20-F 1 d20f.htm ANNUAL REPORT Annual Report
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

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

OR

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

For the fiscal year ended March 31, 2009

OR

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

Date of event requiring this shell company report                     

For the transition period from              to             

Commission file number 1-7628

 

HONDA GIKEN KOGYO KABUSHIKI KAISHA

(Exact name of Registrant as specified in its charter)

 

HONDA MOTOR CO., LTD.

(Translation of Registrant’s name into English)

 

JAPAN

(Jurisdiction of incorporation or organization)

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

(Address of principal executive offices)

Mitsuhiro Okayama, American Honda Motor Co., Inc., mitsuhiro_okayama@ahm.honda.com,

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

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

 

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

Title of each class

 

Name of each exchange on which registered

Common Stock*   New York Stock Exchange

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

None

(Title of class)

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

None

(Title of class)

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

Title of each class

 

Outstanding as of March 31, 2009

Common Stock   1,814,609,000**

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

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

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

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

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

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

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

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

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

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

* Not for trading purposes, but only in connection with the registration of American Depositary Shares, each representing one share of Common Stock.
** Shares of Common Stock include 81,804,835 shares represented by American Depositary Shares.

 

 


Table of Contents

PART I

  

Item 1. Identity of Directors, Senior Management and Advisors

   1

Item 2. Offer Statistics and Expected Timetable

   1

Item 3. Key Information

   1

A. Selected Financial Data

   1

B. Capitalization and Indebtedness

   3

C. Reason for the Offer and Use of Proceeds

   3

D. Risk Factors

   3

Item 4. Information on the Company

   7

A. History and Development of the Company

   7

B. Business Overview

   8

C. Organizational Structure

   24

D. Property, Plants and Equipment

   25

Item 4A. Unresolved Staff Comments

   27

Item 5. Operating and Financial Review and Prospects

   27

A. Operating Results

   27

B. Liquidity and Capital Resources

   53

C. Research and Development

   55

D. Trend Information

   57

E. Off-Balance Sheet Arrangements

   57

F. Tabular Disclosure of Contractual Obligations

   57

G. Safe Harbor

   58

Item 6. Directors, Senior Management and Employees

   58

A. Directors and Senior Management

   58

B. Compensation

   72

C. Board Practices

   72

D. Employees

   72

E. Share Ownership

   73

Item 7. Major Shareholders and Related Party Transactions

   73

A. Major Shareholders

   73

B. Related Party Transactions

   74

C. Interests of Experts and Counsel

   74

Item 8. Financial Information

   74

A. Consolidated Statements and Other Financial Information

   74

B. Significant Changes

   75

Item 9. The Offer and Listing

   76

A. Offer and Listing Details

   76

B. Plan of Distribution

   77

C. Markets

   77

D. Selling Shareholders

   77

E. Dilution

   77

F. Expenses of the Issue

   77

Item 10. Additional Information

   77

A. Share Capital

   77

B. Memorandum and Articles of Association

   77

C. Material Contracts

   84

D. Exchange Controls

   84

E. Taxation

   85


Table of Contents

F. Dividends and Paying Agents

   88

G. Statement by Experts

   88

H. Documents on Display

   88

I. Subsidiary Information

   89

Item 11. Quantitative and Qualitative Disclosure about Market Risk

   89

Item 12. Description of Securities Other than Equity Securities

   92

PART II

  

Item 13. Defaults, Dividend Arrearages and Delinquencies

   92

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

   92

Item 15. Controls and Procedures

   93

Item 16A. Audit Committee Financial Expert

   93

Item 16B. Code of Ethics

   94

Item 16C. Principal Accountant Fees and Services

   94

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

   95

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

   96

Item 16F. Change in Registrant’s Certifying Accountant

   96

Item 16G. Corporate Governance

   96

PART III

  

Item 17. Financial Statements

   98

Item 18. Financial Statements

   98

Item 19. Exhibits

   99


Table of Contents

PART I

 

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

 

Item 1. Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A. Selected Financial Data:

 

The selected consolidated financial data set out below for each of the five fiscal years ended March 31, 2009 have been derived from our consolidated financial statements that were prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).

 

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

 

    Fiscal years ended March 31,
Yen (millions)
  U.S. dollars
(millions)
    2005   2006   2007   2008   2009           2009        

Income statement data:

           

Net sales and other operating revenue

  ¥ 8,650,105   ¥ 9,907,996   ¥ 11,087,140   ¥ 12,002,834   ¥ 10,011,241   $ 101,916

Research and development

    467,754     510,385     551,847     587,959     563,197     5,733

Operating income

    630,920     868,905     851,879     953,109     189,643     1,931

Income before income taxes, minority interest, and equity in income of affiliates

    668,364     829,904     792,868     895,841     161,734     1,646

Equity in income of affiliates

    96,057     99,605     103,417