd. and
the Company.
Outside Directors
The Company has appointed outside directors to receive
advice on its corporate activities from an objective, broadranging, and advanced viewpoint based on extensive
experience and a high level of insight in corporate
management and diplomacy.
Outside directors attend meetings of the Board of
Directors, asking questions and offering opinions as necessary. The Board of Directors also provides information
on items of business and topics as necessary to outside
directors.
There is no particular relationship between the
Company and its outside director, Satoru Kishi.
There is no particular relationship between the
Company and its outside director, Kensaku Hogen.
41
Corporate Governance
Law from fiscal 2007), the Securities and Exchange Law
and the U.S. Securities Exchange Act. In addition, they
supervise the election of independent auditors, their
remuneration and their non-audit services.
In the previous fiscal year, the Company elected Ernst
& Young ShinNihon as its independent auditor under the
Commercial Code’s Audit Special Exceptions Law and the
Securities and Exchange Law, and elected AZSA & Co. as
its independent auditor under the Securities Exchange Act
of the U.S.A.
In fiscal 2006, the Company elected AZSA & Co. as its
independent auditor under Japanese laws, thus having
the same independent auditor under both U.S. and
Japanese laws, in order to ensure an efficient Group-wide
auditing system.
A total of 47 people from AZSA & Co. provided auditing services for Honda: four Japanese certified public
accountants (Masanori Sato, Shuji Ohtsu, Kensuke
Sodegawa and Atsuji Maeno) and 43 assistants (13
certified public accountants, 14 assistant accountants,
three U.S. certified public accountants and 13 others).
In fiscal 2006, the Company and its consolidated subsidiaries paid a total of ¥1,119 million in fees to AZSA &
Co. and its affiliated accounting firm, KPMG, for audit
certification services under the Commercial Code’s Audit
Special Exceptions Law, the Securities and Exchange
Law and the U.S. Securities Exchange Act.
In fiscal 2006, the Company’s overseas consolidated
subsidiaries paid a total of ¥395 million in fees to AZSA &
Co. and its affiliated accounting firm, KPMG, for nonauditing services.
There is no particular relationship between the Company and its outside corporate auditor, Fumihiko Saito.
Mr. Saito serves as a partner of Saito Law Office. There is
no particular relationship between Saito Law Office and
the Company.
Directors’ Remuneration
The total amount of remuneration and bonuses of directors and corporate auditors is determined according to
criteria that reflect their performance in the Company.
Remuneration for directors and corporate auditors is
paid based on criteria approved by the Board of Directors,
and it is paid within the extent of the maximum amount
resolved by the Ordinary General Meeting of Shareholders.
Bonuses for directors and corporate auditors are paid
based on a decision of the Ordinary General Meeting of
Shareholders, taking into consideration the Company’s
profits during the fiscal year, past bonuses paid and
various other factors.
The total remuneration paid to directors and corporate
auditors during fiscal 2006 was ¥997 million: ¥897 million
to the 37 directors (including 16 directors who retired
during the year) and ¥100 million to the six corporate
auditors. The remuneration paid to directors includes
employee wages paid to directors who also held
employee status and remuneration paid by subsidiaries of
the Company to directors who had business execution
responsibilities for the subsidiaries. The remuneration paid
to corporate auditors includes amounts paid by subsidiaries of the Company to corporate auditors who also served
as corporate auditors for those subsidiaries.
Executive bonuses paid during fiscal 2006 totaled
¥720 million: ¥668 million to the 36 directors who were
directors at the end of fiscal 2005 and ¥52 million to the
five corporate auditors who were corporate auditors as at
the end of fiscal 2005.
Retirement allowances paid to the two retired directors
totaled ¥464 million, in accordance with a resolution of
the Ordinary General Meeting of Shareholders, held in
June 2005.
Policy and Procedures for Obtaining Board of
Corporate Auditors’ Prior Consent
To ensure that the independent auditor and its affiliate
involved in audit certification services under the U.S.
Securities Exchange Act behave in accordance with all
applicable laws and regulations and maintain complete
independence from the Company, they must obtain the
prior consent of the Company’s Board of Corporate
Auditors before they carry out auditing services, auditingrelated services, tax services and other services for Honda.
The Company’s initial policy required that each contractual agreement have a separate prior consent from
the Board of Corporate Auditors. In order to make the
decision-making process more efficient, however, we are
enhancing procedural efficiency by establishing categories
of matters requiring comprehensive prior consent. These
categories are reviewed regularly by the Board of Corporate Auditors. Any matter that does not fall under one of
these categories still requires separate consent of the
Board of Corporate Auditors.
Decisions Regarding Director Candidates
Candidates for directors are decided at meetings of the
Board of Directors. Candidates for corporate auditors are
decided by resolution of the Board of Directors, subject to
agreement of the Board of Corporate Auditors.
Accounting Audits
In order to ensure proper auditing of the Company’s
accounts, the Board of Corporate Auditors and the Board
of Directors receive auditing reports based on the Commercial Code’s Audit Special Exceptions Law (Company
42
Corporate Governance
Status of Measures Related to
Shareholders and Others with
Vested Interests
(2) Business Execution System
Organization
As for execution of business, the Company has six
regional operations around the world to develop business
based on its fundamental corporate philosophy. These
operations adopt long-term perspectives and maintain
close ties with local communities.
The Company’s four business operations—motorcycles, automobiles, power products and spare parts—
formulate the medium- and long-term plans for their
business development, and each operation aims to maximize its business performance on a global basis. Each
functional operation—such as Customer Service Operations, Production Operations, Purchasing Operations,
Business Management Operations and Business Support
Operations—supports the other functional operations,
with the aim of increasing Honda’s effectiveness and
efficiencies.
Research and development activities are conducted
principally at the independent subsidiaries of the Company.
Honda R&D Co., Ltd., is responsible for research and
development on products, while Honda Engineering Co.,
Ltd., handles research and development in the area of
production technology. The Company actively carries out
research and development in advanced technologies with
the aim of creating products that are distinctive and
internationally competitive.
(1) Measures to Invigorate Ordinary General
Meetings of Shareholders and Ensure
Smooth Exercise of Voting Rights
To invigorate the annual Ordinary General Meeting of
Shareholders, the Company holds the meeting as early as
possible. The Company also presents easy-to-understand
reports using video and slides, and displays its products
at the conference room.
The Company sends convocation notices before the
date required by law, and also allows shareholders to
exercise their voting rights via the Internet, using personal
computers or mobile phones. Convocation notices are
sent in English to overseas investors. In these and other
ways, the Company strives to make the exercise of rights
as smooth as possible.
(2) IR Activities
For analysts and institutional investors, the Company
holds meetings to present its results four times a year and
meetings with the president twice a year. Company representatives visit and hold information meetings as needed
for major Japanese and overseas institutional investors to
explain the Honda Group’s future business strategies.
Representatives based in North America and Europe also
hold information meetings for institutional investors as
appropriate. In addition, the Company holds information
meetings for investors at motor shows and other major
events, where presentations on such topics as Honda
Group strategies are made by the president or relevant
director. Moreover, the Company conducts regular tours
of facilities in Japan and overseas for shareholders and
other investors.
The latest information for investors is available on the
Company’s website (http://www.honda.co.jp/investors/ in
Japanese; http://world.honda.com/investors/ in English).
All new information is uploaded to the site simultaneously
in Japanese and English.
The Company issues a regular publication for shareholders, containing information about its businesses,
products, financial status and other matters.
Business Execution Officer System
The Company has assigned a general manager from the
Board of Directors or an operating officer to each regional,
business and functional division, as well as to each
research and development subsidiary. By ensuring swift,
optimal decision-making in each region and workplace,
the Company is building a highly effective and efficient
business execution system.
Management Council
The Company has established the Management Council,
which consists of 10 representative directors. Along with
discussing in advance the items to be resolved at meetings of the Board of Directors, the Management Council
discusses important management issues within the scope
of authority conferred upon it by the Board of Directors.
In the year under review, the Management Council met
22 times.
(3) Respecting the Perspective of
Stakeholders
Regional Operating Councils
Seeking to earn the unwavering trust of customers and
society, the Honda Group has formulated a set of
behavioral guidelines, which is observed by all individual
employees.
In addition to supplying products incorporating the
most advanced safety and environmental technologies,
To enhance the independence of each regional operation
and ensure swift decision-making, regional operating
councils have been established at each regional operation
to discuss important management issues in the region
within the scope of authority conferred upon it by the
Management Council.
43
Corporate Governance
Business Ethics Committee and the Business Ethics
Improvement Proposal Line.
the Company pursues environmental protection activities,
safe driving campaigns and social contribution activities
covering all aspects of its operations, including production, logistics and sales. These initiatives reflect the
Company’s effort to earn the trust and understanding of
society via its corporate activities.
The Company provides information about its corporate
activities via financial reports and other disclosures
according to law. We also publish yearly reports on environmental protection activities, safe driving campaigns and
social contribution activities, which are posted on our
website. In addition, we plan to produce a corporate social
responsibility (CSR) report that comprehensively explains
our activities related to the environment, safety and society.
Business Ethics Committee
Honda’s Business Ethics Committee is chaired by the
Compliance Officer and consists of directors and corporate officers. The Committee deliberates matters related to
corporate ethics and compliance. It met four times in the
year under review.
Business Ethics Improvement Proposal Line
Honda places high priority on open communications in its
divisions. It has also set up the Business Ethics
Improvement Proposal Line to receive suggestions related
to corporate ethics issues. By devising appropriate
responses to suggestions received, Honda is constantly
working to enhance corporate ethics. The system is
designed to ensure to protect informants, who can either
use their real name or remain anonymous.
The Business Ethics Committee supervises the operation of the Business Ethics Improvement Proposal Line and
submits status reports to the Board of Corporate Auditors.
Internal Control System:
Fundamental Stance and
Implementation Status
Basic Stance
To earn the trust of customers and society, the Company’s
divisions, under the guidance of their respective directors in
charge, have frameworks in place to ensure a systematic
approach to compliance and risk management. These
include formulation of behavioral guidelines and procedures
for self-assessment. The Company also has a system to
support initiatives of each division. Moreover, effective
audits are carried out to monitor the execution status of
each division.
Risk Management System
Each division works to prevent and address its particular
set of risks. In addition, the Honda Crisis Response Rules
are designed to address company-wide crises, such as
major natural disasters.
The Company has appointed a Risk Management
Officer, who is a director in charge of risk managementrelated initiatives. It also established the Company-Wide
Response Headquarters to address crisis situations.
Group Governance System
Behavioral Guidelines
Storage and Management of Information on
Execution of Business by Directors
The “Honda Conduct Guideline,” formulated to guide the
behavior of all employees, is posted on the Company’s
website (http://www.honda.co.jp/conductguideline/ in
Japanese; http://world.honda.com/conductguideline/ in
English). In addition, each division produces more detailed
behavioral guidelines according to its specific attributes.
Documents and other information related to the execution
of business by directors are stored and managed appropriately, according to the document management policies
of Honda and its major regional subsidiaries.
Self-Assessment Checklist
Business Audits
Each division of the Company approaches compliance and
risk management in a systematic way. For example, each
division has a checklist that clarifies specific laws and risks
to consider related to its particular business, and conducts
regular self-assessments. The results of such assessments
are reported to the director in charge of each division, and
the overall status of compliance and risk management is
evaluated regularly by the Management Council.
The Audit Office is an independent supervisory department under the direct control of the president. This office
audits the performance of each department and works to
improve the internal auditing of subsidiaries and affiliates
in each region.
Disclosure Committee
The Disclosure Committee, which consists of relevant
directors, deliberates matters related to the accuracy and
appropriateness of corporate information to be disclosed
in business results announcements and financial reports.
Compliance System
The Company has appointed a Compliance Officer, who is
a director in charge of compliance-related initiatives. Other
key elements of our compliance system include the
44
Corporate Governance
Code of Ethics
303A of the NYSE Listed Company Manual. However,
listed companies that are foreign private issuers, such as
Honda, are permitted to follow home country practice in
lieu of certain provisions of Section 303A.
The following table shows the significant differences
between the corporate governance practices followed by
U.S. listed companies under Section 303A of the NYSE
listed Company Manual and those followed by Honda.
The Company has also established a “Code of Ethics” as
set forth in the rules of the U.S. Securities and Exchange
Commission regulations pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002.
Companies listed on the NYSE must comply with certain
standards regarding corporate governance under Section
Corporate Governance Practices Followed by
NYSE-listed U.S. Companies
Corporate Governance Practices Followed by Honda
For Japanese companies that employ a corporate governance system based
on a board of corporate auditors (the “corporate auditor system”), including
Honda, Japan’s company law has no independence requirement with respect to
directors. The task of overseeing management and, together with the accounting
audit firm, accounting is assigned to the corporate auditors, who are separate
from the company’s management and who satisfy the independency
requirements under Japan’s Company Law.
A NYSE-listed U.S. company must have a majority of directors meeting the
independence requirements under Section 303A of the NYSE Listed Company
Manual.
In the case of Japanese companies that employ the board of corporate auditors
system, including Honda, at least half of the corporate auditors must be
“outside” corporate auditors who must meet additional independence requirements under Japan’s company law. An outside corporate auditor is defined as a
corporate auditor who has not served as a director, accounting councilor,
executive officer, manager or any other employee of the company or any of its
subsidiaries.
Currently, Honda has three outside corporate auditors which constitute 50% of
Honda’s corporate auditors.
A NYSE-listed U.S. company must have an audit committee composed entirely
of independent directors, and the audit committee must have at least three
members.
Like a majority of Japanese companies, Honda employs the corporate auditor
system as described above. Under this system, the board of corporate auditors
is a legally separate and independent body from the board of directors. The
main function of the board of corporate auditors is similar to that of independent directors, including those who are members of the audit committee, of a
U.S. company: to monitor the performance of the directors, and review and
express opinion on the method of auditing by the company’s accounting audit
firm and on such accounting audit firm’s audit reports, for the protection of the
company’s shareholders.
Japanese companies that employ a corporate auditor system, including Honda,
are required to have at least three corporate auditors. Currently, Honda has six
corporate auditors. Each corporate auditor has a four-year term. In contrast,
the term of each director of Honda is one year.
With respect to the requirements of Rule 10A-3 under the U.S. Securities
Exchange Act of 1934 relating to listed company audit committees, Honda
relies on an exemption under that rule which is available to foreign private
issuers with boards of corporate auditors meeting certain criteria.
A NYSE-listed U.S. company must have a nominating/corporate governance
committee composed entirely of independent directors.
Honda’s directors are elected at a meeting of shareholders. Its Board of
Directors does not have the power to fill vacancies thereon.
Honda’s corporate auditors are also elected at a meeting of shareholders. A
proposal by Honda’s Board of Directors to elect a corporate auditor must be
approved by a resolution of its Board of Corporate Auditors. The Board of
Corporate Auditors is empowered to request that Honda’s directors submit a
proposal for election of a corporate auditor to a meeting of shareholders. The
corporate auditors have the right to state their opinion concerning election of a
corporate auditor at the meeting of shareholders.
A NYSE-listed U.S. company must have a compensation committee composed
entirely of independent directors.
Maximum total amounts of compensation for Honda directors and corporate
auditors are proposed to, and voted on, by a meeting of shareholders. Once
the proposals for such maximum total amounts of compensation are approved
at the meeting of shareholders, each of the Board of Directors and Board of
Corporate Auditors determines the compensation amount for each member
within the respective maximum total amounts.
A NYSE-listed U.S. company must generally obtain shareholder approval with
respect to any equity compensation plan.
Currently, Honda does not adopt stock option compensation plans. When
Honda adopts it, such plans, Honda must obtain shareholder approval for
stock options only if the stock options are issued with specifically favorable
conditions or price concerning the issuance and exercise of the stock options.
45
Board of Directors, Corporate Auditors and Operating Officers
Front row:
President and
Representative Director
Executive Vice President and
Representative Director
Takeo Fukui
Satoshi Aoki
Back row:
Koichi Kondo
Senior Managing and Representative Directors
Satoshi Toshida
Satoshi Dobashi
Minoru Harada Motoatsu Shiraishi
Atsuyoshi Hyogo
Koki Hirashima
Directors
<Name>
President and
Representative Director
Executive Vice President
and Representative Director
Senior Managing and
Representative Director
Senior Managing and
Representative Director
Senior Managing and
Representative Director
Senior Managing and
Representative Director
Senior Managing and
Representative Director
<Area of Responsibility or Principal Occupations>
Takeo Fukui
Satoshi Aoki
Chief Operating Officer for Motorcycle Operations
Purchasing Operations Support
General Supervisor, Quality
Motoatsu Shiraishi
President and Director of Honda R&D Co., Ltd.
Minoru Harada
Satoshi Dobashi
Chief Operating Officer for Regional Sales Operations (Japan)
Atsuyoshi Hyogo
Chief Operating Officer for Regional Operations (China)
President of Honda Motor (China) Investment Corporation, Limited
Satoshi Toshida
Chief Operating Officer for Power Product Operations
Senior Managing and
Representative Director
Koki Hirashima
Senior Managing and
Representative Director
Koichi Kondo
Senior Managing and
Representative Director
Mikio Yoshimi
Chief Operating Officer for Production Operations
Risk Management Officer
General Supervisor, Information Systems
Chief Operating Officer for Regional Operations (North America)
President and Director of Honda North America, Inc.
President and Director of American Honda Motor Co., Inc.
Chief Operating Officer for Business Support Operations
Chief Officer of Driving Safety Promotion Center
Compliance Officer
Government & Industrial Affairs
46
Mikio Yoshimi
Board of Directors, Corporate Auditors and Operating Officers
<Name>
<Area of Responsibility or Principal Occupations>
Managing Director
Managing Director
Toru Onda
Akira Takano
Managing Director
Shigeru Takagi
Managing Director
Hiroshi Kuroda
Managing Director
Tetsuo Iwamura
Managing Director
Tatsuhiro Oyama
Director
Director
Director and Advisor
Director
Satoru Kishi
Kensaku Hogen
Hiroyuki Yoshino
Fumihiko Ike
Chief Operating Officer for Purchasing Operations
Chief Operating Officer for Customer Service Operations
Chief Operating Officer for Regional Operations (Europe, the Middle & Near East and Africa)
President and Director of Honda Motor Europe Limited
Chief Operating Officer for Automobile Operations
Chief Operating Officer for Regional Operations (Latin America)
President and Director of Honda South America Ltda.
President and Director of Moto Honda da Amazonia Ltda.
President and Director of Honda Automoveis do Brasil Ltda.
Chief Operating Officer for Regional Operations (Asia & Oceania)
President and Director of Asian Honda Motor Co., Ltd.
Advisor of the Board of The Bank of Tokyo-Mitsubishi UFJ, Ltd.
Chief Operating Officer for Business Management Operations
(Note) Mr. Satoru Kishi and Mr. Kensaku Hogen satisfy the required conditions for outside directors provided for in Article 2, Item 15 of the Company Law.
Corporate Auditors
<Name>
Corporate Auditor (Full-time)
Corporate Auditor (Full-time)
Corporate Auditor (Full-time)
Corporate Auditor
Corporate Auditor
Corporate Auditor
<Area of Responsibility or Principal Occupations>
Hiroshi Okubo
Koji Miyajima
Shinichi Sakamoto
Koukei Higuchi
Advisor of the Board of Tokio Marine & Nichido Fire Insurance Co., Ltd.
Kuniyasu Yamada President of M·U·TRUST·APPLE PLANNING COMPANY,LTD.
Fumihiko Saito
Representative of Saito Law Office
(Note) Corporate Auditors Mr. Koukei Higuchi, Mr. Kuniyasu Yamada and Mr. Fumihiko Saito are outside corporate auditors as provided in Article 2, Item 16 of the
Company Law.
47
Board of Directors, Corporate Auditors and Operating Officers
Operating Officers
<Name>
Managing Officer
Managing Officer
Managing Officer
Managing Officer
Managing Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
Operating Officer
<Principal Occupations>
Yasuo Ikenoya
Takanobu Ito
Deputy Chief Operating Officer for Regional Operations (China)
General Manager of Suzuka Factory of Production Operations
Executive Vice President and Director of Honda Motor Europe Limited
Masaaki Kato
President and Director of Honda of the U.K. Manufacturing Ltd.
Akio Hamada
President and Director of Honda of America Mfg., Inc.
Teruo Kowashi
General Manager of Saitama Factory of Production Operations
Takashi Yamamoto
President and Director of Honda Manufacturing of Alabama, LLC
Executive Vice President and Director of Honda R&D Co., Ltd.
Suguru Kanazawa
President and Director of Honda Racing Corporation
Deputy Chief Operating Officer for Regional Sales Operations (Japan)
General Manager of Automobile Sales Operations in Regional Sales Operations
Manabu Nishimae
(Japan)
General Manager of Aftermarket Operations in Regional Sales Operations (Japan)
Masaya Yamashita
General Manager of Kumamoto Factory of Production Operations
Hiroshi Kobayashi
President and Director of Honda Canada Inc.
Corporate Communications, Motor Sports
Hiroshi Oshima
General Manager of Corporate Communications Division in Business Support
Operations
Sho Minekawa
President of Guangzhou Honda Automobile Co., Ltd.
Tsutomu Saka
General Manager of Hamamatsu Factory of Production Operations
Hidenobu Iwata
President and Director of Honda Engineering Co., Ltd.
Motohide Sudo
Executive Vice President and Director of Asian Honda Motor Co., Ltd.
Production for Production Opertions
Gen Tsujii
General Manager of Automobile Production Planning Office in Production
Operations
Koichi Fukuo
Quality, Certification & Regulation Compliance
Hiroshi Soda
Executive Vice President and Director of Honda North America, Inc.
Takuji Yamada
President and Director of Honda Motor Europe (North) GmbH
Hideki Okada
General Manager of Accounting Division in Business Management Operations
Masahiro Takedagawa President and Director of Honda Siel Cars India Limited
Yoichi Hojo
General Manager of Automobile Purchasing Division 2 in Purchasing Operations
Tsuneo Tanai
Executive Vice President and Director of Honda of America Mfg., Inc.
Yoshiyuki Matsumoto Automobile Products for Automobile Operations
Eiji Okawara
Production in China for Production Operations
(Note) The Company has introduced an operating officer system to facilitate transfer of authority to regions and local workplaces and effectively separate the
supervisory and executive roles, while also making the Board of Directors more versatile.
As of June 23, 2006
48
Financial Section
Contents
050
066
068
069
070
071
102
103
103
104
49
Financial Review
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Selected Quarterly Financial Data (Unaudited and Not Reviewed)
Net Sales and Operating Income by Business Segment
Financial Summary
Financial Review
Equity in Income of Affiliates
Equity in income of affiliates increased by 3.7%, to ¥99.6
billion.
Net Sales and Other Operating Revenue
Honda’s consolidated net sales and other operating revenue
(hereafter “net sales”) for fiscal 2006, ended March 31, 2006,
amounted to ¥9,907.9 billion, up 14.5% from the previous
fiscal year.
Of this amount, domestic net sales decreased by ¥5.1 billion, or 0.3%, to ¥1,694.0 billion, while overseas net sales
increased by ¥1,263.0 billion, or 18.2% to ¥8,213.9 billion.
Net Income
Net income amounted to ¥597.0 billion, an increase of 22.8%.
The effective tax rate was 38.9%, an decrease by 1.7 percentage points from the previous fiscal year.
Basic net income per common share amounted to ¥648.67,
compared with ¥520.68 in fiscal 2005.
The gain on “return” of ¥138.0 billion which was recorded in
the fiscal year ended March 31, 2006, was included in the
result of consolidated operating income and consolidated
income before income taxes. Accordingly, the result of amount
of the relevant income after tax that was recorded by the
“return” was included in the consolidated net income for the
fiscal year ended March 31, 2006.
Operating Income
Operating income amounted to ¥868.9 billion, which was an
increase of 37.7% from the previous fiscal year.
This was primarily due to positive currency effects caused
by the depreciation of the Japanese yen, increased profit
attributable to higher revenue, continuing cost reduction effects
and gain on return of the substitutional portion of the Employees’ Pension Funds to the Japanese government (herein
referred to as “return”), which offset the negative impact of
increased SG&A and R&D expenses.
Liquidity and Capital Resources
The policy of Honda is to support its business activities by
maintaining sufficient capital resources, an ample level of
liquidity and a sound balance sheet.
Honda’s main business is the manufacture 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 for
dealers.
In its manufacturing and sales business, Honda requires
operating capital mainly to purchase parts and materials
required for production, as well as to control inventory of
finished products and cover receivables from dealers. Honda
also requires funds for capital expenditures, mainly to upgrade,
rationalize and renew production facilities, as well as to expand
and reinforce research and development and sales facilities.
Honda meets its operating capital requirements mainly
through cash generated by operations. Honda funds its
financial programs for customers and dealers primarily from
Selling, General and Administrative Expenses/Research
and Development Expenses
SG&A expenses for fiscal 2006 increased by ¥143.1 billion or
9.5%, to ¥1,656.3 billion, reflecting increased sales expenses
and storage fee due to the increase of net sales and increased
advertisement expenses.
R&D expenses increased by ¥42.6 billion or 9.1%, to
¥510.3 billion.
Income before Income Taxes and Equity in Income of
Affiliates
Income before income taxes and equity in income of affiliates
was up 24.0%, to ¥814.6 billion.
Other income & expenses, net decreased by ¥80.1 billion
from the previous fiscal year, due mainly to decline in gains on
derivative instruments.
Net Sales and Other Operating
Revenue
Net Income and Net Income
per Common Share
Years ended March 31
Years ended March 31
Yen (billions)
10,000
Yen (billions)
800
(Yen)
800
7,500
600
600
5,000
400
400
2,500
200
200
0
0
02
03
04
05
06
0
02
03
04
05
06
Net Income (left)
Net Income per Common Share
(right)
50
Honda’s short- and long-term debt securities are rated by
credit rating agencies, such as Moody’s Investors Service, Inc.,
and Standard & Poor’s Rating Services. Based on major current ratings, which are shown below, Honda will be able to
raise funds even if it requires more capital than its present level
of liquidity would allow.
The following table shows the ratings of Honda’s unsecured
debt securities by Moody’s and Standard & Poor’s at the date
of filing of this annual report.
corporate bonds, medium-term notes and commercial paper,
as well as securitization of finance receivables. The year-end
balance of liabilities associated with fund-raising by financial
subsidiaries was ¥3,880.8 billion.
Cash Flows
Consolidated cash and cash equivalents at end of year
amounted to ¥747.3 billion as of March 31, 2006, down ¥26.2
billion, or 3.4%, from a year earlier, owing to decreases from
business subsidiaries.
Year-end cash and cash equivalents of business subsidiaries declined as net income and depreciation were outweighed
by increases in purchases of production equipment and other
tangible fixed assets. However, year-end cash and cash
equivalents of finance subsidiaries increased, owing to an
increase in their fund-raising activities associated with a rise in
their receivables.
Net cash provided by operating activities amounted to
¥576.5 billion. Factors increasing cash flows included ¥597.0
billion in net income (including a ¥138.0 billion non-cash gain
on the return of the substitutional portion of the employees’
pension plan) and ¥262.2 billion in depreciation. By contrast,
there was a ¥113.2 billion increase in trade accounts and notes
receivable and a ¥109.6 billion increase in inventories.
Net cash used in investing activities totaled ¥672.7 billion.
This was mainly due to ¥460.0 billion in capital expenditures
associated with introducing new models, upgrading, streamlining and renewing production facilities, and the improvement of
Sales and R&D facilities. Another factor was a ¥230.3 billion
increase in acquisition (net) of finance subsidiaries’ receivables
associated with higher sales of automobiles in North America
and elsewhere.
Net cash provided by financing activities was ¥24.0 billion.
During the year, Honda raised ¥865.6 billion in long-term debt
through the issue of bonds and medium-term notes to meet
capital requirements associated with an increase in liabilities of
finance subsidiaries, as well as to repay ¥568.3 billion in longterm debt. By contrast, there was a ¥124.9 billion decrease in
short-term debt accompanying a decline in external liabilities in
Europe. Honda also allocated ¥77.0 billion in payments for purchase of treasury stock and ¥71.0 billion in cash dividends
paid.
The ¥747.3 billion in cash and cash equivalents at end of
year corresponds to approximately 0.9 month 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, financial subsidiaries carry total short-term
borrowings of ¥1,369.1 billion in the form of commercial paper
issued regularly to replace debt. This serves as alternative
liquidity for a back-up credit line equivalent to ¥701.0 billion. In
addition, Honda currently has ample credit limits, extended
by prominent international banks, that are not subject to
contracts.
Honda believes it has adequate liquidity to meet its cash
obligations for the near future at least for the year ending
March 31, 2007.
Credit Ratings for
Moody’s Investors Service
Standard & Poor’s Rating Services
Short-term
unsecured
debt securities
Long-term
unsecured
debt securities
P-1
A-1
A1
A+
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 uses different standards for
calculating Honda’s credit rating, and also makes its own
assessments. 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 debt.
Off-Balance Sheet Arrangements
Special Purpose Entity
For the purpose of accelerating the receipt of cash related to
our finance receivables, we periodically securitize and sell pools
of these receivables. In these securitizations, we sell a portfolio
of finance receivables to a special purpose entity, which is
established for the limited purpose of buying and reselling
finance receivables. We remain as a servicer of the finance
receivables and are paid a servicing fee for our services. The
special purpose entity transfers the receivables to a trust or
bank conduit, which issues interest-bearing asset-backed
securities or commercial paper, respectively, to investors. We
retain certain subordinated interests in the sold receivables in
the form of subordinated certificates, servicing assets and
residual interests in certain cash reserves provided as credit
enhancements for investors. We apply significant assumptions
regarding prepayments, credit losses and average interest
rates in estimating expected cash flows from the trust or bank
conduit, which affect the recoverability of our retained interests
in the sold finance receivables. We periodically evaluate these
assumptions and adjust them, if appropriate, to reflect the
performance of the finance receivables.
Guarantee
At March 31, 2006, we guaranteed ¥46.7 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 ¥46.7
billion. As of March 31, 2006, 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.
51
Tabular Disclosure of Contractual Obligations
The following table shows our contractual obligations at March 31, 2006:
Yen (millions)
Payments due by period
Long-term debt
Operating leases
Purchase commitments(*)
Total
Less than 1 year
1-3 years
3-5 years
¥2,536,645
119,216
53,304
¥657,645
25,087
53,304
¥1,370,518
33,057
—
¥472,813
20,246
—
After 5 years
¥35,669
40,826
—
(*) Honda had commitments for purchases of property, plant and equipment at March 31, 2006.
At March 31, 2006, 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.
improvement, streamlining and modernization of production
facilities, and improvement of sales and R&D facilities.
In the automobile business, we made capital expenditures
of ¥392.9 billion associated with introducing new models,
improving, streamlining, and modernizing our production
facilities, and improving our sales and R&D facilities in the year
ended March 31, 2006.
In the financial services segment, capital expenditures
amounted to ¥1.3 billion in the year ended March 31, 2006.
Capital expenditures in power product and other businesses in
the year ended March 31, 2006, totaling ¥11.3 billion, were
deployed to upgrade, streamline, and modernize manufacturing facilities for power products, and to improve R&D facilities
for power products.
Capital Expenditures
Manufacturing-related capital expenditures in fiscal 2006 were
applied to the expansion of manufacturing facilities, streamlining efforts, and the replacement of older equipment. Other
expenditures included funds used to augment sales and R&D
facilities.
Total capital expenditures for the year amounted to ¥457.8
billion, up ¥83.8 billion from the previous year. Spending by
business segment is shown below.
Yen (millions)
Years ended March 31
2005
2006
Motorcycle Business
Automobile Business
Financial Services
Power Product and
Other Businesses
¥041,845
317,271
1,941
¥052,246
392,934
1,316
12,923
11,345
Total
¥373,980
¥457,841
In the motorcycle business, we made capital expenditures
of ¥52.2 billion in the year ended March 31, 2006. Funds were
allocated to the introduction of new models, as well as the
Plans after Fiscal 2006
Honda plans to build a new auto plant capable of synchronous
auto production—from the engine to the entire automobile—in
Yorii-cho Oosato-gun, Saitama, Japan with an investment of
approximately ¥70,000 million. The annual production capacity
of this new auto plant will be approximately 200,000 units. This
new auto plant plans to start operation in 2010, and when the
Capital Expenditures and
Depreciation
R&D Expenses and R&D Expenses
as a Percentage of Net Sales
Years ended March 31
Years ended March 31
Yen (billions)
600
Yen (billions)
600
(%)
10.0
450
450
7.5
300
300
5.0
150
150
2.5
0
0
02
03
04
05
0.0
02
06
03
04
05
06
Capital Expenditures
R&D Expenses (left)
Depreciation
R&D Expenses as a Percentage
of Net Sales (right)
52
new plant becomes operational, Honda’s total annual production capacity in Japan will increase to 1.5 million units.
Honda plans to build a new R&D center in Sakura City,
Tochigi, Japan with an investment of approximately ¥17,000
million.This new R&D facility will have multiple test courses,
which reproduce various driving conditions including highspeed driving to urban-area driving.
Honda is aiming to begin operation of this new R&D facility
in 2009.
Honda plans to build a new auto plant in the U.S., with an
investment of approximately $550 million. The annual production capacity of this new plant will be approximately 200,000
units. This new auto plant plans to start operation in 2008, and
when the new plant becomes operational, Honda’s total annual
production capacity in North America will increase to 1.6 million
units.
Honda plans to build a new engine plant in Canada with an
investment of approximately $140 million. The annual production capacity of this new plant will be approximately 200,000
units, and the products of this new plant will be supplied to the
auto plant of Honda Canada Inc. This new plant should begin
operation in 2008.
The planned amount of capital expenditures in fiscal 2007 is
shown below.
industry in addressing safety and environmental issues.
In Japan, we made a number of R&D achievements in fiscal
2006. The FORZA Z 250cc scooter underwent a full model
change, and was outfitted with the Honda S-Matic sevenspeed automatic transmission in place of the previous manual
six-speed transmission. This model was also the first in the
world to be fitted with an auto-shift mode, creating a riding
experience that is finely tuned to road conditions.
In Japan, North America and Europe, the CBR1000RR onroad super sports model underwent a full model change. While
the new model inherits the same basic styling and engine
specifications of its predecessor, it is four kilograms lighter than
the previous model to achieve quicker acceleration and better
handling.
In Asia, we launched a new model, Click, the first 110cc
scooter to be equipped with a water-cooled engine in Thailand.
In China, we produced and released the Storm, a 125cc
motorcycle featuring enhanced environmental technologies
and acceleration.
Honda has succeeded in developing the world’s first production motorcycle airbag system. This new system helps
lessen the severity of injuries caused by head-on collisions. In
another development, we released the Honda Advanced
Safety Vehicle-3 (ASV-3), equipped with the latest safety technologies developed as a result of Honda’s participation in the
five-year Advanced Safety Vehicle (ASV) Project led by the
Ministry of Land, Infrastructure and Transport. Features of the
new vehicle include the Intersection Stop & Go Assistance
System, which analyzes images from a camera mounted on
the front of the motorcycle to detect stop signs and other
markings. If the rider does not slow down when approaching
an intersection, a warning appears on the motorcycle’s display
screen, and an audio warning sounds in the rider’s helmet,
prompting the rider to decelerate. Once the motorcycle has
come to a stop, the Inter-Vehicle Communication System
detects the position of any approaching vehicles, helping the
rider determine whether or not it is safe to proceed through the
intersection. In addition, since the shape and size of motorcycles make them less noticeable than automobiles, we have
used research on human brain function to develop a new
design concept that significantly improves motorcycle visibility.
Research and development expenses in the Motorcycle
Business segment in fiscal 2006 totaled ¥83.0 billion.
Yen (millions)
Year ending March 31
2007
Motorcycle Business
Automobile Business
Financial Services
Power Product and Other Businesses
¥065,500
489,500
1,300
13,700
Total
¥570,000
Research and Development
Using the most advanced technologies, Honda Motor Company and its consolidated subsidiaries conduct R&D activities
aimed at creating distinctive products that are internationally
competitive. The Group’s main R&D divisions operate independently as subsidiaries, allowing technicians to pursue their
tasks with complete freedom.
Product-related research and development is spearheaded
by the Honda Research Institute in Japan, Honda R&D
Americas, Inc., in the United States and Honda R&D Europe
(Deutschland) GmbH in Germany. Research and development
on production technologies centers on Honda Engineering Co.,
Ltd., in Japan and Honda Engineering North America, Inc. All
of these entities work in close association with our other
entities and business in their respective regions.
Total consolidated R&D expenditures for the year ended
March 31, 2006, amounted to ¥510.3 billion. Main R&D activities
conducted by each business segment are outlined below.
Automobile Business
In the Automobile Business segment, we strive to develop
innovative technologies and products through creativityoriented development in response to customer needs. We also
actively develop technologies that address environmental
issues and provide enhanced safety performance.
Major achievements during the year include a full worldwide
model change of the Civic. The engines of the new models
employ an intelligent VTEC (i-VTEC) system, which switches
the valve timing for maximum efficiency during startup and
acceleration to achieve powerful, torquey performance, then
delays intake valve closure timing during cruising and other
low-load conditions for improved fuel economy. In Japan,
North America and Europe, the Civic Hybrid underwent a full
model change. The new line is equipped with the New Honda
Motorcycle Business
Honda is committed to developing motorcycles with new
value-added features that meet the individual needs of customers around the world, and to implementing timely local development of regional products at its overseas locations. At the
same time, we focus on developing technologies that lead the
53
scooter with a comfortable ride and high maneuvering stability.
Research and development expenses in this segment in
fiscal 2006 amounted to ¥13.3 billion.
Hybrid System, combining a 3-stage i-VTEC engine that regulates the valves to provide three stages of valve timing (lowrpm, high-rpm and cylinder idle mode) with a significantly
smaller and more efficient Integrated Motor Assist (IMA) system. We also launched a sporty 5-door model Civic developed
exclusively for the European market. This new model is available with a choice of three engines: a 1.4-liter i-DSI (Intelligent
Dual and Sequential Ignition) engine, a 1.8-liter i-VTEC
engine—both realizing enhanced fuel economy—and a 2.2-liter
i-CTDi diesel engine that complies with strict European
regulations on gas emissions.
In Japan, we introduced the all-new Airwave compact
station wagon, featuring a roomy passenger interior and a luggage compartment with ample storage capacity, as well as an
extra-large glass “Sky Roof” that creates open-air feeling. We
also introduced the new Step Wagon, following a full model
change that lowered the vehicle’s floor level and center of gravity, providing enhanced driving performance and comfort. In
addition, we commenced sales of the new Zest minicar, incorporating low-floor design technology for greater cabin room,
generous storage area and a convenient access bay.
During the year under review, we announced the development of the Honda ASV-3, equipped with several new
advanced safety technologies developed as a result of Honda’s
participation in the five-year Advanced Safety Vehicle (ASV)
Project led by the Ministry of Land, Infrastructure and Transport.
In addition to using inter-vehicle communication to ascertain the
position of automobiles, motorcycles and pedestrians relative to
each other, the Honda ADV-3 incorporates a system that uses
cameras and radar to provide drivers with information on
approaching vehicles and obstacles on the road. There is also a
system that offers driver support through steering- and brakeassist technologies, as well as an emergency response system
designed to aid in rescue efforts in the event of an accident.
In fuel cell technologies, the FCX, featuring Honda FC STACK
next-generation fuel cell technology, became Japan’s first fuel
cell vehicle to receive motor vehicle type certification from the
Japanese Ministry of Land, Infrastructure and Transport.
Research and development expenses in the Automobile
Business segment in fiscal 2006 totaled ¥413.9 billion.
Fundamental Research
In the area of fundamental research, Honda pursues steady
and varied research activities into technologies that may lead to
innovative applications in the future.
In joint research conducted with Nagoya University, we
became the first in the world to discover a gene that dramatically improves rice harvests. Using rice of the Koshihikari variety,
we identified a gene that radically enhances the regenerative
ability of rice. This will lead the way to more rapid improvements
in Koshihikari, the most popular variety of rice in Japan.
Honda’s latest ASIMO humanoid robot model is capable of
performing tasks in concert with the movement of people, such
as freely operating a cart. A newly developed total control system, which controls all of ASIMO’s functions, enables the robot
to act autonomously—as a receptionist, for instance, or even
as a waiter serving drinks on a tray. A drastic improvement in
the robot’s mobility allows it to run at a speed of 6km/hr, as
well as run in a circular pattern.
Expenses incurred in fundamental research are distributed
among Honda’s business segments.
Patents and Licenses
On March 31, 2006, Honda owned more than 9,600 patents
and 160 utility model registrations in Japan and more than
16,100 patents abroad. Honda also had applications pending
for more than 19,900 patents in Japan and for more than
18,500 patents abroad. Under Japanese law, a utility model
registration is a right granted with respect to inventions of less
originality than those which qualify for patents. While the Company 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.
Segment Information
Business segments
Power Product and Other Businesses
In the Power Products Business, we seek to develop products
that match customers’ lifestyles and needs while strengthening
our lineup of offerings that address environmental issues.
In fiscal 2006, we introduced the new iGX440 generalpurpose engine in Japan, United States, Europe and elsewhere. Highly friendly to the environment and extremely quiet,
the iGX440 is the world’s first single-cylinder general-purpose
engine to employ electronic governor speed control technology, which eliminates the need for a battery. The electronic
governor system allows optimum engine control to suit a wide
range of power requirements.
In Japan, we incorporated the iGX440 into the newly
launched HSM1590i, a mid-sized hybrid snow plow featuring a
gasoline engine for removing snow and an electric motor for
travel motion. The combination of the two power units facilitates
switching between work modes and enhances user-friendliness.
We also unveiled the Monpal ML200, a stylish four-wheel
Motorcycles
In fiscal 2006, domestic unit sales of motorcycles fell 2.6%, to
368,000 units. Overseas unit sales fell 2.0%, to 9,903,000 units,
mainly due to a decrease in unit sales of parts for local production
at affiliates accounted for under the equity method in Asia*.
As a result, total unit sales of motorcycles amounted to
10,271,000 units, down 2.0% compared to the previous fiscal
year. Net sales from sales to unaffiliated customers in the
motorcycle segment increased 11.7%, to ¥1,225.8 billion, due
mainly to the positive impact of the currency translation effects
and the change in model mix, offsetting negative impact of
decreased unit sales. Operating income increased by 64.4% to
¥113.9 billion, due mainly to the positive impact of currency
effects caused by the depreciation of the Japanese yen,
increased profit attributable to higher revenue, continuing cost
reduction effects and gain on “return”, offsetting the negative
54
effects caused by the depreciation of the yen, increased profit
attributable to higher revenue and continuing cost reduction
effects and gain on “return” of ¥138.0 billion, which offset the
negative impact of the increase in SG&A and R&D expenses.
impact of the increase in SG&A and R&D expenses.
* Of the net sales of Honda-brand motorcycle products that are
manufactured and sold by overseas affiliates accounted for under the
equity method, those with respect to which parts for manufacturing
were not supplied from Honda or such subsidiaries are not included in
net sales and other operating revenue, in conformity with U.S. generally
accepted accounting principles.
North America
Net sales in North America increased by 19.4% from the
previous fiscal year to ¥5,616.3 billion, due mainly to positive
currency translation impact and the increased revenue in all of
Honda’s business segments. Operating income in North
America increased by 10.2% to ¥353.9 billion, due primarily to
the positive impact of currency effects caused by the depreciation of the Japanese yen and the increased profit attributable to
higher revenue, which offset the negative impact of the increase
in SG&A expenses.
Automobiles
Domestic unit sales of automobiles in fiscal 2006 fell 2.2%, to
696,000 units and overseas unit sales increased by 6.5%, to
2,695,000 units. Consequently, total unit sales of automobiles
grew 4.6%, to 3,391,000 units, compared to the previous fiscal
year. Net sales from sales to unaffiliated customers in the automobile segment increased 14.9%, to ¥8,004.6 billion, due to
the positive currency translation effects and increased unit
sales mainly in North America. Operating income increased by
38.9% to ¥628.3 billion, due mainly to the positive impact of
currency effects caused by the depreciation of the Japanese
yen, an increase in profit attributable to higher revenue, continuing cost reduction effects and gain on “return”, which offset
the negative impact of increase in SG&A and R&D expenses.
Europe
Net sales in Europe increased by 14.0% to ¥1,189.5 billion
compared to the previous fiscal year, due mainly to the positive
currency translation impact and the increased revenue in all of
Honda’s business segments. Operating income in Europe
decreased by 36.2% to ¥26.3 billion, due mainly to the negative impact of the changes in model mix and increased SG&A
expenses, offsetting the positive impact of the currency effects
caused by the depreciation of the Japanese yen and the
increased profit attributable to higher revenue.
Financial Services
Revenue from sales to unaffiliated customers in financial services business rose 20.0%, to ¥306.8 billion, compared to the
previous fiscal year. Operating income increased 0.8%, to
¥90.5 billion, due primarily to the positive impact of currency
effects caused by the depreciation of the Japanese yen, higher
revenue due to an increased finance-subsidiaries receivable
from growth of business and decreased SG&A expenses which
offset increased funding costs.
Asia
Net sales in Asia increased by 15.9% to ¥997.3 billion from the
previous fiscal year, due mainly to positive currency translation
impact and the increased revenue in all of Honda’s business
segments. Operating income increased by 7.1% to ¥64.9 billion from the same period of the previous year, due mainly to
the positive impact of the currency effects caused by the
depreciation of the Japanese yen, increased profit attributable
to higher revenue and continuing cost reduction, which offset
the negative impact of the increase in SG&A expenses.
Power Product and Other Businesses
Domestic unit sales of power products in fiscal 2006 increased
12.7%, to 487,000 units. Overseas unit sales increased 10.7%,
to 5,389,000 units. Accordingly, total unit sales of power products rose 10.9%, to 5,876,000 units, compared to the previous
fiscal year.
Net sales from power products and other businesses
increased 11.3%, to ¥370.6 billion, due mainly to increased
unit sales. Operating income increased 86.3% to ¥35.9 billion,
due mainly to positive currency effects caused by the depreciation of the Japanese yen, the increased profit attributable to
higher revenue and gain on “return”, which offset the negative
impact of the increase in SG&A expenses.
Other Regions
Net sales in Other Regions increased by 22.7% to ¥571.6 billion compared to the previous fiscal year, due mainly to positive
impact of the currency translation effects and the increased
revenue in all of Honda’s business segments. Operating
income increased by 72.2% from the same period of the previous year to ¥57.1 billion, due mainly to the positive currency
effects caused by the depreciation of the Japanese yen, the
increased profit attributable to higher revenue and continuing
cost reduction effects, offsetting the negative impact of the
increase in SG&A expenses.
Geographical segments
Geographical segments are based on the location of the
Company and its subsidiaries.
Application of Critical Accounting Policies
Critical accounting policies require us to apply most difficult,
subjective or complex judgments, often requiring us to make
estimates about the effect of matters that are inherently
uncertain and 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
Japan
Net sales in Japan were ¥4,437.8 billion, up by 7.2% from the
previous fiscal year, due mainly to increased export sales in the
automobile business and increased revenue in the motorcycle,
power product and other businesses, which offset the negative
impact of decreased unit sales in domestic automobile business. Operating income in Japan was ¥370.9 billion, up by
100.6%, due primarily to the positive impact of the currency
55
Allowance for Credit Losses
Our finance subsidiaries provide wholesale financing to dealers
and retail lending and direct financing leases to customers
mainly in order to support sales of our products, principally in
North America. We classify the receivables derived from those
services as finance subsidiaries-receivables. Certain finance
receivables related to sales of inventory are reclassified to trade
receivables and other assets in the consolidated balance sheets.
An allowance for credit losses is maintained to cover
estimated losses incurred on finance subsidiaries-receivables.
To determine the overall allowance amount, receivables are
segmented into pools with common characteristics such as
product and collateral types. For each of these pools, we
estimate losses primarily based on our historic loss experiences, delinquency rates, recovery rates and scale and composition of the portfolio, taking factors into consideration such
as changing economic conditions and changes in operational
policies and procedures.
We believe that the accounting estimate related to allowance for credit losses is a “critical accounting estimate”
because it requires us to make assumptions about inherently
uncertain items such as future economic trends, quality of
finance subsidiaries-receivables and other factors.
We review the adequacy of the allowance for credit losses,
and the allowance for credit losses is maintained at an amount
that we deem sufficient to cover the estimated credit losses on
our owned portfolio of finance receivables.
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 2006 in our North America portfolio,
the provision for fiscal 2006 and the allowance balance at the
end of fiscal 2006 would have increased by approximately ¥5.1
and ¥3.0 billion, respectively. Note that this sensitivity analysis
may be asymmetric, and are specific to the base conditions in
fiscal 2006.
operations. The following is not intended to be a comprehensive
list of all our accounting policies. Our significant accounting
policies are more fully described in Footnote 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. Our warranty expense accruals are costs for general warranties on
products we sell and product recalls. We provide for estimated
warranty expenses at the time products are sold to customers
or the time new warranty programs are initiated. Estimated
warranty expenses 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 warranty expense accruals.
We believe that the accounting estimate related to warranty
expense accruals is a “critical accounting estimate” because
changes in the calculation can materially affect net income, and
require us to estimate the frequency and amounts of future
claims, which are inherently uncertain.
Our policy is to continuously monitor warranty expense
accruals to determine their 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.
Additional detailed information about the changes in
provisions for the product warranties for each of the years in the
two-year period ended March 31,2006 is described in Footnote
16 to the accompanying consolidated financial statements.
Additional Narrative of the Change in Provision for Credit Loss as Below
The following table shows information related to our credit loss experience in our North America portfolio:
Yen (billions)
2004
Charge-offs (net of recoveries)
Provision for credit losses
Allowance for credit losses
Ending receivable balance(**)
Average receivable balance, net(**)
Charge-offs as a % of average receivable balance(**)
Allowance as a % of ending receivable balance(**)
¥0,016.2
28.8
23.7
3,145.9
2,982.1
0.54%
0.75%
(*)
2005
¥0,023.1
31.7
29.2
3,613.6
3,333.5
0.70%
0.81%
2006
¥0,022.8
27.4
30.1
4,166.5
3,938.2
0.58%
0.72%
The allowance for credit losses and average receivable balance include allowance for credit losses and finance subsidiaries-receivables classified as trade
receivables and other assets in the consolidated balance sheets. Additional information is described in Footnote 3 to the accompanying consolidated financial statements.
(**) For fiscal year ended March 31, 2006, Honda excluded unearned interest income and fees from the ending receivables balance and average receivables balance in the table above. The reclassifications have made to the prior years’ balances to conform to the presentation used for the year ended
March 31, 2006.
56
purchased varies depending on the difference between the actual market value of the vehicle at the end of the lease and the
residual value estimated at the time of inception of the lease.
Our finance subsidiaries initially determine the residual value of
the leased vehicle by using our estimation of future used
vehicle values, which take into consideration data gathered
from third parties. Our finance subsidiaries recognize a loss
when the proceeds from the sale of leased vehicles are less
than contractual residual value at the end of the lease term.
Our finance subsidiaries purchase insurance to cover a portion
of the estimated residual value at the end of the lease term of
vehicles leased to customers under direct financing leases. An
allowance for expected losses on lease residual values is maintained to cover estimated losses on the uninsured portion of
the vehicles’ residual values.
We project two important components of losses in determining our allowance for losses on lease residual values:
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 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. 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 believe that the accounting estimate related to allowance for losses on lease residual values 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.
The allowance is maintained at an amount we deem
adequate to cover estimated losses on the uninsured portion
of the vehicles’ lease residual values. Evaluating the adequacy
of the allowance requires us to make assumptions of inherently
uncertain factors, including changes in economic conditions.
As a result, actual losses incurred may differ from original
estimates.
If future auction values for all Honda and Acura vehicles in
our North American lease portfolio as of March 31, 2006, were
to decrease by approximately ¥10,000 per unit from our
present estimates, the total impact would be an increase of our
allowance for losses on residual value by about ¥2.3 billion,
which would be charged to our provision for losses on residual
values in the current year. 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 to increase our allowance for losses
on residual values by about ¥0.4 billion, which would be
charged to our provision for losses on residual values in the
current year. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2006.
Fiscal Year 2006 Compared with Fiscal Year 2005
Net charge-offs in our North America portfolio decreased by
¥0.3 billion, or 1%. The lower loan originations during fiscal
year 2005 resulted in a lower volume of defaults during fiscal
year 2006, offsetting the currency translation effects. Also the
difficulties experienced with the implementation of the new
customer account servicing system in fiscal year 2005 has
passed, which improved collection efforts.
The provision for credit losses decreased by ¥4.3 billion, or
14%. The allowance for credit losses increased by ¥0.9 billion,
or 3%, due to the currency translation effects. Excluding this
effect, the allowance for credit losses decreased.
Fiscal Year 2005 Compared with Fiscal Year 2004
Net charge-offs in the North America portfolio increased by
¥6.9 billion, or 43%, primarily due to the significant growth in
finance receivables during fiscal year 2003 and 2004. Historically, the majority of customer defaults occur when loans are
between one to two years old. Therefore, we experienced
higher losses as the large number of new contracts booked in
prior fiscal years became between one to two years old in fiscal
year 2005.
Higher losses were also attributable to difficulties experienced in connection with the implementation of a new
customer account servicing system for our North American
operations. The conversion process caused disruptions in
servicing activities both during and after rollout of the new
system. Disruptions were due to, among other things, periods
of system downtime, periods devoted to user training, and
extremely high volumes of calls from customers inquiring about
new statements or errors on statements received. As a result,
collectors were not able to make their requisite collection calls.
These and other implementation difficulties contributed to
higher delinquencies beginning in August 2004, and resulted in
higher charge-offs in the second and third quarters of fiscal
year 2005. By the end of fiscal year 2005, delinquencies and
charge-offs have started to return back to historical levels
experienced prior to the system conversion. Management
expects that the initial period of difficulties involved with the
system conversion has passed and the new system, as
designed, will improve operating efficiency and enhance
customer service.
The provision for credit losses in our North America portfolio
increased by ¥2.9 billion, or 10%, which was due to the
increase in charge-offs and the increase to the allowance
balance.
The allowance for credit losses in our North America portfolio increased by ¥5.5 billion, or 23%, primarily due to the
continued growth in finance receivables.
Allowance for Losses on Lease Residual Values
End-customers of vehicles leased under a direct financing
lease typically have an option to buy the leased vehicle from
the car dealership (dealer) for the estimated residual value of
the vehicle or to return the leased vehicle to the dealer at the
end of the lease term. Likewise, dealers have the option to
return the vehicle to our finance subsidiaries or to buy the
leased vehicle at the end of the lease term from our finance
subsidiaries. The likelihood that the leased vehicle will be
Pension and Other Postretirement Benefits
We have various pension plans covering substantially all of our
employees in Japan and in certain 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
57
We believe that the accounting estimates related to our
pension plans are “critical accounting estimates” because
changes in these estimates can materially affect our financial
condition and results of operations.
Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expenses and recorded obligations in
future periods. We believe that the assumptions used are
appropriate. However, differences in actual experience or
changes in assumptions could affect our pension costs and
obligations, including our cash requirements to fund such
obligations.
assets. The discount rate and expected long-term rate of
return on plan assets are determined based on our evaluation
of current market conditions, including changes in interest
rates. The salary increase assumptions reflect our actual experience as well as near-term outlook. Our assumed discount
rate and rate of salary increase as of March 31, 2006 were
2.0% and 2.2%, respectively, and our assumed expected longterm rate of return for the year ended March 31, 2006 was
4.0% for Japanese plans. Our assumed discount rate and rate
of salary increase as of March 31, 2006 were 4.9-5.8% and
3.5-5.2%, respectively, and our assumed expected long-term
rate of return for fiscal 2006 was 6.8-8.0% for foreign plans.
The following table shows the effect on our funded status, equity and pension expense from a 0.5% change in the assumed discount rate and the expected long-term rate of return.
Japanese Plans
Yen (billions)
Assumptions
Discount rate
Expected long-term rate of return
Percentage Point Change (%)
Funded status
Equity
Pension expense
+0.5/– 0.5
+0.5/– 0.5
–88.3/+95.7
—
+40.6/–43.8
—
–6.3/+7.3
–4.1/+4.1
Percentage Point Change (%)
Funded status
Equity
Pension expense
+0.5/– 0.5
+0.5/– 0.5
–39.0/+44.8
—
+3.5/–10.0
—
–5.0/+5.7
–1.3/+1.3
Foreign Plans
Assumptions
Discount rate
Expected long-term rate of return
Yen (billions)
(*1) Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions at March 31, 2006.
(*2) Funded status for fiscal 2006 is affected by March 31, 2006 assumptions. Pension expense for fiscal 2006 is affected by March 31, 2005 assumptions.
Quantitative and Qualitative Disclosure About Market Risk
Honda is exposed to market risks, which are changes in foreign currency exchanges rates, in interest rates and in prices
of marketable equity securities. Honda is a party to derivative
financial instruments in the normal course of business in order
to manage risks associated with changes in foreign currency
exchanges rates and in interest rates. Honda does not hold
any derivative financial instruments for trading purposes.
denominated in foreign currencies (principally U.S. dollars).
Foreign currency written option contracts are entered into in
combination with purchased option contracts to offset
premium amounts to be paid for purchased option contracts.
The tables below provide information about our derivatives
related to foreign exchange risk as of March 31, 2005 and
2006. For forward exchange contracts and currency options,
the table presents the contract amounts and fair value. All forward exchange contracts and currency options to which we
are a party have original maturities of less than one year.
Foreign Currency Risk
Foreign currency forward contracts and purchased option
contracts are normally used to hedge sale commitments
58
Foreign Exchange Risk
2005
Yen (millions)
Contract
amounts
Fair value
2006
Yen (millions)
Average
contractual
rate
Contract
amounts
Average
contractual
rate
Fair value
Forward Exchange Contract
To sell US$
To sell EUR
To sell CAD
To sell GBP
To sell other foreign currencies
To buy US$
To buy other foreign currencies
Cross-currencies
Total
¥225,573
56,727
22,736
49,407
57,109
3,596
2,304
275,389
¥692,841
(5,233)
(915)
(845)
(1,188)
(523)
75)
19)
(1,023)
(9,633)
104.58
136.32
84.73
195.81
—
104.62
—
—
¥270,070
132,694
19,225
82,546
82,985
5,535
992
304,078
¥898,125
(1,771)
(3,333)
(1)
(984)
310)
45)
22)
2,228)
(3,484)
115.88
138.57
100.59
201.67
—
115.78
—
—
Currency Option
Option purchased to sell US$
Option written to sell US$
Option purchased to sell other currencies
Option written to sell other currencies
Total
¥071,004
92,482
20,462
30,263
¥214,211
258)
(1,270)
123)
(287)
(1,176)
—
—
—
—
¥058,446
104,576
4,982
8,544
¥176,548
520)
(323)
19)
(85)
131)
—
—
—
—
exchange risk as well as interest rate risk.
The following tables provide information about Honda’s financial instruments that were sensitive to changes in interest
rates at March 31, 2005 and 2006. For finance receivables and
long-term debt, these tables present principal cash flows, fair
value and related weighted average interest rates. For interest
rate swaps and currency & interest rate swaps, the table presents notional amounts, fair value and weighted average interest rates. Variable interest rates are determined using formulas
such as LIBOR+ α and an index at the fiscal year end.
Interest Rate Risks
Honda is exposed to market risk for changes in interest rates
related primarily to its debt obligations and finance receivables.
In addition to short-term financing such as commercial paper,
Honda has long-term debt with both fixed and floating rates.
Our finance receivables are primarily fixed rate. Interest swap
agreements are mainly used to convert floating rate financing
to (normally 3-5 years) fixed rate financing in order to match
financing costs with income from finance receivables. Foreign
currency and interest rate swap agreements used among
different currencies, also serve to hedge foreign currency
Interest Rate Risk
Finance Subsidiaries-Receivables
2005
2006
Yen (millions)
Yen (millions)
Expected maturity date
Total
Direct Finance Leases*1 :
JP¥
US$
Other
Fair value
Total
Within 1 year 1-2 years
2-3 years
3-4 years
4-5 years
Thereafter
Fair value
¥0,024,250
1,562,695
335,303
—
—
—
¥0,024,450 14,387
5,097
2,951
1,398
1,846,959 611,039 595,153 498,507 142,260
348,691 22,339 110,490 105,391 87,488
617
—
22,925
—
—
58
—
—
—
¥1,922,248
—
¥2,220,100 647,765
710,740
606,849 231,146
23,542
58
—
¥0,350,281
1,768,541
314,043
319,697
1,743,376
281,768
¥0,412,415 140,606
1,982,413 712,455
428,934 242,705
107,007
402,810
69,883
76,111 48,524 24,848
363,843 287,695 170,035
56,464 34,731 20,095
15,319
45,575
5,056
377,036
1,935,956
405,397
Total—Other Finance Receivables ¥2,432,865
Retained interest in the sold pool
of finance receivables*2
62,904
Total* 3
¥4,418,017
2,344,841
¥2,823,762 1,095,766
579,700
496,418 370,950 214,978
65,950
2,718,389
Total—Direct Finance Leases
Other Finance Receivables:
JP¥
US$
Other
62,904
94,634
¥5,138,496
Average
interest
rate
5.30%
4.40%
4.51%
5.30%
6.34%
8.46%
94,634
*1 : Under the U.S. generally accepted accounting principles, disclosure of fair values of direct finance leases is not required.
*2 : The retained interest in the sold pool of finance receivables is accounted for as “trading” securities and is reported at fair value.
*3 : The finance subsidiaries-receivables include finance subsidiaries-receivables classified as trade receivables and other assets in the consolidated balance
sheets. Additional detailed information is described in Footnote 3 to the accompanying consolidated financial statements.
59
Long-Term Debt (including current maturities)
2005
2006
Yen (millions)
Yen (millions)
Expected maturity date
Total
Fair value
Japanese yen bonds
¥0,171,000
Japanese yen medium-term notes
470,273
U.S. dollar medium-term notes
1,111,126
U.S. dollar commercial paper
187,526
Loans and others—primarily fixed rate
154,680
Total
¥2,094,605
Total
Within 1 year 1-2 years
2-3 years
3-4 years
30,050
80,741
96,365
—
14,572
4-5 years
Thereafter
Fair value
172,209
475,575
1,118,885
187,526
154,832
¥0,231,200 61,050
475,320 56,599
1,322,522 482,568
204,893
—
302,710 57,428
50,050
137,718
407,888
204,893
102,635
30,050
140,601
253,937
—
42,746
60,000
59,661
58,403
—
73,021
—
—
23,361
—
12,308
228,555
476,215
1,330,282
204,893
303,969
2,109,027
¥2,536,645 657,645
903,184
467,334 221,728 251,085
35,669
2,543,914
Average
interest
rate
0.72%
0.63%
4.66%
4.32%
3.95%
Interest Rate Swaps
2005
2006
Yen (millions)
Yen (millions)
Expected maturity date
Notional
principal
currency
Receive/Pay
JP¥
US$
Float/Fix
Float/Fix
Fix/Float
Float/Float
Float/Fix
Fix/Float
Float/Float
Float/Fix
Fix/Float
CA$
GBP
Total
Contract
amounts
Fair value
Contract
amounts
Within
1 year
1-2 years
2-3 years
3-4 years
4-5 years
Thereafter
Fair value
¥0,004,525
2,326,726
250,219
40,808
361,748
50,737
93,270
75,061
24,311
(87)
28,996)
(1,635)
(199)
(1,981)
(288)
(147)
175)
(31)
¥0,001,455
1,240
80
135
—
—
2,712,564 260,549 583,020 1,163,743 705,252
—
337,726 24,669 35,241 107,485 88,102 58,735
52,274 11,160 32,304
—
8,810
—
433,089 39,534 58,915 88,373 158,582 87,685
71,663
—
— 27,350 27,586 16,727
185,057
—
—
—
— 185,057
54,927 25,509 17,365
9,150
2,688
215
8,993
5,662
2,661
670
—
—
—
—
23,494
—
—
—
—
—
—
(3)
39,965)
(6,426)
(311)
4,445)
(1,067)
(303)
32)
—)
¥3,227,405
24,803)
¥3,857,748 368,323 729,586 1,396,906
23,494
36,332
991,020
348,419
Average
receive
rate
1.00%
4.76%
4.31%
4.44%
3.14%
3.04%
3.48%
4.81%
5.09%
Average
pay
rate
1.49%
4.00%
4.92%
4.72%
3.71%
3.98%
4.14%
4.90%
4.74%
Currency & Interest Rate Swaps
2005
2006
Yen (millions)
Receiving Paying
side
side
currency currency
JP¥
US$
JP¥
CA$
JP¥
Other
GBP
Other
Total
Yen (millions)
Expected maturity date
Receive/Pay
Fix/Float
Float/Float
Fix/Float
Float/Float
Fix/Float
Fix/Float
Float/Float
Contract
amounts
Fair value
Contract
amounts
Within
1 year
1-2 years
Average
pay
rate
2-3 years
3-4 years
4-5 years
Thereafter
¥353,314
84,526
2,418
5,846
28,314
—
30,854
21,472)
4,588)
(182)
(868)
5)
—)
(194)
¥393,389
103,823
2,772
—
—
70,041
14,333
32,359 116,976 108,842
26,138 25,249 40,297
—
—
—
—
—
—
—
—
—
—
—
—
14,333
—
—
72,792
12,139
2,772
—
—
—
—
62,420
—
—
—
—
70,041
—
—)
—)
—)
—)
—.
—)
—)
(22,996)
0.72% 5.01%
(5,520)
0.25% 4.98%
(610)
0.95% 4.14%
—)
—%
—%
—)
—%
—%
736) 8.953.75% 1.15.07%
241)
2.99% 4.66%
¥505,272
24,821
¥584,358
72,830 142,225
87,703
132,461
—)
(28,149)
149,139
Fair value
Average
receive
rate
subsidiary to convert its investment into common shares of
the issuer. The convertible features are accounted for as
embedded derivatives.
Additionally, a subsidiary has convertible notes and convertible preferred stocks with conversion features that enable the
subsidiary to convert its investment into common shares of
the issuer. The convertible features are accounted for as
embedded derivatives.
The conversion features are measured at fair value in our
consolidated balance sheets, and the changes in fair value are
Equity Price Risk
Honda is exposed to equity price risk as a result of its holdings
of marketable equity securities. Marketable equity securities
included in Honda’s investment portfolio are generally securities
of domestic Japanese companies and are held for purposes
other than trading. At March 31, 2005 and 2006, the estimated
fair value of marketable equity securities was ¥93.0 billion and
¥141.8 billion, respectively.
Additionally, a subsidiary has convertible notes and convertible preferred stocks with conversion features that enable the
60
recognized as other income or expense in our consolidated
statements of income. Furthermore, the subsidiary entered into
a forward sale contract in relation to a portion of convertible
notes. The changes in fair value of this derivative financial
instrument are recognized as other income or expense in our
consolidated statements of income.
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 reserves. Punitive damages are claimed in certain of these lawsuits. We are also subject to potential liability
by other various lawsuits and claims.
Seventy-seven purported class actions on behalf of all
purchasers of new motor vehicles in the United States since
January 1, 2001, have been filed in various state and federal
courts against American Honda Motor Co., Inc., Honda
Canada, Inc., General Motors, Ford, Daimler Chrysler, Toyota,
Nissan, and Volkswagen and their Canadian affiliates, the
National Automobile Dealers Association and the Canadian
Automobile Dealers Association. Several of the state court
actions also name Honda Motor Co., Ltd. as a defendant, as
well as other Japanese and German parent companies of
United States based subsidiaries. The federal court actions
have been consolidated for coordinated pretrial proceedings in
federal court in Maine and 37 California cases have been
consolidated in the state court in San Francisco. Additionally,
there are pending cases in 9 other states.
The nearly identical complaints allege that the manufacturer
defendants, aided by the association defendants, conspired
among themselves and with their dealers to prevent United
States citizens from purchasing vehicles produced for the
Canadian market and sold by dealers in Canada. The complaints allege that new vehicle prices in Canada are 10 to 30%
lower than those in the United States and that preventing the
sale of these vehicles to United States citizens resulted in the
payment of supracompetitive prices by United States consumers. The complaints seek treble damages under the antitrust
laws, but do not specify damages. The federal court has
certified a class for injunctive relief and damages. We believe
our actions have been lawful and are vigorously defending
these cases.
After consultation with legal counsel, and taking into
account all known factors pertaining to existing lawsuits and
claims, we believe that the overall results of all lawsuits and
pending claims should not result in liability to us that would be
likely to have an adverse material effect on our consolidated
financial position and results of operations.
61
Business Segment Information
Yen (millions)
Years ended or at March 31
Net sales and
other operating revenue:
Motorcycle Business
Unaffiliated customers
Automobile Business
Unaffiliated customers
Financial Services Business
Unaffiliated customers
Intersegment
2005
2006
¥1,097,754
¥31,225,812
6,963,635
8,004,694
255,741
3,447
306,869
4,068
Total
Power Product and Other Businesses
Unaffiliated customers
Intersegment
259,188
310,937
332,975
9,869
370,621
11,941
Total
Eliminations
342,844
(13,316)
382,562
(16,009)
¥8,650,105
¥39,907,996
¥0,069,332
452,382
89,901
19,305
¥30,113,974
628,372
90,585
35,974
¥0,630,920
¥30,868,905
¥0,848,671
4,160,818
4,362,096
261,843
(316,458)
¥31,006,308
4,752,405
5,008,058
294,170
(489,260)
¥9,316,970
¥10,571,681
¥0,028,606
189,150
419
7,577
¥30,330,232
222,165
771
9,057
¥0,225,752
¥30,262,225
¥0,041,845
317,271
1,941
12,923
¥30,352,246
392,934
1,316
11,345
¥0,373,980
¥30,457,841
Consolidated
Operating income:
Motorcycle Business
Automobile Business
Financial Services Business
Power Product and Other Businesses
Consolidated
Assets:
Motorcycle Business
Automobile Business
Financial Services Business
Power Product and Other Businesses
Corporate assets and eliminations
Consolidated
Depreciation:
Motorcycle Business
Automobile Business
Financial Services Business
Power Product and Other Businesses
Consolidated
Capital expenditures:
Motorcycle Business
Automobile Business
Financial Services Business
Power Product and Other Businesses
Consolidated
Note:
The gain on return of the substitutional portion of the Employees’ Pension Funds to the Japanese government of ¥138,016 million which was recorded in the fiscal year ended
March 31, 2006, was allocated to the Motorcycle Business segment for ¥15,319 million, Automobile Business segment for ¥115,935 million and Power Product and Other
Businesses segment for ¥6,762 million in the results of consolidated operating income.
62
Geographical Segment Information
Yen (millions)
Years ended or at March 31
2005
2006
¥1,983,182
2,155,756
¥02,021,999
2,415,874
4,138,938
4,437,873
4,585,650
119,904
5,475,261
141,064
Total
Europe
Sales to unaffiliated customers
Transfers between geographical segments
4,705,554
5,616,325
858,936
184,136
1,001,177
188,341
Total
Asia
Sales to unaffiliated customers
Transfers between geographical segments
1,043,072
1,189,518
773,753
86,810
856,892
140,501
Total
Others
Sales to unaffiliated customers
Transfers between geographical segments
860,563
997,393
448,584
17,373
552,667
19,023
465,957
(2,563,979)
571,690
(2,904,803)
¥(8,650,105
¥09,907,996
¥(0,184,899
321,154
41,243
60,692
33,193
(10,261)
¥09,370,950
353,943
26,305
64,999
57,163
(4,455)
¥(0,630,920
¥09,868,905
¥(2,480,052
5,202,980
649,547
541,331
203,605
239,455
¥02,737,454
6,026,342
800,786
717,933
309,209
(20,043)
¥(9,316,970
¥10,571,681
Net sales and other operating revenue:
Japan
Sales to unaffiliated customers
Transfers between geographical segments
Total
North America
Sales to unaffiliated customers
Transfers between geographical segments
Total
Eliminations
Consolidated
Operating income:
Japan
North America
Europe
Asia
Others
Eliminations
Consolidated
Assets:
Japan
North America
Europe
Asia
Others
Corporate assets and eliminations
Consolidated
Notes:
1. Major countries or regions in each geographic segment:
North America United States, Canada, Mexico
Europe
United Kingdom, Germany, France, Italy, Belgium
Asia
Thailand, Indonesia, China, India
Other Regions Brazil, Australia
2. The gain on return of the substitutional portion of the Employees’ Pension Funds to the Japanese government of ¥138,016 million which was recorded in the fiscal year ended
March 31, 2006, was included in consolidated operating income of the Japan segment.
63
Consolidated Balance Sheets Divided into Non-Financial Services Businesses and Finance Subsidiaries
Yen (millions)
At March 31, 2005 and 2006
2005
2006
¥3,376,411
757,894
422,673
862,370
1,333,474
830,698
1,564,762
274,958
6,046,829
¥03,788,184
727,735
504,101
1,036,304
1,520,044
942,970
1,795,173
237,943
6,764,270
15,644
1,028,488
2,625,078
692,886
4,362,096
(1,091,955)
19,592
1,240,581
2,982,832
765,053
5,008,058
(1,200,647)
Total assets
¥9,316,970
¥10,571,681
Liabilities and Stockholders’ Equity
Non-financial services businesses
Current liabilities:
Short-term debt
Current portion of long-term debt
Trade payables
Accrued expenses
Other current liabilities
Long-term debt
Other liabilities
¥2,281,768
228,558
6,385
1,022,394
770,887
253,544
19,570
717,636
¥02,355,999
171,122
9,138
1,144,159
763,879
267,701
34,396
575,034
3,018,974
2,965,429
1,310,678
535,825
151,867
1,546,953
352,317
3,897,640
(888,938)
6,027,676
1,369,177
653,276
181,140
1,858,362
392,316
4,454,271
(973,769)
6,445,931
86,067
172,531
34,688
3,809,383
(793,934)
(19,441)
3,289,294
¥9,316,970
86,067
172,529
35,811
4,267,886
(407,187)
(29,356)
4,125,750
¥10,571,681
Assets
Non-financial services businesses
Current Assets:
Cash and cash equivalents
Trade accounts and notes receivable
Inventories
Other current assets
Investments and advances
Property, plant and equipment, at cost
Other assets
Total assets
Finance subsidiaries
Cash and cash equivalents
Finance subsidiaries—short-term receivables, net
Finance subsidiaries—long-term receivables, net
Other assets
Total assets
Eliminations
Total liabilities
Finance subsidiaries
Short-term debt
Current portion of long-term debt
Accrued expenses
Long-term debt
Other liabilities
Total liabilities
Eliminations
Total liabilities
Common stock
Capital surplus
Legal reserves
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’ equity
Note:
The Company and its subsidiaries engaged in financial services are referred to as finance subsidiaries. Other subsidiaries are referred to as non-financial services businesses.
64
Consolidated Statements of Cash Flows Divided into Non-Financial Services Businesses and Finance Subsidiaries
Yen (millions)
2005
Years ended March 31, 2005 and 2006
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
Deferred income taxes
Equity in income of affiliates
Cash dividends from affiliates
Loss (gain) on derivative instruments, net
Gain on transfer of the substitutional portion of
the Employees’ Pension Funds
Decrease (increase) in trade accounts and
notes receivable
Decrease (increase) in inventories
Increase (decrease) in trade payables
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Decrease (increase) in investments and advances
Capital expenditures
Proceeds from sales of property, plant and equipment
Decrease (increase) in finance subsidiaries–receivables
Net cash used in investing activities
Cash flows from financing activities:
Increase (decrease) in short-term debt
Proceeds from long-term debt
Repayment of long-term debt
Proceeds from issuance of common stock
Cash dividends paid
Increase (decrease) in commercial paper classified
as long-term debt
Payment for purchase of treasury stock, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and
cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Non-financial
services
businesses
2006
Finance
subsidiaries
Non-financial
services
businesses
Finance
subsidiaries
¥(408,251
¥(077,955
¥(543,200
¥(053,847
225,333
38,737
(97,821)
35,824
(4,000)
419
76,782
—
—
(56,432)
261,454
22,037
(99,605)
64,055
11,683
771
(24,793)
—
—
(1,332)
—
—
(138,016)
—
(29,754)
(79,483)
82,548
89,703
669,338
(43,224)
—
—
59,382
114,882
(44,881)
(109,661)
45,297
25,146
580,709
(72,695)
—
—
47,674
3,472
(155,006)
(372,039)
13,990
—
(513,055)
—
(1,941)
226
(465,841)
(467,556)
(36,954)
(458,705)
39,645
—
(456,014)
—
(1,316)
306
(231,909)
(232,919)
14,604
7,752
(9,172)
—
(47,806)
138,511
697,703
(486,568)
1,911
—
(66,144)
25,995
(11,485)
—
(71,075)
(54,391)
851,710
(566,188)
1,490
—
—
(84,147)
(118,769)
(131)
—
351,426
—
(77,064)
(199,773)
(234)
—
232,387
12,463
49,977
707,917
¥(757,894
388
(860)
16,504
¥(015,644
44,919
(30,159)
757,894
¥(727,735
1,008
3,948
15,644
¥(019,592
Notes:
1. The Company and its subsidiaries engaged in financial services are referred to as finance subsidiaries. Other subsidiaries are referred to as non-financial services businesses.
2. Free cash flow (the net of cash flows from operating activities and cash flows from investing activities) for non-financial services businesses was ¥156,283 million, while finance subsidiaries generated a negative free cash flow of ¥352,674 million in fiscal 2005. Non-financial services businesses lend to finance subsidiaries. These cash flows are included in the
decrease (increase) in investments and advances, increase (decrease) in short-term debt, proceeds from long-term debt and repayment of long-term debt. Excluding the increase in
loans to finance subsidiaries (¥132,317 million), free cash flow for non-financial services businesses in fiscal 2005 was ¥288,600 million.
3. Free cash flow (the net of cash flows from operating activities and cash flows from investing activities) for non-financial services businesses was ¥124,695 million, while finance subsidiaries generated a negative free cash flow of ¥229,447 million in fiscal 2006. Excluding the increase in loans to finance subsidiaries (¥13,242 million), free cash flow for non-financial
services businesses in fiscal 2006 was ¥137,937 million.
4. For each cash flow item shown above, the sum of the amounts for the non-financial services businesses and the finance subsidiaries does not necessarily equal the consolidated
amounts reflected in the Company’s audited consolidated statements of cash flows appearing elsewhere in this annual report due to the existence of intercompany transactions such
as loans from the non-financial services businesses to the finance subsidiaries described in Notes 2 and 3 which have not been eliminated in the unaudited consolidated statements of
cash flows presented above.
5. Decrease (increase) in trade accounts and notes receivable for finance subsidiaries is due to the reclassification of finance subsidiaries-receivables which relate to sales of inventory in
the unaudited consolidated statements of cash flows presented above.
6. As described in Note (1)(t) to our consolidated financial statements, certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the
presentation used for the fiscal year ended March 31, 2006.
65
Consolidated
Balance
SheetsSHEETS
CONSOLIDATED
BALANCE
Honda Motor Co., Ltd. and Subsidiaries
March 31, 2005 and 2006
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Assets
2005
2006
2006
¥0,773,538
¥0,747,327
$06,362
791,195
963,320
8,199
1,021,116
1,230,912
10,479
Inventories (note 4)
862,370
1,036,304
8,822
Deferred income taxes (note 9)
214,059
198,033
1,686
Other current assets (notes 6, 7 and 14)
346,464
450,002
3,831
4,008,742
4,625,898
39,379
2,623,909
2,982,425
25,389
Investments in and advances to affiliates (note 5)
349,664
408,993
3,482
Other, including marketable equity securities (note 6)
264,926
286,092
2,435
614,590
695,085
5,917
Current assets:
Cash and cash equivalents
Trade accounts and notes receivable, net of allowance
for doubtful accounts of ¥9,710 million in 2005 and
¥10,689 million ($91 million) in 2006 (notes 3 and 18)
Finance subsidiaries–receivables, net (notes 3, 7 and 18)
Total current assets
Finance subsidiaries–receivables, net (notes 3, 7 and 18)
Investments and advances:
Total investments and advances
Property, plant and equipment, at cost (note 7):
Land
365,217
384,447
3,273
Buildings
1,030,998
1,149,517
9,786
Machinery and equipment
2,260,826
2,562,507
21,814
96,047
115,818
985
3,753,088
4,212,289
35,858
2,168,836
2,397,022
20,405
1,584,252
1,815,267
15,453
485,477
453,006
3,857
¥9,316,970
¥10,571,681
$89,995
Construction in progress
Less accumulated depreciation and amortization
Net property, plant and equipment
Other assets (notes 3, 7, 9 and 14)
Total assets
See accompanying notes to consolidated financial statements.
66
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Liabilities and Stockholders’ Equity
2005
2006
2006
¥0,769,314
¥0,693,557
$05,904
535,105
657,645
5,598
26,727
31,698
270
987,045
1,099,902
9,363
913,721
930,115
7,918
Current liabilities:
Short-term debt (note 7)
Current portion of long-term debt (note 7)
Trade payables:
Notes
Accounts
Accrued expenses
Income taxes payable (note 9)
Other current liabilities (notes 7, 9 and 14)
Total current liabilities
Long-term debt, excluding current portion (note 7)
Other liabilities (notes 7, 8, 9, 11 and 14)
Total liabilities
65,029
110,160
938
451,623
466,332
3,970
3,748,564
3,989,409
33,961
1,559,500
1,879,000
15,996
719,612
577,522
4,916
6,027,676
6,445,931
54,873
86,067
86,067
733
172,531
172,529
1,468
Stockholders’ equity:
Common stock, authorized 3,554,000,000 shares in 2005
and 3,543,000,000 shares in 2006;
issued 928,414,215 shares in 2005 and 917,414,215 shares in 2006
Capital surplus
Legal reserves (note 10)
Retained earnings (note 10)
Accumulated other comprehensive loss, net (notes 6, 9, 11 and 13)
34,688
35,811
305
3,809,383
4,267,886
36,332
(793,934)
(407,187)
(3,466)
(19,441)
(29,356)
(250)
Treasury stock, at cost 3,543,788 shares in 2005 and
4,340,000 shares in 2006
Total stockholders’ equity
3,289,294
4,125,750
35,122
¥9,316,970
¥10,571,681
$89,995
Commitments and contingent liabilities (notes 16 and 17)
Total liabilities and stockholders’ equity
67
Consolidated Statements of Income
Honda Motor Co., Ltd. and Subsidiaries
Years ended March 31, 2004, 2005 and 2006
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Net sales and other operating revenue (note 3)
2004
2005
2006
2006
¥8,162,600
¥8,650,105
¥9,907,996
$84,345
Operating costs and expenses:
Cost of sales (note 3)
5,609,806
6,038,172
7,010,357
59,678
Selling, general and administrative
1,503,683
1,513,259
1,656,365
14,100
448,967
467,754
510,385
4,345
7,562,456
8,019,185
9,177,107
78,123
—
—
138,016
1,175
600,144
630,920
868,905
7,397
9,299
10,696
27,363
233
54,909
60,541
2,214
19
64,208
71,237
29,577
252
Interest
10,194
11,655
11,902
101
Other
12,231
33,697
71,963
613
22,425
45,352
83,865
714
641,927
656,805
814,617
6,935
Research and development
Gain on transfer of the substitutional portion of
the Employees’ Pension Funds (note 11)
Operating income
Other income (notes 1 (p) and 6):
Interest
Other
Other expenses (notes 1 (c), (p) and 6):
Income before income taxes and equity in income of affiliates
Income tax (benefit) expense (note 9):
Current
139,318
151,146
319,945
2,723
Deferred
113,422
115,519
(2,756)
(23)
252,740
266,665
317,189
2,700
389,187
390,140
497,428
4,235
75,151
96,057
99,605
847
¥6,464,338
¥6,486,197
¥6,597,033
$05,082
Income before equity in income of affiliates
Equity in income of affiliates (note 5)
Net income
U.S. dollars
(note 2)
Yen
2004
Basic net income per common share (note 1 (n))
2005
¥0,0486.91. ¥0,0520.68.
See accompanying notes to consolidated financial statements.
68
2006
¥0,0648.67.
2006
$005.52.
Consolidated Statements of Stockholders’ Equity
Honda Motor Co., Ltd. and Subsidiaries
Years ended March 31, 2004, 2005 and 2006
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2004
2005
2006
2006
Common stock:
Balance at beginning of year
Balance at end of year
¥0,086,067
86,067
¥0,386,067
86,067
¥0,386,067
86,067
$00,733
733
Capital surplus:
Balance at beginning of year
Reissuance of treasury stock
Retirement of treasury stock
Balance at end of year
172,529
190
—
172,719
172,719
2
(190)
172,531
172,531
—
(2)
172,529
1,468
—
(0)
1,468
29,391
3,027
32,418
32,418
2,270
34,688
34,688
1,123
35,811
295
10
305
3,161,664
464,338
(33,541)
(3,027)
—
—
3,589,434
3,589,434
486,197
(47,797)
(2,270)
—
(216,181)
3,809,383
3,809,383
597,033
(71,061)
(1,123)
(125)
(66,221)
4,267,886
32,430
5,082
(605)
(10)
(1)
(564)
36,332
(763,165)
(91,408)
(854,573)
(854,573)
60,639
(793,934)
(793,934)
386,747
(407,187)
(6,759)
3,293
(3,466)
(56,766)
(95,318)
419
—
(151,665)
¥2,874,400
(151,665)
(84,160)
13
216,371
(19,441)
¥3,289,294
(19,441)
(77,067)
928
66,224
(29,356)
¥4,125,750
(166)
(656)
8
564
(250)
$35,122
¥0,464,338
¥0,486,197
¥0,597,033
$05,082
(195,941)
40,476
249,160
2,122
21,246
(3,668)
29,807
254
—
1,346
(841)
(8)
—
—
(26)
(0)
—
83,287
(91,408)
¥0,372,930
—
22,485
60,639
¥0,546,836
(38)
108,685
386,747
¥0,983,780
(0)
925
3,293
$08,375
Legal reserves:
Balance at beginning of year
Transfer from retained earnings (note 10)
Balance at end of year
Retained earnings:
Balance at beginning of year
Net income for the year
Cash dividends (note 10)
Transfer to legal reserves (note 10)
Reissuance of treasury stock
Retirement of treasury stock
Balance at end of year
Accumulated other comprehensive loss, net
(notes 6, 9, 11 and 13):
Balance at beginning of year
Other comprehensive income (loss) for the year, net of tax
Balance at end of year
Treasury stock:
Balance at beginning of year
Purchase of treasury stock
Reissuance of treasury stock
Retirement of treasury stock
Balance at end of year
Total stockholders’ equity
Disclosure of comprehensive income (loss):
Net income for the year
Other comprehensive income (loss) for the year, net of tax
(notes 6, 9, 11 and 13)
Adjustments from foreign currency translation
Unrealized gains (losses) on marketable equity securities:
Unrealized holding gains (losses) arising during the year
Reclassification adjustments for losses (gains) realized in
net income
Unrealized gains (losses) on derivative instruments:
Unrealized holding gains (losses) arising during the year
Reclassification adjustments for losses (gains) realized in
net income
Minimum pension liabilities adjustment
Total comprehensive income for the year
See accompanying notes to consolidated financial statements.
69
Consolidated Statements of Cash Flows
Honda Motor Co., Ltd. and Subsidiaries
Years ended March 31, 2004, 2005 and 2006
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Cash flows from operating activities (note 12):
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation
Deferred income taxes
Equity in income of affiliates
Dividends from affiliates
Provision for credit and lease residual losses on finance
subsidiaries–receivables
Loss (gain) on derivative instruments, net
Gain on transfer of the substitutional portion of
the Employees’ Pension Funds (note 11)
Decrease (increase) in assets:
Trade accounts and notes receivable
Inventories
Other current assets
Other assets
Increase (decrease) in liabilities:
Trade accounts and notes payable
Accrued expenses
Income taxes payable
Other current liabilities
Other liabilities
Other, net
Net cash provided by operating activities
2004
2005
2006
2006
¥0,464,338
¥0,486,197
¥0,597,033
$05,082
213,445
113,422
(75,151)
46,780
225,752
115,519
(96,057)
35,824
262,225
(2,756)
(99,605)
64,055
2,232
(23)
(847)
545
45,937
(84,783)
50,638
(60,432)
36,153
10,351
308
88
(138,016)
(1,175)
—
—
22,829
(51,836)
(154,320)
(33,376)
(70,145)
(79,483)
(11,797)
(52,198)
(113,259)
(109,661)
(75,771)
(61,482)
(964)
(934)
(645)
(523)
132,541
64,830
(31,068)
13,763
43,656
(8,739)
722,268
76,338
71,469
33,704
19,973
19,826
17,320
782,448
41,360
98,273
39,900
6,126
5,740
15,891
576,557
352
837
340
52
49
134
4,908
(10,822)
18,049
(61)
10,082
(13,409)
—
(287,741)
19,157
(2,689,554)
1,156,888
820,650
(976,761)
(25,661)
15,985
(1,608)
13,140
(20,856)
—
(373,980)
14,216
(2,710,520)
1,561,299
684,308
(843,677)
(17,314)
3,711
(6,915)
5,666
(63,395)
55,990
(460,021)
39,951
(3,031,644)
1,870,675
930,595
(672,701)
(148)
32
(59)
48
(540)
477
(3,916)
340
(25,808)
15,925
7,922
(5,727)
(7,910)
885,162
(289,107)
(33,541)
20,244
704,433
(495,107)
(47,797)
(124,941)
865,677
(568,371)
(71,061)
(1,064)
7,369
(4,838)
(605)
280
(95,312)
459,572
(131)
(84,147)
97,495
(234)
(77,064)
24,006
(2)
(656)
204
Effect of exchange rate changes on cash and cash equivalents
(28,062)
12,851
45,927
392
Net change in cash and cash equivalents
177,017
49,117
(26,211)
(223)
Cash and cash equivalents at beginning of year
547,404
724,421
773,538
6,585
¥0,724,421
¥0,773,538
¥0,747,327
$06,362
Cash flows from investing activities:
Increase in investments and advances
Decrease in investments and advances
Payment for purchase of available-for-sale securities
Proceeds from sales of available-for-sale securities
Payment for purchase of held-to-maturity securities
Proceeds from redemption of held-to-maturity securities
Capital expenditures
Proceeds from sales of property, plant and equipment
Acquisitions of finance subsidiaries–receivables
Collections of finance subsidiaries–receivables
Proceeds from sales of finance subsidiaries–receivables
Net cash used in investing activities
Cash flows from financing activities:
Increase (decrease) in short-term debt
Proceeds from long-term debt
Repayment of long-term debt
Cash dividends paid (note 10)
Increase (decrease) in commercial paper classified as
long-term debt
Payment for purchase of treasury stock, net
Net cash provided by financing activities
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
70
Notes to Consolidated Financial Statements
Honda Motor Co., Ltd. and Subsidiaries
1. General and Summary of Significant
Accounting Policies
maintain their books of account in conformity with those of
(a) Description of Business
have been prepared in a manner and reflect the adjustments
Honda Motor Co., Ltd. (the “Company”) and its subsidiaries
which are necessary to conform them with U.S. generally
(collectively “Honda”) develop, manufacture, distribute and
accepted accounting principles.
the countries of their domicile.
The consolidated financial statements presented herein
provide financing for the sale of its motorcycles, automobiles
and power products. Honda’s manufacturing operations are
(c) Consolidation Policy
principally conducted in 32 separate factories, 4 of which are
The consolidated financial statements include the accounts
located in Japan. Principal overseas manufacturing facilities
of the Company, its subsidiaries and those variable interest
are located in the United States of America, Canada, Mexico,
entities where the Company is the primary beneficiary under
the United Kingdom, France, Italy, Spain, China, India,
FASB Interpretation No.46 (revised December 2003),
Indonesia, Malaysia, Pakistan, the Philippines, Taiwan,
“Consolidation of Variable Interest Entities”. All significant
Thailand, Vietnam, Brazil and Turkey.
intercompany balances and transactions have been
eliminated in consolidation.
Net sales and other operating revenue by category of
activity for the year ended March 31, 2006 were derived
Investments in affiliates in which the Company has the
from: motorcycle business 12.4%, automobile business
ability to exercise significant influence over their operating
80.8%, financial services 3.1%, and power products and
and financial policies, but where the Company does not have
other businesses 3.7%. Operating income by category of
a controlling financial interest are accounted for using the
activity for the year ended March 31, 2006 was derived from:
equity method.
Minority interests in net assets and income are not signifi-
motorcycle business 13.1%, automobile business 72.3%,
financial services 10.4%, and power products and other
cant and, accordingly, are not presented separately in the
businesses 4.2%. The total assets at March 31, 2006 were
accompanying consolidated balance sheets and statements
attributable to: motorcycle business 9.5%, automobile busi-
of income. The amount of minority interest recognized in
ness 45.0%, financial services 47.4%, power products and
earnings, included in other expenses–other, for each of the
other businesses 2.8%, and corporate assets (net of
years in the three-year period ended March 31, 2006 were
company-wide accounts eliminated in consolidation) (4.7%).
¥11,753 million, ¥11,559 million and ¥15,287 million
($130million), respectively.
Honda sells motorcycles, automobiles and power products in most countries in the world. For the year ended
March 31, 2006, 79.6% of net sales and other operating rev-
(d) Use of Estimates
enue (¥7,885,997 million; $67,132 million) was derived from
Management of Honda has made a number of estimates and
subsidiaries operating outside Japan (2005: ¥6,666,923 mil-
assumptions relating to the reporting of assets, liabilities, rev-
lion, 2004: ¥6,283,459 million). Net sales and other operating
enues and expenses, and the disclosure of contingent assets
revenue for the year ended March 31, 2006 was geographi-
and liabilities to prepare these consolidated financial state-
cally broken down based on the location of customers as
ments in conformity with U.S. generally accepted accounting
follows: Japan 17.1%, North America 55.1%, Europe 10.2%,
principles. Significant items subject to such estimates and
Asia 11.0% and others 6.6%. For the year ended March 31,
assumptions include, but are not limited to, allowance for
2006, 57.8% of operating income (¥502,410 million; $4,277
credit losses, allowance for losses on lease residual values,
million) was generated from foreign subsidiaries, disregarding
valuation allowance for inventories and deferred tax assets,
the effect of elimination of unrealized profits between domes-
impairment of long-lived assets, product warranty, and
tic operations and foreign operations (2005: ¥456,282 mil-
assets and obligations related to employee benefits. Actual
lion, 2004: ¥404,464 million). Also, 74.3% of Honda’s assets
results could differ from those estimates.
at March 31, 2006 (¥7,854,270 million; $66,862 million) was
(e) Revenue Recognition
identified with foreign operations (2005: ¥6,597,463 million).
Sales of manufactured products are recognized when per(b) Basis of Presenting Consolidated Financial Statements
suasive evidence of an arrangement exists, delivery has
The Company and its domestic subsidiaries maintain their
occurred, title and risk of loss have passed to the customers,
books of account in conformity with financial accounting
the sales price is fixed or determinable, and collectibility is
standards of Japan, and its foreign subsidiaries generally
probable.
71
(h) Investments in Securities
Honda provides dealer incentives passed on to the end
customers generally in the form of below-market interest rate
Honda classifies its debt and equity securities in one of three
loans or lease programs. The amount of interest or lease
categories: available-for-sale, trading, or held-to-maturity.
subsidies paid is the difference between the amount offered
Debt securities that are classified as “held-to-maturity”
to retail customers and a market-based interest or lease rate.
securities are reported at amortized cost. Debt and equity
Honda also provides dealer incentives retained by the dealer,
securities classified as “trading” securities are reported at fair
which generally represent discounts provided by Honda to
value, with unrealized gains and losses included in earnings.
the dealers. These incentives are classified as a reduction of
Other debt and equity securities are classified as “available-
sales revenue as the consideration is paid in cash and Honda
for-sale” securities and are reported at fair value, with unreal-
does not receive an identifiable benefit in exchange for this
ized gains or losses, net of deferred taxes included in
consideration. The estimated costs are accrued at the time
accumulated other comprehensive income (loss) in the
the product is sold to the dealer.
stockholders’ equity section of the consolidated balance
Interest income from finance receivables is recognized
sheets. Honda did not hold any “trading” securities at March
using the interest method. Finance receivable origination fees
31, 2005 and 2006, except for retained interests in the sold
and certain direct origination costs are deferred, and the net
pools of finance receivables, which are accounted for as
fee or cost is amortized using the interest method over the
“trading” securities and included in finance subsidiaries-
contractual life of the finance receivables.
receivables.
Honda periodically reviews the fair value of investment
Finance subsidiaries of the Company periodically sell
finance receivables. Gain or loss is recognized equal to the
securities. If the fair value of investment securities has
difference between the cash proceeds received and the
declined below our cost basis and such decline is judged to
carrying value of the receivables sold and is recorded in the
be other-than-temporary, Honda recognizes the impairment
period in which the sale occurs. Honda allocates the
of the investment securities and the carrying value is reduced
recorded investment in finance receivables between the
to its fair value through a charge to income. The determina-
portion(s) of the receivables sold and portion(s) retained
tion of other-than-temporary impairment is based upon an
based on the relative fair values of those portions on the date
assessment of the facts and circumstances related to each
the receivables are sold. Honda recognizes gains or losses
investment security. In determining the nature and extent of
attributable to the change in the fair value of the retained
impairment, Honda considers such factors as financial and
interests, which are recorded at estimated fair value and
operating conditions of the issuer, the industry in which the
accounted for as “trading” securities. Honda determines the
issuer operates, degree and period of the decline in fair value
fair value of the retained interests by discounting the future
and other relevant factors.
cash flows. Those cash flows are estimated based on prepayments, credit losses and other information as available
(i) Goodwill
and are discounted at a rate which Honda believes is com-
Goodwill is not amortized but instead is tested for impairment
mensurate with the risk free rate plus a risk premium. A ser-
at least annually. Goodwill is considered impaired if its esti-
vicing asset or liability is amortized in proportion to and over
mated fair value is less than the carrying value. Honda com-
the period of estimated net servicing income. Servicing
pleted its annual test effective March 31, 2004, 2005 and
assets and servicing liabilities at March 31, 2005 and 2006
2006 and concluded no impairment needed to be recog-
were not significant.
nized. The carrying amount of goodwill at March 31, 2005
and 2006 was ¥17,887 million and ¥27,951 million ($238
million), respectively.
(f) Cash Equivalents
Honda considers all highly liquid debt instruments with an
original maturity of three months or less to be cash
(j) Depreciation
equivalents.
Depreciation of property, plant and equipment is calculated
principally by the declining-balance method based on esti-
(g) Inventories
mated useful lives and salvage values of the respective
Inventories are stated at the lower of cost, determined
assets.
principally by the first-in, first-out method, or market.
72
costs for general warranties on vehicles Honda sells and
The estimated useful lives used in computing depreciation
product recalls.
of property, plant and equipment are as follows:
Asset
Life
Buildings
3 to 50 years
(n) Basic Net Income per Common Share
Machinery and equipment
2 to 20 years
Basic net income per common share has been computed by
dividing net income available to common stockholders by the
(k) Impairment of Long-Lived Assets and Long-Lived
weighted average number of common shares outstanding
Assets to Be Disposed Of
during each year. The weighted average number of common
Honda’s long-lived assets and certain identifiable intangibles
shares outstanding for the years ended March 31, 2004,
having finite useful lives are reviewed for impairment when-
2005 and 2006 was 953,638,262, 933,767,978 and
ever events or changes in circumstances indicate that the
920,399,836 respectively. There were no potentially dilutive
carrying amount of an asset may not be recoverable. Recov-
shares outstanding during the years ended March 31, 2004,
erability of assets to be held and used is measured by a
2005 or 2006.
comparison of the carrying amount of an asset to future net
cash flows (undiscounted and without interest charges)
(o) Foreign Currency Translation
expected to be generated by the asset. If such assets are
Foreign currency financial statement amounts are translated
considered to be impaired, the impairment to be recognized
into Japanese yen on the basis of the year-end rate for all
is measured by the amount by which the carrying amount of
assets and liabilities and the weighted average rate for the
the assets exceeds the estimated fair value of the assets.
year for all income and expense amounts. Translation
Assets to be disposed of by sale are reported at the lower of
adjustments resulting therefrom are included in accumulated
the carrying amount or estimated fair value less costs to sell.
other comprehensive income (loss) in the stockholders’
equity section of the consolidated balance sheets.
Foreign currency receivables and payables are translated
(l) Income Taxes
Income taxes are accounted for under the asset and liability
at the applicable current rates on the balance sheet date. All
method. Deferred tax assets and liabilities are recognized for
revenue and expenses associated with foreign currencies are
the future tax consequences attributable to differences
converted at the rates of exchange prevailing when such
between the financial statement carrying amounts of existing
transactions occur. The resulting exchange gains or losses
assets and liabilities and their respective tax bases and
are reflected in other income (expense) in the consolidated
operating loss and tax credit carryforwards. Deferred tax
statements of income.
Foreign currency transaction gains (losses) included in
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
other income (expenses)–other for each of the years in the
those temporary differences are expected to be recovered or
three-year period ended March 31, 2006 are as follows:
settled. The effect on deferred tax assets and liabilities of a
U.S. dollars
(millions)
(note 2)
Yen
(millions)
change in tax rates is recognized in earnings in the period
that includes the enactment date.
2004
2005
2006
¥13,668
¥(17,146)
¥(38,880)
2006
$(331)
(m) Product-Related Expenses
Advertising and sales promotion costs are expensed as
(p) Derivative Financial Instruments
incurred. Advertising expenses for each of the years in the
Honda has entered into foreign exchange agreements and
three-year period ended March 31, 2006 were ¥239,332 mil-
interest rate agreements to manage currency and interest
lion, ¥246,997 million and ¥287,901 million ($2,451 million),
rate exposures. These instruments include foreign currency
respectively. Provisions for estimated costs related to product
forward contracts, currency swap agreements, currency
warranty are made at the time the products are sold to cus-
option contracts and interest rate swap agreements.
tomers or new warranty programs are initiated. Estimated
Honda recognizes the fair value of all derivative financial
warranty expenses are provided based on historical warranty
instruments in its consolidated balance sheet.
claim experience with consideration given to the expected
Starting from the year ended March 31, 2006, Honda
level of future warranty costs as well as current information
adopted hedge accounting for certain foreign currency
on repair costs. Included in warranty expenses accruals are
forward contracts related to forecasted foreign currency
73
transactions between the Company and its subsidiaries.
(q) Shipping and Handling Costs
These are designated as cash flow hedges on the date
Shipping and handling costs included in selling, general and
derivative contracts entered into. The Company has a cur-
administrative expenses for each of the years in the three-
rency rate risk management policy documented. In addition,
year period ended March 31, 2006 are as follows:
it documents all relationships between all derivative financial
U.S. dollars
(millions)
(note 2)
Yen
(millions)
instruments designated as cash flow hedges and the relevant
hedged items to identify the relationship between them. The
2004
Company assesses, both at the hedge’s inception and on an
¥146,698
ongoing basis, whether the derivative financial instruments
designated as cash flow hedge are highly effective to offset
2005
¥159,472
2006
¥181,675
2006
$1,547
(r) Asset Retirement Liability
changes in cash flows of hedged items.
During the year ended March 31, 2006, Honda adopted
When it is determined that a derivative financial instrument
Financial Accounting Standards Board (FASB) Interpretation
is not highly effective as a cash flow hedge, when the
No. (FIN) 47, “Accounting for Conditional Asset Retirement
hedged item matures, is sold or is terminated, or when it is
obligations–an interpretation of FASB Statement No. 143”.
identified that the forecasted transaction is no longer prob-
FIN47 clarifies the term conditional asset retirement obliga-
able, the Company discontinues hedge accounting. To the
tion as used in SFAS No. 143 and requires a liability to be
extent derivative financial instruments are designated as cash
recorded if the fair value of the obligation can be reasonably
flow hedges and have been assessed as being highly effec-
estimated. Asset retirement obligations covered by this Inter-
tive, changes in their fair value are recognized in other com-
pretation include those for which an entity has a legal obliga-
prehensive income (loss). The amounts are reclassified into
tion to perform an asset retirement activity, however the
earnings in the period when forecasted hedged transactions
timing and (or) method of settling the obligation are condi-
affect earnings. When these cash flow hedges prove to be
tional on a future event that may or may not be within the
ineffective, changes in the fair value of the derivatives are
control of the entity.
immediately recognized in earnings.
Adoption of FIN47 had no material impact on Honda’s
In conformity with Financial Accounting Standards (SFAS)
consolidated financial position or results of operations.
No.133, changes in the fair value of derivative financial
instruments not designated as accounting hedges are
(s) New Accounting Pronouncements Not Yet Adopted
recognized in earnings in the period of the change.
In November 2004, the Financial Accounting Standards
The amount recognized in earnings included in other
Board (FASB) issued Statement of Financial Accounting
income (expenses)–other during the year ended March 31,
Standards (SFAS) No. 151, “Inventory Costs, an amendment
2004, 2005 and 2006 are ¥122,583 million gain, ¥44,905
of Accounting Research Bulletin (ARB) No. 43, Chapter 4.”
million gain and ¥55,516 million ($473 million) loss, respec-
SFAS No. 151 amends the guidance in ARB No.43, “Inven-
tively. In relation to this, the Company included gains and
tory Pricing,” for abnormal amounts of idle facility expense,
losses on translation of debts of finance subsidiaries denomi-
freight, handling costs, and wasted material (spoilage)
nated in foreign currencies intended to be hedged of
requiring that those items be recognized as current-period
¥36,410 million loss, ¥10,667 million gain and ¥45,046
expenses regardless of whether they meet the criterion of “so
million ($383 million) gain in other income (expenses)–other
abnormal,” as described in ARB No. 43. This statement also
during the years ended March 31, 2004, 2005 and 2006,
requires that allocation of fixed production overheads to the
respectively. In addition, net realized gains and losses on
costs of conversion be based on the normal capacity of the
interest rate swap contracts not designated as accounting
production facilities. The statement is effective for inventory
hedges by finance subsidiaries of ¥38,894 million loss,
costs incurred during the fiscal years beginning after June
¥28,000 million loss and ¥827 million ($7 million) gain are
15, 2005. Management does not expect this statement to
included in other income (expenses)–other during the years
have a material impact on Honda’s consolidated financial
ended March 31, 2004, 2005 and 2006, respectively. These
position or results of operations.
gains and losses are presented on a net basis.
In March 2006, the Financial Accounting Standards Board
Honda doesn’t hold any derivative financial instruments
(FASB) issued Statement of Financial Accounting Standards
for trading purposes.
(SFAS) No. 156, “Accounting for Servicing of Financial
Assets”. This statement amends SFAS No. 140, “Accounting
74
for Transfers and Servicing of Financial Assets and Extin-
(t) Reclassifications
guishments of Liabilities”, with respect to the accounting for
Certain reclassifications have been made to the prior years’
separately recognized servicing assets and servicing liabili-
consolidated financial statements to conform to the presen-
ties. SFAS No. 156 gives revised guidance as to when
tation used for the year ended March 31, 2006. In the current
servicing assets and servicing liabilities should be recog-
year, management has classified cash dividends received
nized. It also revises guidance regarding the initial and subse-
from affiliates in operating activities in the consolidated state-
quent measurement of servicing assets and liabilities. SFAS
ments of cash flows. Consequently management has revised
No. 156 is effective as of the beginning of an entity’s first
the consolidated statements of cash flows for the years
fiscal year that begins after September 15, 2006, with early
ended March 31, 2004 and 2005 to include such cash divi-
adoption being permitted. Management is currently in pro-
dends in operating activities, instead of investing activities, to
cess of determining whether to early adopt this statement
achieve a comparable presentation for all periods presented
and quantifying the financial impact of adoption. It is not
herein.
anticipated that adoption will have a material impact on the
Company’s financial position or results of operations.
2. Basis of Translating Financial Statements
The consolidated financial statements are expressed in Japa-
U.S. dollar amounts presented in the consolidated financial
nese yen. However, the consolidated financial statements as
statements and related notes are included solely for the
of and for the year ended March 31, 2006 have been
reader. This translation should not be construed as a repre-
translated into United States dollars at the rate of ¥117.47=
sentation that all the amounts shown could be converted into
U.S.$1, the approximate exchange rate prevailing on the
U.S. dollars.
Tokyo Foreign Exchange Market on March 31, 2006. Those
3. Finance Subsidiaries-Receivables and Securitizations
Finance subsidiaries-receivables represent finance receiv-
portfolio and the borrower’s ability to pay.
ables generated by finance subsidiaries. Certain finance
Finance subsidiaries of the Company purchase insurance
receivables related to sales of inventory are reclassified to
to cover a substantial amount of the estimated residual value
trade receivables and other assets in the consolidated bal-
of vehicles leased to customers. The allowance for losses on
ance sheets. Finance receivables include wholesale financing
lease residual values is maintained at an amount manage-
to dealers and retail financing and direct financing leases to
ment deems adequate to cover estimated losses on the
consumers.
uninsured portion of the vehicles’ lease residual values. The
The allowance for credit losses is maintained at an
allowance is also based on management’s evaluation of
amount management deems adequate to cover estimated
many factors, including current economic conditions,
losses on finance receivables. The allowance is based on
industry experience and the finance subsidiaries’ historical
management’s evaluation of many factors, including current
experience with residual value losses.
economic trends, industry experience, inherent risks in the
75
Finance subsidiaries-receivables, net, consisted of the following at March 31, 2005 and 2006:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Direct financing leases
Retail
Wholesale
Term loans to dealers
Total finance receivables
Retained interests in the sold pools of finance receivables
2005
2006
2006
¥1,922,248
¥2,220,100
$18,899
2,110,018
2,405,926
20,481
312,318
403,499
3,435
10,529
14,337
122
4,355,113
5,043,862
42,937
62,904
94,634
806
4,418,017
5,138,496
43,743
Allowance for credit losses (a)
32,749
35,316
301
Allowance for losses on lease residual values
34,025
37,774
322
201,873
224,901
1,914
4,149,370
4,840,505
41,206
374,988
470,002
4,000
Less:
Unearned interest income and fees (b)
Finance subsidiaries–receivables, net, before reclassification
Less:
Reclassification to trade receivables, net
Reclassification to other assets, net
Finance subsidiaries-receivables, net
Less current portion
Noncurrent finance subsidiaries–receivables, net
129,357
157,166
1,338
3,645,025
4,213,337
35,868
1,021,116
1,230,912
10,479
¥2,623,909
¥2,982,425
$25,389
(a) The allowance for credit losses of finance subsidiaries-
accounts of trade receivable and other assets in the
receivables at March 31, 2005 include ¥1,356 million and
consolidated balance sheets, respectively.
¥467 million, which were reclassified to the allowance for
doubtful accounts of trade receivable and other assets in the
(b) The unearned interest income and fees at March 31, 2005
consolidated balance sheets, respectively. The allowance for
and 2006 include ¥19,118 million and ¥21,252 million ($181
credit losses of finance subsidiaries-receivables at March 31,
million), which were reclassified to trade receivable and other
2006 include ¥1,903 million ($16 million) and ¥463 million ($4
assets in the consolidated balance sheets.
million), which were reclassified to the allowance for doubtful
The following schedule shows the contractual maturities of finance receivables for each of the five years following March 31,
2006 and thereafter:
Yen
(millions)
Years ending March 31
U.S. dollars
(millions)
(note 2)
2007
¥1,743,531
$14,842
2008
1,290,440
10,985
2009
1,103,267
9,392
2010
602,096
5,126
2011
238,520
2,030
66,008
562
After five years
Total
76
3,300,331
28,095
¥5,043,862
$42,937
Net sales and other operating revenue and cost of sales include finance income and related cost of finance subsidiaries for
each of the years in the three-year period ended March 31, 2006 as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Finance income
Finance cost
2004
2005
2006
2006
¥245,834
¥259,188
¥310,937
$2,647
35,796
54,815
115,636
984
direct financing lease receivables subject to limited recourse
Finance subsidiaries of the Company periodically sell
finance receivables. Finance subsidiaries sold retail finance
provisions totaling approximately ¥100,374 million ($854
receivables subject to limited recourse provisions during the
million) during the year ended March 31, 2006. Pre-tax net
year ended March 31, 2004, 2005 and 2006 totaling
gains or losses on such sales which are included in finance
approximately ¥793,261 million, ¥731,508 million and
income in the table above are ¥483 million ($4 million) gain.
¥930,629 million ($7,922 million), respectively, to investors.
The leases sold during the year ended March 31, 2006 had
Pre-tax net gains or losses on such sales for each of the
100% insurance coverage of the residual value of the
years in the three-year period ended March 31, 2006, which
vehicles collateralizing those leases.
Finance subsidiaries serviced approximately ¥1,078,463
are included in finance income in the table above, are ¥3,821
million gain, ¥4,291 million loss and ¥11,849 million ($101
million and ¥1,500,263 million ($12,771 million) of receivables
million) loss, respectively. Finance subsidiaries also sold
for investors at March 31, 2005 and 2006, respectively.
Retained interests in securitizations were comprised of the following at March 31 2005 and 2006:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Subordinated certificates
Residual interests
Total
2005
2006
2006
¥37,480
¥52,572
$448
25,424
42,062
358
¥62,904
¥94,634
$806
The changes in retained interest in securitizations for each of the years in the three-year period ended March 31, 2006 are as
follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Balance at beginning of year
Additions
Repurchases
Amortization and fair value adjustments
Cash received
Foreign exchange translation
Balance at end of year
77
2004
2005
2006
¥(67,024
¥(61,072
¥62,904
$537
41,045
31,267
59,841
509
(7,716)
(4,632)
(5,119)
(44)
868
2,846
(32,140)
(28,606)
(30,753)
(8,009)
957
6,896
59
¥(61,072
¥(62,904
¥94,634
$806
865
2006
7
(262)
At March 31, 2006, the significant assumptions used in estimating the retained interest in the sold pools of finance
receivables are as follows:
Weighted average
assumption
Prepayment speed
1.28%
Expected credit losses
0.42%
Residual cash flows discount rate
9.99%
The sensitivity of the current fair value to immediate 10% and 20% adverse changes from expected levels for each significant
assumption above mentioned were immaterial.
Key economic assumptions used in initially estimating the fair values at the date of the securitizations during each of the
years in the three-year period ended March 31, 2006 are as follows:
2004
2005
2006
Weighted average life (years)
1.59 to 1.79
1.64 to 1.77
1.60 to 1.75
Prepayment speed
1.00% to 1.50%
1.25% to 1.30%
1.00% to 1.30%
Expected credit losses
0.22% to 0.81%
0.30% to 0.70%
0.35% to 0.55%
Residual cash flows discount rate
5.30% to 12.00%
6.55% to 12.00%
6.53% to 12.00%
The outstanding balance of securitized financial assets at March 31, 2006 is summarized as follows:
Yen
(millions)
U.S. dollars
(millions)
(note 2)
2006
2006
Receivables sold:
Retail
¥1,402,552
$11,939
97,711
832
¥1,500,263
$12,771
Direct financing leases
Total receivables sold
4. Inventories
Inventories at March 31, 2005 and 2006 are summarized as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2005
Finished goods
Work in process
Raw materials
78
2006
2006
¥570,922
¥0,687,230
24,965
28,218
$5,851
240
266,483
320,856
2,731
¥862,370
¥1,036,304
$8,822
5. Investments and Advances-Affiliates
Investments in affiliates are accounted for using the equity method. Differences between the cost of investments in affiliates and
the amount of underlying equity in net assets of the affiliates are accounted for goodwill which is included in ‘Other assets’.
Goodwill is not amortized but instead be tested for impairment at least annually. Significant investments in affiliates accounted
for under the equity method at March 31, 2005 and 2006 are Showa Corporation (33.5%), Keihin Corporation (42.2%),
Guangzhou Honda Automobile Co., Ltd. (50.0%), Dongfeng Honda Engine Co., Ltd. (50.0%), and P.T. Astra Honda Motor
(50.0%).
Investments in affiliates include equity securities which have quoted market values at March 31, 2005 and 2006 compared
with related carrying amounts as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Carrying amount
Market value
2005
2006
2006
¥108,435
¥130,802
$1,113
204,964
444,250
3,782
Certain combined financial information in respect of affiliates accounted for under the equity method at March 31, 2005 and
2006, and for each of the years in the three-year period ended March 31, 2006 is shown below:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2005
Current assets
Other assets, principally property, plant and equipment
Total assets
2006
2006
¥0,876,559
¥1,056,428
$08,993
830,827
1,063,235
9,051
1,707,386
2,119,663
18,044
Current liabilities
629,578
762,660
6,492
Other liabilities
146,554
182,503
1,554
776,132
945,163
8,046
¥0,931,254
¥1,174,500
$49,998
Total liabilities
Stockholders’ equity
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Net sales
Net income
Cash dividends received by Honda during the year
79
2004
2005
2006
2006
¥2,646,166
¥3,039,751
¥3,426,348
$29,168
168,905
220,596
229,640
1,955
46,780
35,824
64,055
545
Sales to affiliates by the Company and its subsidiaries and sales among such affiliates are made on the same basis as sales
to unaffiliated parties.
Honda’s equity in undistributed income of affiliates at March 31, 2005 and 2006 included in retained earnings was ¥224,047
million and ¥275,874 million ($2,348 million), respectively.
Trade receivables and trade payables include the following balances with affiliates at March 31, 2005 and 2006, and purchases and sales include the following transactions with affiliates for each of the years in the three-year period ended March 31,
2006:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Trade receivables from
Trade payables to
2005
2006
¥025,421
¥059,292
$505
106,543
112,547
958
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Purchases from
Sales to
2006
2004
2005
2006
2006
¥551,757
¥595,589
¥611,711
$5,207
122,241
148,352
155,195
1,321
Mr.Minekawa, a Director of the Company, served as the President of Guangzhou Honda Automobile Co., Ltd., one of our
affiliates in China. In fiscal year 2006 from April to June, Honda sold automobile parts, equipment and services to the affiliated
company in the amount of ¥10,008 million ($85 million). He retired as a Director of the Company as of June 23, 2005 and was
assigned as an operating officer of the Company. In fiscal year 2005, Honda sold automobile parts, equipment and services to
the affiliated company in the amount of ¥37,023 million.
6. Investments and Advances
Investments and advances at March 31, 2005 and 2006 consisted of the following:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2005
2006
2006
¥07,485
¥13,100
$112
3,222
18,733
159
—
5,998
51
¥10,707
¥37,831
$322
Current
Corporate debt securities
U.S. government and agency debt securities
Commercial paper
Investments due within one year are included in other current assets.
80
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2005
2006
2006
Noncurrent
¥093,004
¥141,846
Nonmarketable preferred stocks
Marketable equity securities
11,100
6,000
51
Convertible preferred stocks
27,476
22,934
195
Convertible notes
65,920
56,635
482
3,000
2,999
26
U.S. government and agency debt securities
20,347
2,937
25
Guaranty deposits
31,076
30,110
256
Government bonds
$1,208
Advances
3,915
2,209
19
Other
9,088
20,422
173
¥264,926
¥286,092
$2,435
Certain information with respect to marketable securities at March 31, 2005 and 2006, is summarized below:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2005
2006
2006
Available-for-sale
Cost
¥29,815
¥030,366
$0,259
Fair value
93,004
141,846
1,208
Gross unrealized gains
63,319
111,540
950
130
60
1
¥34,054
¥043,767
$0,373
33,692
43,428
370
75
1
0
437
340
3
Gross unrealized losses
Held-to-maturity
Amortized cost
Fair value
Gross unrealized gains
Gross unrealized losses
Maturities of debt securities classified as held-to-maturity at March 31, 2006 were as follows:
Yen
(millions)
Due within one year
U.S. dollars
(millions)
(note 2)
¥37,831
$322
Due after one year through five years
3,938
34
Due after five years through ten years
1,998
17
¥43,767
$373
Total
Realized gains and losses from available-for-sale securities included in other expenses (income)–other for each of the years in
the three-year period ended March 31, 2006, were, ¥3,468 million net gains, ¥2,206 million net gains and ¥462 million ($4
million) net loss, respectively.
81
Gross unrealized losses on marketable securities and fair value of the related securities, aggregated by length of time that
individual securities have been in a continuous unrealized loss position at March 31, 2006 were as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Available-for-sale
Less than 12 months
¥453
12 months or longer
—
¥(60)
$04
—
$((1)
—
—
¥453
¥(60)
$04
$((1)
¥16,068
¥0(30)
$137
$(0)
21,360
(310)
182
(3)
¥37,428
¥(340)
$319
$(3)
Held-to-maturity
Less than 12 months
12 months or longer
Honda judged this decline in fair value of investment securities to be temporary, with considering such factors as financial and
operating conditions of the issuer, the industry in which the issuer operates, degree and period of the decline in fair value and
other relevant factors.
7. Short-term and Long-term Debt
Short-term debt at March 31, 2005 and 2006 is as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Short-term bank loans
Medium-term notes
Commercial paper
2005
2006
2006
¥279,696
85,273
404,345
¥314,124
152,246
227,187
$2,674
1,296
1,934
¥769,314
¥693,557
$5,904
The weighted average interest rates on short-term debt outstanding at March 31, 2005 and 2006 were 2.09% and 3.21%,
respectively.
82
Long-term debt at March 31, 2005 and 2006 is as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2005
Honda Motor Co., Ltd.:
Loans, maturing through 2031:
Unsecured, principally from banks
Subsidiaries:
Commercial paper
Loans, maturing through 2029
Secured, principally from banks
Unsecured, principally from banks
0.69% Japanese yen unsecured bond due 2006
0.81% Japanese yen unsecured bond due 2006
0.47% Japanese yen unsecured bond due 2007
0.79% Japanese yen unsecured bond due 2008
0.99% Japanese yen unsecured bond due 2009
0.31% Japanese yen unsecured bond due 2010
0.66% Japanese yen unsecured bond due 2010
0.94% Japanese yen unsecured bond due 2010
3.65% Thai baht unsecured bond due 2007
Medium-term notes, maturing through 2019
Less unamortized discount, net
Total long-term debt
Less current portion
2006
2006
¥0,000,238
238
¥0,000,603
603
$00,005
5
187,932
205,573
1,750
30,147
65,892
60,000
1,000
50,000
30,000
30,000
—
—
—
5,460
1,634,342
406
19,765
94,509
60,000
1,000
50,000
30,000
30,000
200
30,000
30,000
6,040
1,979,635
680
168
806
511
9
426
255
255
2
255
255
51
16,852
6
2,094,367
2,536,042
21,589
2,094,605
535,105
2,536,645
657,645
21,594
5,598
¥1,559,500
¥1,879,000
$15,996
At March 31, 2005 and 2006, ¥187,932 million and
The loans maturing through 2031 and through 2029 are
either secured by property, plant and equipment or subject to
¥205,573 million ($1,750 million), respectively, of commercial
collateralization upon request, and their interest rates range
paper borrowings were classified as long-term, as it is the
from 0.89% to 18.08% per annum at March 31, 2006 and
respective finance subsidiary’s intention to refinance them on
weighted average interest rate on total outstanding long-term
a long-term basis and it has established the necessary credit
debt at March 31, 2005 and 2006 is 4.05% and 4.35%,
facilities to do so. The weighted average interest rate on
respectively. Property, plant and equipment with a net book
commercial paper at March 31, 2005 and 2006 was
value of approximately ¥12,881 million and ¥22,592 million
approximately 2.71% and 4.32%, respectively.
Medium-term notes are unsecured, and their interest rates
($192 million) at March 31, 2005 and 2006, respectively,
were subject to specific mortgages securing indebtedness.
range from 0.6% to 3.17% at March 31, 2005 and from
Furthermore, finance subsidiaries-receivables of approxi-
0.63% to 4.66% at March 31, 2006.
mately ¥22,597 million and ¥8,993 million ($77 million) at
March 31, 2005 and 2006, respectively, were pledged as
collateral by a financial subsidiary for certain loans.
83
The following schedule shows the maturities of long-term debt for each of the five years following March 31, 2006 and
thereafter:
Yen
(millions)
Years ending March 31:
U.S. dollars
(millions)
(note 2)
2007
¥0,657,645
$05,598
2008
903,184
7,689
2009
467,334
3,978
2010
221,728
1,888
2011
251,085
2,137
After five years
Total
35,669
304
1,879,000
15,996
¥2,536,645
$21,594
At March 31, 2006, Honda also had committed lines of
Certain of the Company’s subsidiaries have entered into
currency swap and interest rate swap agreements for hedg-
credit amounting to ¥720,982 million ($6,138 million), none of
ing currency and interest rate exposures resulting from the
which was in use. The committed lines are used to back up
issuance of long-term debt. Fair value of contracts related to
the commercial paper programs. Borrowings under those
currency swaps and interest rate swaps is included in other
committed lines of credit generally are available at the prime
assets/liabilities and/or other current assets/liabilities in the
interest rate.
As is customary in Japan, both short-term and long-term
consolidated balance sheets, as appropriate (see note 14).
Unless a right of setoff exists, the offsetting of assets and
bank loans are made under general agreements which pro-
liabilities is not made in the consolidated balance sheets.
vide that security and guarantees for present and future
indebtedness will be given upon request of the bank, and
At March 31, 2006, Honda had unused line of credit facilities amounting to ¥1,523,948 million ($12,973 million), of
that the bank shall have the right to offset cash deposits
which ¥609,634 million ($5,190 million) related to commercial
against obligations that have become due or, in the event of
paper programs and ¥914,314 million ($7,783 million) related
default, against all obligations due to the bank. Certain
to medium-term notes programs. Honda is authorized to
debenture trust agreements provide that Honda must give
obtain financing at prevailing interest rates under these
additional security upon request of the trustee.
programs.
8. Other Liabilities
Other liabilities at March 31, 2005 and 2006 are summarized as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Accrued liabilities for product warranty, net of current portion
Minority interest
2005
2006
¥141,394
¥137,503
2006
$1,171
70,001
87,460
745
381,124
171,773
1,463
Deferred income taxes
68,561
115,360
982
Other
58,532
65,426
555
¥719,612
¥577,522
$4,916
Additional minimum pension liabilities (note 11)
84
9. Income Taxes
Total income taxes for each of the years in the three-year period ended March 31, 2006 were allocated as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Income from continuing operations
Other comprehensive income (note 13)
2004
2005
2006
¥252,740
¥266,665
¥317,189
2006
$2,700
43,620
12,718
154,370
1,314
¥296,360
¥279,383
¥471,559
$4,014
Income before income taxes and equity in income of affiliates by domestic and foreign source and income tax expense
(benefit) for each of the years in the three-year period ended March 31, 2006 consisted of the following:
Yen
(millions)
Income taxes
Income before
income taxes
Current
Deferred
Total
2004:
Japanese
Foreign
¥204,695
¥106,672
¥,(16,448)
¥090,224
251,8437,232
32,646
129,870
162,516
¥641,927
¥139,318
¥113,422
¥252,740
¥147,455
¥057,066
¥024,134
¥081,200
509,350
94,080
91,385
185,465
¥656,805
¥151,146
¥115,519
¥266,665
¥315,828
¥103,697
¥038,225
¥141,922
498,789
216,248
(40,981)
175,267
¥814,617
¥319,945
¥,0(2,756)
¥317,189
2005:
Japanese
Foreign
2006:
Japanese
Foreign
U.S. dollars
(millions) (note 2)
Income before
income taxes
Income taxes
Current
Deferred
Total
2006:
Japanese
Foreign
85
$2,689
$0,883
$(325
$1,208
4,246
1,840
(348)
1,492
$6,935
$2,723
$0(23)
$2,700
The significant components of deferred income tax (benefit) expense for each of the years in the three-year period ended
March 31, 2006 are as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2004
2005
2006
2006
¥109,931
¥115,519
¥(2,756)
$(23)
3,491
—
—
—
¥113,422
¥115,519
¥(2,756)
$(23)
Deferred tax (benefit) expense (exclusive of the effects of
the other component listed below)
Adjustments to deferred tax assets and liabilities for
enacted changes in tax laws and rates
The Company is subject to a national corporate tax of
business tax based on corporate size. The change in busi-
30%, an inhabitant tax of between 5.19% and 6.21% and a
ness tax rate was effective for fiscal years beginning on or
deductible business tax between 9.60% and 10.08%, which
after April 1, 2004. Consequently, the statutory income tax
in the aggregate resulted in a statutory income tax rate of
rate was lowered to approximately 40% for deferred tax
approximately 41% for the year ended March 31, 2004. On
assets and liabilities expected to be settled or realized on or
March 24, 2003, the Japanese Diet approved the Amend-
after April 1, 2004. The foreign subsidiaries are subject to
ments to Local Tax Law, which reduced standard business
taxes based on income at rates ranging from 16% to 40%.
tax rates from 9.60% to 7.68% as well as additionally levying
The effective tax rate for Honda for each of the years in the three-year period ended March 31, 2006 differs from the
Japanese statutory income tax rate for the following reasons:
Statutory income tax rate
2004
2005
2006
41.0%
40.0%
40.0%
Valuation allowance provided for current year operating losses of subsidiaries
2.6
0.5
0.3
Difference in statutory tax rates of foreign subsidiaries
(1.4)
(1.9)
(2.4)
Reversal of valuation allowance due to utilization of operating loss carryforwards
(1.6)
(1.1)
(0.8)
Research and development credit
(3.8)
(2.3)
(3.1)
Adjustments to deferred tax assets and liabilities for enacted changes in tax laws
0.5
—
—
Tax authority assessment relating to prior years*
and rates
—
1.8
—
Other adjustments relating to prior years
—
—
3.1
Other
Effective tax rate
2.1
3.6
1.8
39.4%
40.6%
38.9%
* The prior year income taxes in 2005 are due to assessment by the Japanese tax authorities as a result of their transfer pricing audit relating to
the Company’s motorcycle business in Brazil.
86
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at March 31, 2005 and 2006 are presented below:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2005
2006
2006
¥(024,475
¥(030,012
$(0,255
1,202
Deferred tax assets:
Inventories
Allowance for dealers and customers
131,262
141,141
Foreign tax credit
11,565
913
8
Operating loss carryforwards
58,697
75,131
640
152,036
68,566
584
Minimum pension liabilities adjustment
Other accrued pension liabilities
99,471
56,584
482
131,233
190,335
1,619
608,739
562,682
4,790
59,737
70,239
598
549,002
492,443
4,192
Inventories
(14,322)
(11,018)
(94)
Property, plant and equipment, excluding lease transactions
(63,614)
(67,263)
(573)
Other
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Lease transactions
(328,554)
(357,578)
(3,044)
Undistributed earnings of subsidiaries and affiliates
(34,252)
(75,429)
(642)
Net unrealized gains on marketable equity securities
(25,266)
(44,580)
(380)
Other
(82,129)
(87,324)
(742)
(548,137)
(643,192)
(5,475)
¥000,865
¥(150,749)
$(1,283)
Total gross deferred tax liabilities
Net deferred tax (liability) asset
Deferred income tax assets and liabilities at March 31, 2005 and 2006 are reflected in the consolidated balance sheets under
the following captions:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Current assets—Deferred income taxes
2005
2006
2006
¥(214,059
¥(198,033
Other assets
129,162
37,686
321
Other current liabilities
(273,795)
(271,108)
(2,308)
Other liabilities
Net deferred tax (liability) asset
$(1,686
(68,561)
(115,360)
(982)
¥(000,865
¥(150,749)
$(1,283)
strategies in making this assessment. Based upon the level
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
of historical taxable income and projections for future taxable
some portion or all of the deferred tax assets will not be
income over the periods which the deferred tax assets are
realized. The ultimate realization of deferred tax assets is
deductible, management believes it is more likely than not
dependent upon the generation of future taxable income over
that Honda will realize the benefits of these deductible differ-
the periods in which those temporary differences become
ences and operating loss carryforwards, net of the existing
deductible and operating loss carryforwards utilized. Man-
valuation allowances at March 31, 2005 and 2006. The net
agement considered the scheduled reversal of deferred tax
change in the total valuation allowance for the years ended
liabilities, projected future taxable income and tax planning
March 31, 2004 was increase of ¥6,686 million, for the year
87
ended March 31, 2005 was decrease of ¥11,989 million, and
to valuation allowance for deferred tax assets associated with
for the year ended March 31, 2006 was increase of ¥10,502
net operating loss carryforwards incurred by certain foreign
million ($89 million). The valuation allowance primarily relates
subsidiaries.
At March 31, 2006, certain of the Company’s subsidiaries have operating loss carryforwards for income tax purposes of
¥224,982 million ($1,915 million), which are available to offset future taxable income, if any. Periods available to offset future taxable income vary in each tax jurisdiction and range from one year to an indefinite period as follows:
Yen
(millions)
Within 1 year
1 to 5 years
5 to 15 years
Indefinite periods
At March 31, 2005 and 2006, Honda did not recognize
U.S. dollars
(millions)
(note 2)
¥000,127
15,431
29,791
179,633
$0,001
131
254
1,529
¥224,982
$1,915
reinvested. At March 31, 2005 and 2006, the undistributed
deferred tax liabilities of ¥47,340 million and ¥60,703 million
earnings not subject to deferred tax liabilities were
($517million), respectively, for certain portions of the undis-
¥1,895,285 million and ¥2,676,892 million ($22,788 million),
tributed earnings of the Company’s foreign subsidiaries
respectively.
because such portions were considered permanently
10. Dividends and Legal Reserves
The Company law of Japan enforced on May 1, 2006 pro-
subsidiaries are also required to appropriate their earnings to
vides that earnings in an amount equal to 10% of dividends
legal reserves under the laws of the respective countries.
of retained earnings shall be appropriated as a capital sur-
Dividends and appropriations to the legal reserves
plus or a legal reserve on the date of distribution of retained
charged to retained earnings during the years in the three-
earnings until an aggregated amount of capital surplus and a
year period ended March 31, 2006 represent dividends paid
legal reserve equals 25% of stated capital. The Japanese
out during those years and the related appropriations to the
Commercial Code, effective until the enforcement of the
legal reserves. Dividends per share for each of the years in
Company law of Japan, provided that earnings in an amount
the three-year period ended March 31, 2006 were ¥35, ¥51
equal to at least 10% of appropriations of retained earnings
and ¥77 ($0.66), respectively. The accompanying consoli-
that were paid in cash shall be appropriated as a legal re-
dated financial statements do not include any provision for
serve until an aggregated amount of capital surplus and the
the dividend of ¥60 ($0.51) per share aggregating ¥54,784
legal reserve equaled 25% of stated capital. Certain foreign
million ($466 million) to be proposed in June 2006.
88
11. Pension and Other Postretirement Benefits
benefit obligation and related plan assets. The separation
process is considered the culmination of a series of steps in a
The Company and its subsidiaries have various pension
single settlement transaction. Under this approach, the differ-
plans covering substantially all of their employees in Japan
ence between the fair value of the obligation and the assets
and in certain foreign countries. Benefits under the plans are
required to be transferred to the government should be
primarily based on the combination of years of service and
accounted for and separately disclosed as a subsidy.
As stipulated in the Japanese Welfare Pension Insurance
compensation. The funding policy is to make periodic contri-
Law, the “Honda Employees’ Pension Fund (a confederated
butions as required by applicable regulations. Plan assets
welfare pension fund, the “Fund”)”, of which the Company and
consist primarily of listed equity securities and bonds.
a part of its domestic subsidiaries and affiliates accounted for
Retirement benefits for directors, excluding certain benefits,
are provided in accordance with management policy. There are
under the equity method were members, has obtained
occasions where officers other than directors receive special
approval from the Japanese Minister of Health, Labor and
lump-sum payments at retirement. Such payments are charged
Welfare for exemption from benefits obligations related to past
to income as paid since amounts vary with circumstances and it
employee service with respect to the substitutional portion of
is impractical to compute a liability for future payments.
the Fund on July 1, 2005 and completed its transfer on
March 9, 2006. Previously on April 1, 2004, the Company
In January 2003, the Emerging Issues Task Force (EITF)
reached a final consensus on Issue No. 03-2 “Accounting for
received approval of exemption from the obligation for benefits
the Transfer to the Japanese Government of the Substitutional
related to future employee services with respect to the fund. As
Portion of Employee Pension Fund Liabilities” (“EITF 03-2”).
a result, the Company recognized a gain of ¥228,681 million,
EITF 03-2 addresses accounting for a transfer to the Japanese
which is the difference between the settled accumulated ben-
government of a substitutional portion of an Employees’
efit obligation and the assets transferred to the government; a
Pension Fund (“EPF”) plan, which is a defined benefit pension
gain of ¥56,448 million for the derecognition of previous
plan established under the Welfare Pension Insurance Law.
accrued salary progression; and settlement loss of ¥147,113
EITF 03-2 requires employers to account for the separation
million for the related unrecognized loss. Collectively, the Com-
process of the substitutional portion from the entire EPF plan
pany recognized a net gain of ¥138,016 million ($1,175 million)
(which includes a corporation portion) upon completion of the
for the fiscal year ended March 31, 2006.
transfer to the government of the substitutional portion of the
89
Reconciliations of beginning and ending balances of the pension benefit obligations and the fair value of the plan assets are
as follows:
Yen
(millions)
Japanese plans
2005
Change in benefit obligations:
Benefit obligations at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Actuarial gain (loss)
Benefits paid
Amendment
Transfer of the substitutional portion
Foreign exchange translation
Foreign plans
2006
¥(1,618,402) ¥(1,641,593)
(40,963)
(41,271)
(32,368)
(31,788)
(352)
(94)
18,383
9,198
32,109
33,957
—
20,652
—
517,614
—
—
Benefit obligations at end of year
2005
2006
¥(212,393)
(17,560)
(14,445)
(681)
(42,687)
2,501
(8,684)
—
(7,430)
¥(301,379)
(25,121)
(18,838)
(111)
(22,421)
2,949
(1,584)
—
(28,911)
(1,641,593)
(1,133,325)
(301,379)
(395,416)
794,543
33,559
46,197
352
(32,109)
—
—
842,542
98,450
37,687
94
(33,957)
(232,485)
—
194,849
28,743
29,058
681
(2,501)
—
6,335
257,165
27,240
49,912
111
(2,949)
—
26,596
842,542
712,331
257,165
358,075
Funded status
(799,051)
(420,994)
(44,214)
(37,341)
Unrecognized actuarial loss (gain)
Unrecognized net transition obligations
Unrecognized prior service cost (benefit)
607,399
5,726
(62,089)
354,172
3,733
(75,797)
81,240
332
6,764
100,047
317
8,345
(248,015)
(138,886)
44,122
71,368
—
—
(311)
(316)
(377,864)
(171,158)
(2,949)
(299)
Prepaid (accrued) pension cost recognized in the consolidated
balance sheets
¥0,(625,879)
¥(310,044)
¥0(40,862
¥(070,753
Pension plans with accumulated benefit obligations in
excess of plan assets:
Projected benefit obligations
Accumulated benefit obligations
Fair value of plan assets
¥(1,630,982) ¥(1,117,157)
(1,460,030)
(1,007,022)
833,539
696,128
¥0(52,334)
(33,749)
29,685
¥0(70,415)
(45,686)
40,114
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Transfer of the substitutional portion
Foreign exchange translation
Fair value of plan assets at end of year
Net amount recognized
Adjustments to recognize additional minimum liabilities (note 8):
Intangible assets
Amount included in accumulated other comprehensive
income (loss)
90
U.S. dollars
(millions) (note2)
Change in benefit obligations:
Benefit obligations at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Actuarial gain (loss)
Benefits paid
Amendment
Transfer of substitutional portion
Foreign exchange translation
Benefit obligations at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Transfer of substitutional portion
Foreign exchange translation
Fair value of plan assets at end of year
Japanese plans
Foreign plans
2006
2006
$(13,975)
(351)
(271)
(1)
79
289
176
4,406
—
$(2,566)
(214)
(160)
(1)
(191)
25
(13)
—
(246)
(9,648)
(3,366)
7,172
838
321
1
(289)
(1,979)
—
2,189
232
425
1
(25)
—
226
6,064
3,048
Funded status
(3,584)
(318)
Unrecognized actuarial loss (gain)
Unrecognized net transition obligations
Unrecognized prior service cost (benefit)
3,015
32
(645)
852
3
71
(1,182)
608
—
(1,457)
(3)
(3)
Prepaid (accrued) pension cost recognized in the consolidated balance sheets
$0(2,639)
$0,(602
Pension plans with accumulated benefit obligations in excess of plan assets:
Projected benefit obligations
Accumulated benefit obligations
Fair value of plan assets
$0(9,510)
(8,573)
5,926
$0,(599)
(389)
341
Net amount recognized
Adjustments to recognize additional minimum liabilities (note 8):
Intangible assets
Amount included in accumulated other comprehensive income (loss)
91
Pension expense for each of the years in the three-year period ended March 31, 2006 included the following:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2004
2005
2006
2006
Service cost-benefits earned during the year
¥49,309
¥40,963
¥41,271
$351
Interest cost on projected benefit obligations
30,741
32,368
31,788
271
Expected return on plan assets
(32,041)
(33,589)
(33,102)
(282)
Net amortization and deferral
38,058
27,921
23,441
200
¥86,067
¥67,663
¥63,398
$540
Service cost-benefits earned during the year
¥13,022
¥17,560
¥25,121
$214
Interest cost on projected benefit obligations
12,164
14,445
18,838
160
Expected return on plan assets
(12,947)
(17,418)
(21,013)
(179)
2,069
2,576
4,831
41
¥14,308
¥17,163
¥27,777
$236
Japanese plans:
Foreign plans:
Net amortization and deferral
Weighted-average assumptions used to determine benefit obligation at March 31, 2005 and 2006 were as follows:
2005
2006
Discount rate
2.0%
2.0%
Rate of salary increase
2.3%
2.2%
Discount rate
5.4–6.3%
4.9–5.8%
Rate of salary increase
3.5–6.7%
3.5–5.2%
Japanese plans:
Foreign plans:
Weighted-average assumptions used to determine net periodic benefit cost for each of the years in the three-year period
ended March 31, 2006 were as follows:
2004
2005
2006
Japanese plans:
Discount rate
2.0%
2.0%
2.0%
Rate of salary increase
2.3%
2.3%
2.3%
Expected long-term rate of return
4.0%
4.0%
4.0%
Discount rate
5.5–7.0%
5.8–6.8%
5.4–6.3%
Rate of salary increase
4.0–6.7%
3.5–6.7%
3.5–6.7%
Expected long-term rate of return
6.8–8.5%
6.8–8.5%
6.8–8.0%
Foreign plans:
Honda determines the expected long-term rate of return based on the expected long-term return of the various asset
categories in which it invests. Honda considers the current expectations for future returns and the actual historical returns of
each plan asset category.
92
Measurement date
Honda uses a March 31 measurement date for their plans excluding certain foreign subsidiaries which use a December 31
measurement date for their plans.
Plan Assets
Honda’s domestic and foreign pension plan weighted-average asset allocations at March 31, 2005 and 2006, by asset category
are as follows:
2005
2006
Equity securities
37%
48%
Debt securities
23%
37%
Other
40%
15%
100%
100%
Japanese plans:
Foreign plans:
Equity securities
68%
65%
Debt securities
24%
24%
Other
8%
11%
100%
100%
benefit plans at March 31, 2005 and 2006 were ¥1,468,115
Honda investment policies for the domestic and foreign
pension benefit are designed to maximize total returns are
million and ¥1,019,764 million ($8,681 million), respectively.
available to provide future payments of pension benefits to
The accumulated benefit obligation for all foreign defined
eligible participants under accepted risks. Honda sets target
benefit plans at March 31, 2005 and 2006 were ¥225,853
assets allocations for the individual asset categories based
million and ¥303,509 million ($2,584 million), respectively.
on the estimated returns and risks in the long future. Plan
assets are invested in individual equity and debt securities
Cash flows
using the target assets allocation.
Honda expects to contribute ¥33,281 million ($283 million) to
its domestic pension plans and ¥40,178 million ($342 million)
Obligations
to its foreign pension plans in the year ending March 31,
The accumulated benefit obligation for all domestic defined
2007.
Estimated future benefit Payment
The following table presents estimated future gross benefit payments:
Yen
(millions)
U.S. dollars
(millions) (note 2)
Japanese plans
Foreign plans
2007
¥031,365
¥03,880
$0,267
$033
2008
38,559
4,448
328
38
2009
41,663
5,150
355
44
2010
45,484
6,190
387
53
2011
46,061
7,223
392
61
263,490
63,666
2,243
542
2012–2016
Certain of the Company’s subsidiaries in North America
Japanese plans
Foreign plans
retired employees. Such benefits have no material effect on
provide certain health care and life insurance benefits to
Honda’s financial position and results of operations.
93
12. Supplemental Disclosures of Cash Flow Information
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Cash paid during the year for:
Interest
Income taxes
2004
2005
2006
¥091,207
203,029
¥099,475
159,041
¥134,609
282,986
2006
$1,146
2,409
During the year ended March 31, 2004, the Company
During the year ended March 31, 2006, the Company
reissued certain of its treasury stock at fair value of ¥603
reissued certain of its treasury stock at fair value of ¥802
million to the minority shareholder of subsidiary, upon which
million ($7 million) to the minority shareholder of subsidiary,
the Company merged with the subsidiary. During the fiscal
which the Company made a wholly owned subsidiary, and
year ended March 31, 2005, the Company retired shares
the Company retired shares totaling 11,000,000 shares at a
totaling 46,000,000 shares at a cost of ¥216,371 million by
cost of ¥66,224 million ($564 million) by offsetting with capi-
offsetting with capital surplus of ¥190 million and unappro-
tal surplus of ¥2 million ($0 million) and unappropriated re-
priated retained earnings of ¥ 216,181 million based on the
tained earnings of ¥ 66,221 million ($564 million) based on
resolution of board of directors.
the resolution of board of directors.
13. Accumulated Other Comprehensive Income (Loss)
The components and related changes in accumulated other comprehensive income (loss) for each of the years in the three-year
period ended March 31, 2006 are as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Adjustments from foreign currency translation:
Balance at beginning of year
Adjustments for the year
Balance at end of year
Net unrealized gains on marketable equity securities:
Balance at beginning of year
Realized (gain) loss on marketable equity securities
Increase (decrease) in net unrealized gains on
marketable equity securities
Balance at end of year
Net unrealized gains (losses) on derivative instruments:
Balance at beginning of year
Realized (gain) loss on derivative instruments
Increase (decrease) in net unrealized gains on
derivative instruments
Balance at end of year
94
2004
2005
2006
2006
¥(469,472)
(195,941)
¥(665,413)
40,476
¥(624,937)
249,160
$(5,321)
2,122
(665,413)
(624,937)
(375,777)
(3,199)
14,820
—
36,066
1,346
33,744
(841)
288
(8)
21,246
(3,668)
29,807
254
36,066
33,744
62,710
534
—
—
—
—
—
(38)
—
(0)
—
—
(26)
(0)
—
—
(64)
(0)
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Minimum pension liabilities adjustment:
Balance at beginning of year
Adjustments for the year
Balance at end of year
Total accumulated other comprehensive income (loss):
Balance at beginning of year
Adjustments for the year
Balance at end of year
2004
2005
2006
2006
(308,513)
83,287
(225,226)
22,485
(202,741)
108,685
(1,726)
925
(225,226)
(202,741)
(94,056)
(801)
(763,165)
(91,408)
(854,573)
60,639
(793,934)
386,747
(6,759)
3,293
¥(854,573)
¥(793,934)
¥(407,187)
$(3,466)
The tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments are as
follows:
Yen
(millions)
2004:
Adjustments from foreign currency translation
Unrealized gains (losses) on marketable equity securities:
Unrealized holding gains (losses) arising during the year
Reclassification adjustments for losses realized in net income
Net unrealized gains (losses)
Minimum pension liabilities adjustment
Other comprehensive income (loss)
2005:
Adjustments from foreign currency translation
Unrealized gains (losses) on marketable equity securities:
Unrealized holding gains (losses) arising during the year
Reclassification adjustments for losses realized in net income
Net unrealized gains (losses)
Minimum pension liabilities adjustment
Other comprehensive income (loss)
2006:
Adjustments from foreign currency translation
Unrealized gains (losses) on marketable equity securities:
Unrealized holding gains (losses) arising during the year
Reclassification adjustments for gains realized in net income
Net unrealized gains (losses)
Unrealized gains (losses) on derivative instruments:
Unrealized holding gains (losses) arising during the year
Reclassification adjustments for gains realized in net income
Net unrealized gains (losses)
Minimum pension liabilities adjustment
Other comprehensive income (loss)
95
Before-tax
amount
Tax (expense)
or benefit
(note 9)
Net-of-tax
amount
¥(219,372)
¥(023,431
¥(195,941)
35,069
—
(13,823)
—
21,246
—
35,069
(13,823)
21,246
136,515
(53,228)
83,287
¥0(47,788)
¥0(43,620)
¥0(91,408)
¥(039,469
¥(001,007
¥(040,476
(6,104)
2,114
2,436
(768)
(3,668)
1,346
(3,990)
1,668
(2,322)
37,878
(15,393)
22,485
¥0(73,357
¥0(12,718)
¥0(60,639
¥(301,737
¥0(52,577)
¥(249,160
49,675
(1,395)
(19,868)
554
29,807
(841)
48,280
(19,314)
28,966
(43)
(64)
17
26
(26)
(38)
(107)
43
(64)
191,207
(82,522)
108,685
¥(541,117
¥(154,370)
¥(386,747
U.S. dollars
(millions) (note 2)
Tax (expense)
or benefit
(note 9)
Before-tax
amount
2006:
Adjustments from foreign currency translation
Unrealized gains (losses) on marketable equity securities:
Unrealized holding gains (losses) arising during the year
Reclassification adjustments for gains realized in net income
$2,570
$0,(448)
423
(13)
(169)
5
254
(8)
410
(164)
246
Net unrealized gains (losses)
Unrealized gains (losses) on derivative instruments:
Unrealized holding gains (losses) arising during the year
Reclassification adjustments for gains realized in net income
Net unrealized gains (losses)
Minimum pension liabilities adjustment
Other comprehensive income (loss)
Net-of-tax
amount
$2,122
0
0
0
0
0
0
0
0
0
1,627
(702)
925
$4,607
$(1,314)
$3,293
14. Fair Value of Financial Instruments
The estimated fair values of significant financial instruments at March 31, 2005 and 2006 are as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
2005
Carrying
amount
Finance subsidiaries–receivables (a)
2006
Estimated
fair value
¥2,433,240 ¥2,407,745
Carrying
amount
2006
Estimated
fair value
¥2,843,819 ¥2,813,023
Carrying
amount
Estimated
fair value
$24,209
$23,947
Marketable equity securities
93,004
93,004
141,846
141,846
1,208
1,208
Held-to-maturity securities
34,054
33,692
43,767
43,428
373
370
Convertible preferred stocks
Host contracts
Embedded derivatives
7,791
7,791
8,943
8,943
76
76
19,685
19,685
13,991
13,991
119
119
27,476
27,476
22,934
22,934
195
195
Convertible notes (b)
Host contracts
Embedded derivatives
Debt
7,038
7,038
8,156
8,156
69
69
58,882
58,882
48,479
48,479
413
413
65,920
65,920
56,635
56,635
482
482
(2,863,919) (2,878,341)
(3,230,202) (3,237,471)
(27,498)
(27,560)
¥0,028,030 ¥0,028,030
¥0,004,477 ¥0,004,477
$00,038
$00,038
Foreign exchange instruments (c)
Asset position
Liability position
Net
(14,018)
(14,018)
(35,979)
(35,979)
(306)
(306)
¥0,014,012 ¥0,014,012
¥00(31,502) ¥00(31,502)
$00(268)
$00(268)
¥0,027,353 ¥0,027,353
¥0,036,334 ¥0,036,334
$00,309
$00,309
Interest rate instruments (d)
Asset position
Liability position
Net
(2,550)
(2,550)
¥2,124,803 ¥2,124,803
96
(2)
(2)
¥0,036,332 ¥0,036,332
(0)
$00(309
(0)
$00(309
(a) The carrying amounts of finance subsidiaries-receivables at March 31, 2005 and 2006 in the table exclude ¥1,716,130 million and ¥1,996,686 million ($16,997 million) of direct financing leases, net, classified as finance subsidiaries-receivables in
the consolidated balance sheets, respectively. The carrying amounts of finance subsidiaries-receivables at March 31, 2005
and 2006 in the table also include ¥504,345 million and ¥627,168 million ($5,338 million) of finance receivables classified as
trade receivables and other assets in the consolidated balance sheets.
(b) In relation to a portion of the above convertible notes, a subsidiary entered into a forward sale contract during the year ended
March 31, 2006. The carrying amount and estimated fair value of the derivative financial instrument is ¥5,462 million ($46
million), asset position, at March 31, 2006.
(c) The fair values of foreign currency forward contracts, foreign currency option contracts and foreign currency swap agreements are included in other assets/liabilities and other current assets/liabilities in the consolidated balance sheets as follows
(see note 7):
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Other current assets
2005
2006
2006
¥09,643
¥0(4,477
Other assets
27,387
—
—
Other current liabilities
(14,018)
(35,113)
(299)
Other liabilities
$(038
—
(866)
(7)
¥14,012
¥(31,502)
$(268)
(d) The fair values of interest rate swap agreements are included in other assets/liabilities and other current assets/liabilities in
the consolidated balance sheets as follows (see note 7):
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Other current assets
2005
2006
2006
¥00,161
¥03,101
$026
Other assets
27,192
33,233
283
Other current liabilities
(2,462)
—
—
(2)
(0)
Other liabilities
(88)
¥24,803
¥36,332
$309
Finance subsidiaries-receivables
The estimated fair value amounts have been determined
using relevant market information and appropriate valuation
The fair values of retail receivables and term loans to dealers
methodologies. However, these estimates are subjective in
were estimated by discounting future cash flows using the
nature and involve uncertainties and matters of significant
current rates for these instruments of similar remaining matu-
judgment and, therefore, cannot be determined with preci-
rities. Given the short maturities of wholesale receivables, the
sion. The effect of using different assumptions and/or estima-
carrying amount of such receivables approximates fair value.
tion methodologies may be significant to the estimated fair
Marketable equity securities
value amounts.
The fair value of marketable equity securities was estimated
The methodologies and assumptions used to estimate the
fair values of financial instruments are as follows:
using quoted market prices.
Cash and cash equivalents, trade receivables and trade
Held-to-maturity securities
payables
The fair value of held-to-maturity security was estimated
The carrying amounts approximate fair values because of the
using quoted market prices.
short maturity of these instruments.
97
Convertible Notes and Convertible Preferred Stock
fair value of long-term loans was estimated by discounting
Investment
future cash flows using rates currently available for loans of
Honda investments in convertible instruments are bifurcated
similar terms and remaining maturities. The carrying amounts
into two investments for accounting purposes. The note and
of short-term bank loans and commercial paper approximate
preferred stock portions of these convertible instruments are
fair values because of the short maturity of these instruments.
treated as available-for-sale and are marked-to-market
through other comprehensive income (loss). The fair value is
Foreign exchange and interest rate instruments
determined based on an analysis of interest rate movements
The fair values of foreign currency forward contracts and
and an assessment of credit worthiness. The embedded
foreign currency option contracts were estimated by obtain-
derivative is marked-to-market through the statement of
ing quotes from banks. The fair values of currency swap
income and fair value is estimated using a trinomial
agreements and interest rate swap agreements were esti-
convertible bond pricing model.
mated by discounting future cash flows using rates currently
available for these instruments of similar terms and remaining
maturities.
Debt
The fair values of bonds and notes were estimated based on
the quoted market prices for the same or similar issues. The
15. Risk Management Activities and Derivative
Financial Instruments
Foreign currency forward contracts and currency swap
Honda is a party to derivative financial instruments in the normal course of business to reduce their exposure to fluctuations
agreements are agreements to exchange different currencies at
in foreign exchange rates and interest rates. Currency swap
a specified rate on a specific future date. Foreign currency
agreements are used to convert long-term debt denominated
option contracts are contracts that allow the holder of the
in a certain currency to long-term debt denominated in other
option the right but not the obligation to exchange different cur-
currencies. Foreign currency forward contracts and purchased
rencies at a specified rate on a specific future date. Foreign
option contracts are normally used to hedge sale commitments
currency forward contracts, foreign currency option contracts
denominated in foreign currencies (principally U.S. dollars). For-
and currency swap agreements outstanding at March 31, 2005
eign currency written option contracts are entered into in com-
were ¥692,841 million, ¥214,211 million and ¥505,272 million,
bination with purchased option contracts to offset premium
respectively and totaled ¥1,412,324 million. At March 31,
amounts to be paid for purchased option contracts. Interest
2006, foreign currency forward contracts, foreign currency
rate swap agreements are mainly used to convert floating rate
option contracts and currency swap agreements outstanding
financing, such as commercial paper, to (normally three-five
were ¥898,125 million ($7,646 million), ¥176,548 million
years) fixed rate financing in order to match financing costs
($1,503 million) and ¥584,358 million ($4,975 million),
with income from finance receivables. These instruments
respectively and totaled ¥1,659,031 million ($14,123 million).
involve, to varying degrees, elements of credit, exchange rate
and interest rate risks in excess of the amount recognized in
Cash flow hedge
the consolidated balance sheets.
In the year ended March 31, 2006, the Company adopted
hedge accounting for certain foreign currency forward con-
The aforementioned instruments contain an element of
risk in the event the counterparties are unable to meet the
tracts related to forecasted foreign currency transactions
terms of the agreements. However, Honda minimizes the risk
between the Company and its subsidiaries. Changes in the
exposure by limiting the counterparties to major international
fair value of derivative financial instruments designated as
banks and financial institutions meeting established credit
cash flow hedges are recognized in other comprehensive
guidelines. Management of Honda does not expect any
income (loss). The amounts are reclassified into earnings in
counterparty to default on its obligations and, therefore, does
the same period when forecasted hedged transactions affect
not expect to incur any losses due to counterparty default.
earnings. The amount recognized in other comprehensive
Honda generally does not require or place collateral for these
income (loss) was ¥64 million ($0 million) loss in the fiscal
financial instruments.
year ended March 31, 2006. All amounts recorded in other
98
comprehensive income (loss) as year-end are expected to be
Derivative financial instruments not designated as
recognized in earnings within the next twelve months. The
accounting hedges
period that hedges the changes in cash flows related to the
Changes in the fair value of derivative financial instruments
risk of foreign currency rate is at most around 2 months.
not designated as accounting hedges are recognized in
earnings in the period of the change.
There are no derivative financial instruments where hedge
Interest rate swap agreements generally involve the
accounting has been discontinued due to the forecasted
transaction no longer beeing probable. The Company
exchange of fixed and floating rate interest payment obliga-
excludes financial instruments’ time value component from
tions without the exchange of the underlying principal
the assessment of hedge effectiveness, of which amount
amount. At March 31, 2005 and 2006, the notional principal
was ¥421 million ($4 million) loss. There are no derivative
amounts of interest rate swap agreements were ¥3,227,405
financial instruments that have been assessed as being
million and ¥3,857,748 million ($32,840 million), respectively.
ineffectiveness.
16. Commitments and Contingent Liabilities
At March 31, 2006, Honda had commitments for purchases
to make future payments in the event of defaults is ¥69,574
of property, plant and equipment of approximately ¥53,304
million and ¥46,737 million ($398 million), respectively, at
million ($454 million).
March 31, 2005 and 2006. As of March 31, 2006, no amount
has been accrued for any estimated losses under the obliga-
Honda has entered into various guarantee and indemnification agreements. At March 31, 2005 and 2006, Honda has
tions, as it is probable that the employees will be able to
guaranteed ¥69,574 million and ¥46,737 million ($398 mil-
make all scheduled payments.
Honda warrants its vehicles for specific periods of time.
lion) of bank loan of employees for their housing costs,
respectively. If an employee defaults on his/her loan pay-
Product warranties vary depending upon the nature of the
ments, Honda is required to perform under the guarantee.
product, the geographic location of its sale and other factors.
The undiscounted maximum amount of Honda’s obligation
The changes in provisions for those product warranties for each of the years in the two-year period ended March 31, 2006
are as follow:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Balance at beginning of year
2005
2006
2006
¥278,153
¥268,429
$2,285
Warranty claims paid during the period
(138,368)
(126,834)
(1,080)
Liabilities accrued for warranties issued during the period
124,892
125,732
1,070
(3,770)
332
3
Changes in liabilities for pre-existing warranties during the period
Foreign currency translation
7,522
16,288
139
¥268,429
¥283,947
$2,417
with legal counsel, and taking into account all known factors
With respect to product liability, personal injury claims or
lawsuits, Honda believes that any judgment that may be
pertaining to existing lawsuits and claims, Honda believes
recovered by any plaintiff for general and special damages
that the overall results of such lawsuits and pending claims
and court costs will be adequately covered by Honda’s insur-
should not result in liability to Honda that would be likely to
ance and reserves. Punitive damages are claimed in certain
have an adverse material effect on its consolidated financial
of these lawsuits. Honda is also subject to potential liability
position and results of operations.
under other various lawsuits and claims. After consultation
99
17. Leases
Honda has several operating leases, primarily for office and other facilities, and certain office equipment.
Future minimum lease payments under noncancelable operating leases that have initial or remaining lease terms in excess of
one year at March 31, 2006 are as follows:
U.S. dollars
(millions)
(note 2)
Yen
(millions)
Years ending March 31
2007
¥025,087
$0,214
2008
19,060
162
2009
13,997
119
2010
10,852
92
2011
9,394
80
40,826
348
¥119,216
$1,015
After five years
Total minimum lease payments
Rental expenses under operating leases for each of the years in the three-year period ended March 31, 2006 were ¥43,441
million, ¥44,619 million and ¥46,102 million ($392 million), respectively.
18. Allowances for Trade Receivable and Finance Subsidiaries-receivables
The allowances for trade receivable and finance subsidiaries-receivables for the years ended March 31, 2004, 2005 and 2006
are set forth in the following table:
Yen (millions)
Additions
Deductions
Balance at
beginning
of period
Charged to
costs and
expenses
Bad debts
written off
Net increase
(decrease) in
unearned income
Translation
difference
Balance at
end of
period
¥009,242
¥03,760
¥01,877
¥(00,0—.
¥0,(206)
¥010,919
¥017,601
¥28,965
¥19,924
¥(00,0—.
¥(2,231)
¥024,411
22,355
16,972
10,989
(2,214)
26,124
March 31, 2004:
Trade receivable
Allowance for doubtful accounts
Finance subsidiaries-receivables
Allowance for credit losses
Allowance for losses on lease residual values
Unearned interest income and fees
—
203,602
—
—
(27,963)
2,165
177,804
¥243,558
¥45,937
¥30,913
¥(27,963)
¥(2,280)
¥228,339
¥010,919
¥00,693
¥02,121
¥(00,0—.
¥0,219
¥009,710
¥024,411
¥33,365
¥27,575
¥(00,0—.
¥0,725
¥030,926
26,124
17,273
10,156
784
34,025
March 31, 2005:
Trade receivable
Allowance for doubtful accounts
Finance subsidiaries-receivables
Allowance for credit losses
Allowance for losses on lease residual values
Unearned interest income and fees
—
177,804
—
—
2,029
2,922
182,755
¥228,339
¥50,638
¥37,731
¥(02,029
¥4,431
¥247,706
100
Yen (millions)
Additions
Deductions
Balance at
beginning
of period
Charged to
costs and
expenses
Bad debts
written off
Net increase
(decrease) in
unearned income
¥009,710
¥03,825
¥03,320
¥(00,0—.
¥00,474
¥010,689
¥030,926
¥28,155
¥29,373
¥(00,0—.
¥03,242
¥032,950
34,025
7,998
7,974
—
3,725
37,774
182,755
—
—
5,336
15,558
203,649
¥247,706
¥36,153
¥37,347
¥(05,336
¥22,525
¥274,373
Translation
difference
Balance at
end of
period
March 31, 2006:
Trade receivable
Allowance for doubtful accounts
Finance subsidiaries-receivables
Allowance for credit losses
Allowance for losses on lease residual values
Unearned interest income and fees
U.S. dollars (millions) (note 2)
Balance at
beginning
of period
Additions
Deductions
Charged to
costs and
expenses
Bad debts
written off
Net increase
(decrease) in
unearned income
Translation
difference
Balance at
end of
period
March 31, 2006:
Trade receivable
Allowance for doubtful accounts
$0,083
$033
$028
$,—
$003
$0,091
$0,263
$240
$250
$,—
$028
$0,281
290
68
68
—
32
322
1,556
—
—
45
132
1,733
$2,109
$308
$318
$45
$192
$2,336
Finance subsidiaries-receivables
Allowance for credit losses
Allowance for losses on lease residual values
Unearned interest income and fees
19. Subsequent Event
Stock Split
On April 26, 2006, the Board of Directors declared a two-for-one stock split of the Company’s common stock. All shareholders
of record on June 30, 2006 will receive one additional share of common stock for each share on July 1, 2006. Information pertaining to shares and earnings per share has not been restated in the accompanying consolidated financial statements and
notes to the consolidated financial statements to reflect this split. This information will be presented effective after the stock split
is made.
101
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Honda Motor Co., Ltd.:
We have audited the accompanying consolidated balance sheets of Honda Motor Co., Ltd. and subsidiaries as of
March 31, 2005 and 2006, and the related consolidated statements of income, stockholders’ equity and cash
flows for each of the years in the three-year period ended March 31, 2006. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
The Company’s consolidated financial statements do not disclose certain information required by Statement of
Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related
Information.” In our opinion, disclosure of this information is required by U.S. generally accepted accounting
principles.
In our opinion, except for the omission of the segment information referred to in the preceding paragraph, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Honda Motor Co., Ltd. and subsidiaries as of March 31, 2005 and 2006 and the results of their operations and
their cash flows for each of the years in the three-year period ended March 31, 2006 in conformity with U.S.
generally accepted accounting principles.
The accompanying consolidated financial statements as of and for the year ended March 31, 2006 have been
translated into United States dollars solely for the convenience of the reader. We have recomputed the translation
and, in our opinion, the consolidated financial statements expressed in yen have been translated into dollars on
the basis set forth in note 2 to the consolidated financial statements.
Tokyo, Japan
June 23, 2006
102
Selected Quarterly Financial Data (Unaudited and Not Reviewed)
Yen (millions except per share amounts)
Year ended March 31, 2005
I
II
III
Year ended March 31, 2006
IV
Net sales and
other operating revenue
¥2,073,153 ¥2,093,578 ¥2,133,820 ¥2,349,554
Operating income
159,993
172,932
157,636
140,359
Income before income taxes
174,080
165,587
187,996
129,142
Net income
114,262
127,122
150,760
94,053
Net income per common share:
Basic
¥121.65
¥135.70
¥161.78
¥101.43
Diluted
121.65
135.70
161.78
101.43
Net income
per American depositary share:
Basic
60.82
67.85
80.89
50.71
Diluted
60.82
67.85
80.89
50.71
Tokyo Stock Exchange:
(TSE) (in yen)
High
¥5,320
¥5,640
¥5,520
¥5,700
Low
4,370
4,890
4,830
5,230
New York Stock Exchange:
(NYSE) (in U.S. dollars)
High
$24.85
$25.40
$26.10
$27.30
Low
19.25
22.56
23.55
24.92
I
II
III
IV
¥2,264,579 ¥2,337,670 ¥2,472,006 ¥2,833,741
170,393
162,694
194,986
340,832
144,308
169,392
166,097
334,820
110,666
133,708
133,146
219,513
¥119.75
119.75
¥144.89
144.89
¥144.81
144.81
¥239.78
239.78
59.87
59.87
72.44
72.44
72.40
72.40
119.89
119.89
¥5,670
5,020
¥6,620
5,380
¥7,140
6,140
¥7,500
6,100
$26.00
23.75
$29.08
24.06
$29.70
26.50
$31.74
27.10
*1 All quarterly financial data is unaudited and has not been reviewed by the independent registered public accounting firm (KPMG AZSA & Co.).
*2 On April 26, 2006, the Board of Directors declared a two-for-one stock split of the Company’s common stock. All shareholders of record on June 30,
2006 will receive one additional share of common stock for each share on July 1, 2006. Infomation pertaining to shares and earnings per share has
not been restated in the accompanying consolidated financial statements and notes to the consolidated financial statements to reflect this split. This
information will be presented effective after the stock split is made.
Net Sales and Operating Income by Business Segment
Yen (millions)
Years ended March 31
Motorcycle Business:
Net sales and other operating revenue (Unaffiliated customers)
Operating income
Operating income/Net sales
Automobile Business:
Net sales and other operating revenue (Unaffiliated customers)
Operating income
Operating income/Net sales
Financial Services Business:
Net sales and other operating revenue (Unaffiliated customers)
Operating income
Operating income/Net sales
Power Product & Other Businesses:
Net sales and other operating revenue (Unaffiliated customers)
Operating income
Operating income/Net sales
Total:
Net sales and other operating revenue (Unaffiliated customers)
Operating income
Operating income/Net sales
2002
2003
2004
2005
2006
¥0,947,900
¥0,978,095
¥0,996,290
¥1,097,754
¥1,225,812
68,315
57,230
42,433
69,332
113,974
7.2%
5.9%
4.3%
6.3%
9.3%
5,929,742
512,911
8.6%
6,440,094
551,392
8.6%
6,592,024
438,891
6.7%
6,963,635
452,382
6.5%
8,004,694
628,372
7.9%
201,906
76,365
37.8%
237,958
107,813
45.3%
242,696
108,438
44.7%
255,741
89,901
35.2%
306,869
90,585
29.5%
282,890
3,611
1.3%
315,352
8,092
2.6%
331,590
10,382
3.1%
332,975
19,305
5.8%
370,621
35,974
9.7%
¥7,362,438
¥7,971,499
¥8,162,600
¥8,650,105
¥9,907,996
661,202
724,527
600,144
630,920
868,905
9.0%
9.1%
7.4%
7.3%
8.8%
*1 The business segment information has been prepared in accordance with the Ministerial Ordinance under the Securities and Exchange Law of Japan.
*2 The business segment information is unaudited and not reviewed by the independent registered public accounting firm (KPMG AZSA & Co.).
*3 Certain gains and losses on sale and disposal of property, plant and equipment, which were previously recorded in other income (expenses), have been
reclassified to selling, general and administrative expenses in the year ended March 31, 2004. In addition, net realized gains and losses on interest rate
swap contracts not designated as accounting hedges by finance subsidiaries, which were previously recorded in cost of sales, have been reclassified
to and included in other income (expenses)–other.
103
Financial Summary
Honda Motor Co., Ltd. and Subsidiaries
Years ended or at March 31
1996
1997
1998
1999
Sales, income, and dividends
Net sales and other operating revenue
Operating income
Income before income taxes and equity in income of affiliates
Income taxes
Equity in income of affiliates
Net income
As percentage of sales
Cash dividends paid during the period
Research and development
Interest expense
¥4,252,250 ¥5,293,302 ¥5,999,738 ¥6,231,041
138,741
397,328
456,852
540,978
115,134
390,722
443,351
520,511
58,281
189,044
201,278
229,624
13,948
19,490
18,552
14,158
70,801
221,168
260,625
305,045
1.7%
4.2%
4.3%
4.9%
13,638
13,640
16,563
20,463
220,573
251,128
285,863
311,632
30,601
27,514
27,655
27,890
Assets, long-term debt, and stockholders’ equity
Total assets
Long-term debt
Total stockholders’ equity
¥3,516,113
656,461
1,144,540
¥4,191,294
734,255
1,388,430
¥4,815,265
677,750
1,607,914
¥5,034,247
673,084
1,763,855
125,007
150,489
141,351
217,782
153,337
309,517
177,666
237,080
Per common share
Net income:
Basic
Diluted
Cash dividends paid during the period
Stockholders’ equity
¥0,0072.68.
72.63.
14
1,174.73.
¥0,0227.00.
226.97.
14
1,425.04.
¥0,0267.49.
267.45.
17
1,650.14.
¥0,0313.05.
313.05.
21
1,810.20.
Per American depositary share
Net income:
Basic
Diluted
Cash dividends paid during the period
Stockholders’ equity
36.34.
36.31.
7.0.
587.36.
113.50.
113.48.
7.0.
712.52.
133.74.
133.72.
8.5.
825.07.
156.52.
156.52.
10.5.
905.10.
Depreciation
Capital expenditures
Sales progress
Sales amounts:*
Japan
¥1,540,463 ¥1,826,284 ¥1,710,813 ¥1,556,333
36%
35%
29%
25%
2,711,787
3,467,018
4,288,925
4,674,708
64%
65%
71%
75%
¥4,252,250 ¥5,293,302 ¥5,999,738 ¥6,231,041
100%
100%
100%
100%
Overseas
Total
Unit sales:
Motorcycles
Automobiles
Power Products
5,488
1,887
2,268
5,325
2,184
2,521
5,257
2,343
2,857
4,295
2,333
3,412
Number of employees
96,800
101,100
109,400
112,200
¥0,000,106
96
¥0,000,124
113
¥0,000,132
123
¥0,000,121
128
Exchange rate (yen amounts per U.S. dollar)
Rates for the period-end
Average rates for the period
* The geographic breakdown of sales amounts is based on the location of customers.
(3) Effective fiscal 2000, due to the change in method of business segment categorization, all prior years’ unit sales under Sales progress have been restated to reflect the
change: i.e., unit sales of all-terrain vehicles (ATVs) are now included in Motorcycles,
but were previously included in Power Products.
(4) Previously, revenue from domestic sales of general-purpose engines to customers
who install them in products that are subsequently exported were recorded as overseas sales. However, owing to various factors including changes in transaction formats
and contract terms, as of fiscal 2002, such sales are now recorded as domestic sales.
The sales amount from such sales for fiscal 2002 amounted to ¥5,468 million.
Notes:
(1) The amounts for the fiscal year ended March 31, 2006, have been translated into
U.S. dollars at the rate of ¥117.47=US$1, the approximate exchange rate prevailing on
the Tokyo Foreign Exchange Market on March 31, 2006.
(2) Net income per common (or American depositary) share amounts are computed
based on Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings
per Share.” All net income per common (or American depositary) share data presented prior to fiscal 1998 has been restated to conform with the provisions of
SFAS No. 128.
104
2000
2001
2002
2003
2004
2005
Yen
(millions)
U.S. dollars
(millions)
2006
2006
¥6,098,840 ¥6,463,830 ¥7,362,438
¥7,971,499 ¥8,162,600 ¥8,650,105 ¥09,907,996
418,639
401,438
661,202
724,527
600,144
630,920
868,905
416,063
384,976
551,342
609,755
641,927
656,805
814,617
170,434
178,439
231,150
245,065
252,740
266,665
317,189
16,786
25,704
42,515
61,972
75,151
96,057
99,605
262,415
232,241
362,707
426,662
464,338
486,197
597,033
4.3%
3.6%
4.9%
5.4%
5.7%
5.6%
6.0%
20,463
22,412
24,360
30,176
33,541
47,797
71,061
334,036
352,829
395,176
436,863
448,967
467,754
510,385
18,920
21,400
16,769
12,207
10,194
11,655
11,902
$84,345
7,397
6,935
2,700
847
5,082
¥4,898,428
574,566
1,930,373
¥5,667,409
368,173
2,230,291
¥6,940,795
716,614
2,573,941
¥7,681,291
1,140,182
2,629,720
¥8,328,768
1,394,612
2,874,400
$89,995
15,996
35,122
172,139
222,891
170,342
285,687
194,944
303,424
220,874
316,991
213,445
287,741
¥9,316,970 ¥10,571,681
1,559,500
1,879,000
3,289,294
4,125,750
225,752
373,980
262,225
457,841
Yen
605
4,345
101
2,232
3,898
U.S. dollars
¥0,0269.31.
269.31.
21
1,981.07.
¥0,0238.34.
238.34.
23
2,288.87.
¥0,0372.23.
372.23.
25
2,641.55.
¥0,0439.43.
439.43.
31.
2,734.69.
¥0,0486.91.
486.91.
35
3,054.90.
¥8,520.68.
520.68.
51
3,556.49.
¥8,648.67.
648.67.
77
4,518.53.
$005.52.
5.52.
0.66.
38.47.
134.65.
134.65.
10.5.
990.53.
119.17.
119.17.
11.5.
1,144.43.
186.11.
186.11.
12.5.
1,320.77.
219.71.
219.71.
15.5.
1,367.34.
243.45.
243.45.
17.5.
1,527.45.
260.34.
260.34.
25.5.
1,778.24.
324.33.
324.33.
38.5.
2,259.26.
2.76.
2.76.
0.33.
19.23.
Yen
(millions)
¥1,612,191
¥1,740,340 ¥1,868,746 ¥1,748,706 ¥1,628,493 ¥1,699,205
¥1,694,044
26%
27%
25%
22%
20%
20%
17%
4,486,649
4,723,490
5,493,692
6,222,793
6,534,107
6,950,900
8,213,952
74%
73%
75%
78%
80%
80%
83%
¥6,098,840
¥6,463,830 ¥7,362,438 ¥7,971,499 ¥8,162,600 ¥8,650,105
¥9,907,996
100%
100%
100%
100%
100%
100%
100%
U.S. dollars
(millions)
$14,421
69,924.
$84,345
Thousands
4,436
2,473
4,057
5,118
2,580
3,884
6,095
2,666
3,926
8,080
2,888
4,584
9,206
2,983
5,047
10,482
3,242
5,300
10,271
3,391
5,876
112,400
114,300
120,600
126,900
131,600
137,827
144,785
¥0,000,106
112
¥0,000,124
111
¥,0,000133
125
¥,0,000120
122
¥0,000,106
113
¥8,162,107
108
¥8,650,117
113
(5) Honda’s common stock-to-ADR exchange ratio was changed from two shares of
common stock to one ADR, to one share of common stock to two ADRs, effective
January 10, 2002. Per American depositary share information has been restated for
all periods presented to reflect this four-for-one ADR split.
(6) Certain gains and losses on sale and disposal of property, plant and equipment,
which were previously recorded in other income (expenses), have been reclassified to
selling, general and administrative expenses in the year ended March 31, 2004. In
addition, net realized gains and losses on interest rate swap contracts not designated
as accounting hedges by finance subsidiaries, which were previously recorded in cost
of sales, have been reclassified to and included in other income (expenses)–other.
Operating income prior to fiscal 2003 has been presented to conform with the
reclassifications mentioned above.
(7) On April 26, 2006, the Board of Directors declared a two-for-one stock split of the
Company’s common stock. All shareholders of record on June 30, 2006 will receive
one additional share of common stock for each share on July 1, 2006. Information
pertaining to shares and earnings per share has not been restated in the accompanying consolidated financial statements and notes to the consolidated financial statements to reflect this split. This information will be presented effective after the stock
split is made.
105
Corporate Information
Company Name
Established
Lines of Business
Head Office
Honda Motor Co., Ltd.
September 24, 1948
Motorcycles, Automobiles, Financial Services and Power Products and Others
1-1, 2-chome, Minami-Aoyama, Minato-ku, Tokyo, Japan
Principal Subsidiaries
Region
Japan
North
America
Country
of
Incorporation
Main Lines of Business
Motorcycle
Business
Automobile
Business
Financial Services Power Product &
Business
Other Businesses
Honda R&D Co., Ltd.
100.0
○
○
○
Tochigi
Honda Engineering Co., Ltd.
100.0
○
○
○
Shizuoka
Saitama
Miyazaki
Nagano
Tokyo
Tokyo
Mie
Tokyo
U.S.A.
Yutaka Giken Co., Ltd.
Honda Foundry Co., Ltd.
Honda Lock Mfg. Co., Ltd.
Asama Giken Co., Ltd.
Honda Motorcycle Japan Co., Ltd.
Honda Finance Co., Ltd.
Suzuka Circuitland Co., Ltd.
Honda Trading Corporation
American Honda Motor Co., Inc.
69.7
82.1
100.0
77.5
100.0
100.0
100.0
100.0
100.0
○
○
○
○
○
○
○
○
○
○
○
○
○
Honda North America, Inc.
100.0
Honda of America Mfg., Inc.
American Honda Finance Corporation
Honda Manufacturing of Alabama, LLC
Honda of South Carolina Mfg., Inc.
Honda Transmission Mfg. of America, Inc.
Celina Aluminum Precision Technology Inc.
Honda Power Equipment Mfg., Inc.
Honda R&D Americas, Inc.
Cardington Yutaka Technologies Inc.
Honda Trading America Corporation
○
○
○
○
○
○
○
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
○
○
Honda Engineering North America, Inc.
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
100.0
○
○
○
100.0
100.0
100.0
100.0
○
○
Mexico
Belgium
Honda Canada Inc.
Honda Canada Finance Inc.
Honda de Mexico, S.A. de C.V.
Honda Europe NV
U.K.
Honda Motor Europe Limited
100.0
Honda of the U.K. Manufacturing Ltd.
Honda Finance Europe plc
Honda Motor Europe (South) S.A.
Honda Europe Power Equipment, S.A.
Honda Motor Europe (North) GmbH
Honda Bank GmbH
Honda R&D Europe (Deutschland) GmbH
Honda Italia Industriale S.p.A.
Montesa Honda S.A.
Honda Motor (China) Investment Corporation, Limited
Jialing-Honda Motors Co., Ltd.
Honda Automobile (China) Co., Ltd.
Honda Motorcycle and Scooter India Private Limited
Honda Siel Cars India Limited
P.T. Honda Precision Parts Manufacturing
P.T. Honda Prospect Motor
Honda Malaysia SDN. BHD.
Honda Atlas Cars (Pakistan) Limited
Honda Philippines, Inc.
Honda Cars Philippines, Inc.
Honda Taiwan Co., Ltd.
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
88.1
100.0
70.0
65.0
100.0
99.9
100.0
51.0
51.0
51.0
99.6
74.2
100.0
France
Germany
Asia
Percentage
Ownership and
Voting Interest
Saitama
Canada
Europe
Company
Italy
Spain
China
India
Indonesia
Malaysia
Pakistan
Philippines
Taiwan
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
106
Function
Research & development
Manufacturing and sales of
equipment and development
of production technology
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Sales
Finance
Others (Leisure)
Others (Trading)
Sales
Coordination of subsidiaries’
operation
Manufacturing
Finance
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Research & development
Manufacturing
Others (Trading)
Manufacturing and sales of
equipment and development
of production technology
Manufacturing and sales
Finance
Manufacturing and sales
Sales
Coordination of subsidiaries’
operation and sales
Manufacturing
Finance
Sales
Manufacturing and sales
Sales
Finance
Research & development
Manufacturing and sales
Manufacturing and sales
Holding company
Manufacturing and sales
Manufacturing and sales
Manufacturing and sales
Manufacturing and sales
Manufacturing
Manufacturing and sales
Manufacturing and sales
Manufacturing and sales
Manufacturing and sales
Manufacturing and sales
Manufacturing and sales
(As of March 31, 2006)
Region
Asia
Others
Country
of
Incorporation
Company
Main Lines of Business
Percentage
Ownership and
Voting Interest
Thailand
Asian Honda Motor Co., Ltd.
100.0
Vietnam
Honda Leasing (Thailand) Company Limited
Honda Automobile (Thailand) Co., Ltd.
Thai Honda Manufacturing Co., Ltd.
Honda Vietnam Co., Ltd.
100.0
91.4
60.0
70.0
Brazil
Honda South America Ltda.
100.0
Honda Automoveis do Brasil Ltda.
Moto Honda da Amazonia Ltda.
Honda Componentes da Amazonia Ltda.
Turkey
Honda Turkiye A.S.
Australia
Honda Australia Pty. Ltd.
New Zealand Honda New Zealand Limited
100.0
100.0
100.0
100.0
100.0
100.0
Motorcycle
Business
Automobile
Business
Financial Services
Business
Power Product &
Other Businesses
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
○
Function
Coordination of subsidiaries’
operation and sales
Finance
Manufacturing and sales
Manufacturing
Manufacturing and sales
Coordination of subsidiaries’
operation and holding company
Manufacturing and sales
Manufacturing and sales
Manufacturing
Manufacturing and sales
Sales
Sales
Note: Percentage Ownership and Voting Interest include ownership through consolidated subsidiaries.
Number of Employees
Total
Motorcycle Business
Automobile Business
Financial Services
Business
Power Product and
Other Businesses
144,785
28,783
105,623
1,921
8,458
Note: The above refers to full-time employees.
Principal Manufacturing Facilities
Region
Location
Japan
North
America
U.S.A.
Europe
Canada
Mexico
U.K.
France
Italy
Spain
Asia
China
India
Indonesia
Malaysia
Pakistan
Philippines
Taiwan
Thailand
Others
Vietnam
Brazil
Turkey
Start of
Operations
Number of
Employees
Principal Products Manufactured
Sayama, Saitama
Hamamatsu, Shizuoka
Suzuka, Mie
Ohzu-machi, Kikuchi-gun, Kumamoto
Nov.
Apr.
May
Mar.
1964
1954
1960
1976
5,376
3,391
7,032
2,864
Automobiles
Motorcycles, power products and transmissions
Automobiles
Motorcycles, all-terrain vehicles, power products
and engines
Marysville, Ohio
Anna, Ohio
East Liberty, Ohio
Lincoln, Alabama
Swepsonville, North Carolina
Timmonsville, South Carolina
Alliston, Ontaria
El Salto
Swindon, Wiltshire
Ormes
Atessa
Barcelona
Sep. 1979
Jul. 1985
Dec. 1989
Nov. 2001
Aug. 1984
Jul. 1998
Nov. 1986
Mar. 1988
Jul. 1989
Jan. 1985
Apr. 1977
May 1980
7,208
2,797
2,538
4,580
554
1,649
4,559
1,369
4,095
173
696
287
Motorcycles, all-terrain vehicles and automobiles
Engines
Automobiles
Automobiles
Power products
All-terrain vehicles
Automobiles
Motorcycles and automobiles
Automobiles and engines
Power products
Motorcycles, power products and engines
Motorcycles
Guangzhou
Chongqing
Greater Noida
Gurgaon
Karawang
Alor Gajah
Lahore
Manila
Laguna
Pingtung
Ayutthaya
Bangkok
Vinhphuc
Sumare
Manaus
Gebze
Apr. 2005
Oct. 1994
Dec. 1997
May 2001
Feb. 2003
Jan. 2003
Oct. 1993
May 1973
Mar. 1992
Jan. 2003
Jan. 1993
Apr. 1965
Dec. 1997
Sep. 1997
Jan. 1977
Dec. 1997
663
841
1,199
2,545
1,251
1,130
553
523
678
840
2,236
2,618
1,080
1,669
5,583
519
Automobiles
Power products
Automobiles
Motorcycles
Automobiles
Automobiles
Automobiles
Motorcycles and power products
Automobiles
Automobiles
Automobiles
Motorcycles and power products
Motorcycles
Automobiles
Motorcycles and power products
Automobiles
107
Honda’s History
1946
1947
1948
1949
1952
1953
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1971
1972
1973
1974
1975
1976
1977
1979
1981
1982
1983
1984
1985
1986
1987
1988
1989
Soichiro Honda establishes Honda Technical Research Institute
Honda’s first product, the A-type bicycle engine, produced
• Honda Motor Co., Ltd. incorporated (capital: 1 million yen)
• Dream D-type (2-stroke, 98cc), Honda’s first motorcycle, produced
• Head office moved to Tokyo
• H-type engine, Honda’s first power product, produced
• Listed on the Tokyo Stock Exchange
• Super Cub motorcycle released
• American Honda Motor Co., Inc. established
• Honda racing team participates in the Isle of Man TT Race, taking sixth
place in the 125cc class
• Motorcycle production begins at Suzuka Factory
• Honda R&D Co., Ltd. established
• Honda racing team sweeps first 5 places in Isle of Man TT Race
(125cc, 250cc)
• American Depositary Receipts (ADRs) issued at market price. Adopts
consolidated accounting using U.S. Securities and Exchange
Commission (SEC) standards
• Construction of Suzuka Circuit completed (Mie Prefecture)
• Honda Benelux N.V. (Belgium) begins production of motorcycles
• Honda’s first sports car (S500) and light truck (T360) released
• Automobile production begins at Sayama Factory (presently Saitama
Factory)
• Asian Honda Motor Co., Ltd. (Thailand) established
• Thai Honda Manufacturing Co., Ltd. (Bangkok) established
• Honda (U.K.) Limited established in London
• Honda wins its first F1 victory, in Mexico
• S800 sales and export begins
• Automobile production begins at Suzuka Factory
• Motorcycle production begins in Thailand
• Cumulative motorcycle production reaches 10 million units
• Canadian Honda Motor Ltd. established (presently Honda Canada Inc.)
• Automobile and motorcycle production begins in Malaysia
• Cumulative domestic power product production reaches 1 million units
• Honda Motor do Brazil Ltda. established in Sao Paulo (presently Honda
South America Ltda.)
• Knockdown motorcycle production begins in Mexico
• Details of CVCC low-emission engine system announced
• CVCC engine, world’s first to comply with the U.S. Clean Air Act of 1975,
released
• Motorcycle production begins in the Philippines
• Motorcycle production begins in Indonesia
• Automobile production begins in Indonesia
• Kumamoto Factory begins operation
• Motorcycle production begins at Honda Italia Industriale S.p.A.
• Accord introduced
• Civic cumulative production reaches 1 million units
• ADRs listed on the New York Stock Exchange (NYSE)
• Consolidated financial disclosure begins
• Motorcycle production begins at Moto Honda da Amazonia Ltda. in
Manaus, Brazil
• Quarterly financial disclosure begins
• Honda of America Mfg., Inc. begins motorcycle production
• Listed on the London Stock Exchange
• Honda of America Mfg., Inc. begins automobile production
• Listed on the Zurich, Geneva and Basel stock exchanges
• Cumulative automobile production reaches 10 million units
• Automobile production begins in Thailand
• Cumulative motorcycle production in Belgium reaches 1 million units
• Listed on the Paris Stock Exchange
• Motorcycle engine production begins in the U.S.
• Motorcycle production begins in India
• Motorcycle engine production begins in Malaysia
• Cumulative power product production reaches 10 million units
• Automobile production begins at Honda Canada Inc.
• Motorcycle production begins in Spain
• Power product production begins in France
• Honda North America, Inc. established
• Cumulative motorcycle production in Brazil reaches 1 million units
• Cumulative motorcycle production reaches 50 million units, a world first
• Cumulative Civic production reaches 5 million units
• Automobile production begins in Mexico
• High-performance VTEC engine announced
•
•
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
108
Common stock-to-ADR exchange ratio changed from 10 shares of
common stock to 1 ADR, to 2 shares of common stock to 1 ADR.
• Second automobile plant in the U.S. begins production in East Liberty, Ohio
• Honda Motor Europe Ltd. (U.K.) established
• Honda posts its 60th Grand Prix victory in the Brazil GP
• Automobile production in the U.K. begins
• Automobile production begins in the Philippines
• Honda’s GX120 power product engines meet California emission
regulations, a world first
• Automobile production begins in Pakistan
• Honda introduced first gasoline-powered vehicle to meet ULEV
(Ultra Low Emission Vehicle) standards in California, the U.S.
• Cumulative world production for the Civic reaches 10 million units
• Cumulative automobile production in North America reaches 5 million
units
• Cumulative automobile production reaches 30 million units
• Motorcycle production begins in Turkey
• Automobile production begins in Brazil
• Automobile production begins in Turkey
• Motorcycle production begins in Vietnam
• Cumulative motorcycle production reaches 100 million units
• Construction of Twin Ring Motegi completed (Tochigi Prefecture)
• Honda celebrates 50th anniversary
• Automobile production begins in India
• Automobile production begins at Guangzhou Honda Automobile Co.,
Ltd. in China
• Fuel cell vehicle FCX-V1 and FCX-V2 announced
• Cumulative Accord production in the U.S. reaches 5 million units
• ASIMO humanoid robot announced
• Cumulative automobiles production in North America reaches 10 million,
first for the Japanese automobile manufacturers
• Motorcycle production begins at new production company in India
• Minimum investment unit lowered to 100 shares, from 1,000
• Second automobile plant in the U.K. begins operations
• Honda Manufacturing of Alabama, LLC in the U.S. begins operations
• Common stock-to-ADR exchange ratio changed from 2 shares of
common stock to 1 ADR, to 1 share of common stock to 2 ADRs
• New automobile plant in Taiwan begins operations
• Honda FCX fuel cell vehicle delivered both in Japan and the U.S.
• Cumulative world production for the Civic reaches 15 million units
• Cumulative automobile production in the U.K. reaches 1 million units
• New automobile plant in Indonesia begins operations
• New automobile plant in Malaysia begins operations
• Honda FC STACK, a next-generation fuel cell stack capable of starting in
sub-zero temperatures, announced
• Cumulative motorcycle production in Indonesia reaches 10 million units
• Cumulative automobile production in the U.S. reaches 10 million units
• Cumulative automobile production in Canada reaches 3 million units
• Honda enter cooperative agreement with General Electric to jointly
market our independently developed HF118 jet engine
• Cumulative motorcycle production in Thailand reaches 10 million units
• Honda Motor (China) Investment Co., Ltd. established
• Honda Motor RUS LLC (Russia) established
• Dongfeng Honda Automobile Co. Ltd. in China begins automobile
production
• Second line at Alabama plant in the U.S. begins operations
• New power product plant, Kumamoto factory begins operations
• Cumulative motorcycle production reaches 150 million units
• Honda Automobile (China) Co., Ltd. begins automobile exports
• Cumulative motorcycle production in Brazil reaches 8 million units
• Honda to mass produce next-generation thin-film solar cell
• Cumulative worldwide production of the Super Cub series reaches 50
million units
• In China, Dongfeng Honda Automobile Co., Ltd., completes factory
expansion, raising annual production capacity to 120,000 units
• Wuyang-Honda Motors (Guangzhou) Co., Ltd., begins production at new
motorcycle factory
• Cumulative production of power products reaches 70 million units
• Honda Philippines begins mass production at new motorcycle plant
• Honda establishes subsidiary in Ukraine
• Implementation of two-for-one stock split for common shares
• Common stock-to-ADR exchange ratio changed from 0.5 share of common stock to one ADR, to one share of common stock to one ADR
•
Investor Information
(As of March 31, 2006)
IR Offices
Breakdown of Issued Shares by Type of Shareholders
[JAPAN]
Honda Motor Co., Ltd.
1-1, 2-chome, Minami-Aoyama, Minato-ku, Tokyo
107-8556, Japan
TEL: 81-(0)3-3423-1111 (Switchboard)
Classification
Percentage as
against total
shares issued
57,632
6.3
—
—
421,990
12,946
93,992
326,513
4,339
917,414
46.0
1.4
10.2
35.6
0.5
100.0
(Notes) 1. In the number of shares above, figures of less than 1,000 shares
are rounded off.
2. “Domestic companies and others” include shares in the name of
Japan Securities Depository Center, Incorporated.
[U.K.]
Honda Motor Europe Limited
Public Relations Division
470 London Road, Slough,
Berkshire SL3 8QY, U.K.
TEL: 44 (0) 1753-590-590
Shareholders’ Register Manager for Common Stock
The Chuo Mitsui Trust and Banking Co., Ltd.
33-1, Shiba 3-chome, Minato-ku, Tokyo 105-8574, Japan
Contact Address:
The Chuo Mitsui Trust and Banking Co., Ltd.
Stock Transfer Agency Dept. Operation Center
8-4, Izumi 2-chome, Suginami-ku, Tokyo 168-0063, Japan
TEL: 81-(0)3-3323-7111
TEL: 0120-78-2031 (toll free within Japan)
IR Websites
[Japanese] http://www.honda.co.jp/investors/
[English]
http://world.honda.com/investors/
Depositary and Transfer Agent
for American Depositary Receipts
Stock Exchange Listings
[Overseas]
Number of
shares held
(thousands)
Individuals
56,301
Government and
—
municipal corporation
Financial institutions
271
Securities companies
46
Domestic companies and others
848
Foreign institutions and individuals
897
Treasury stock
1
Total
58,364
[U.S.A.]
Honda North America, Inc.
New York Office
540 Madison Avenue, 32nd Floor,
New York, NY 10022, U.S.A.
TEL: 1-212-355-9191
[Japan]
Number of
shareholders
JPMorgan Chase Bank, N.A.
4 New York Plaza,
New York, NY 10004, U.S.A.
Contact Address:
JPMorgan Service Center
P.O. Box 3408
South Hackensack, NJ 0706-3408
TEL: 1-800-990-1135
E-mail: [email protected]
Tokyo, Osaka, Nagoya, Fukuoka and Sapporo
stock exchanges
New York, London, Swiss and Paris stock
exchanges
Total Number of Shares Issued
917,414,215 shares (Common Stock)
With respect to taxation and other matters relating to the acquisition,
holding and disposition of the Company’s common stock or ADRs by
non-residents of Japan, please also refer to “Item 10E. Taxation” of
Form 20-F included in the “Investor Relations” section on our website.
Honda’s Stock Price and Trading Volume in Tokyo Stock Exchange
(April 2001=100)
150
Honda (ticker: 7267)
Nikkei 225 Stock Average
125
100
75
50
25
0
Apr. 2001
100
Stock
(millions)
Oct. 2001
Apr. 2002
Oct. 2002
Apr. 2003
Oct. 2003
Apr. 2004
Oct. 2004
Apr. 2005
Oct. 2005
Mar. 2006
Apr. 2002
Oct. 2002
Apr. 2003
Oct. 2003
Apr. 2004
Oct. 2004
Apr. 2005
Oct. 2005
Mar. 2006
Trading Volume
50
0 Apr. 2001
Years ended March 31
High
Low
At year-end
Oct. 2001
2002
2003
2004
2005
2006
5,920
3,090
5,380
5,990
3,840
3,950
5,510
3,570
4,800
5,700
4,370
5,370
7,500
5,020
7,290
109
(Yen)
Honda Motor Co., Ltd. Annual Report 2006
This annual report is printed on 100% recycled paper using soy ink with no volatile organic
content. Furthermore, a waterless printing process was used to prevent toxic emissions.
Printed in Japan
Annual Report 2006
Year Ended March 31, 2006
Honda Motor Co., Ltd.

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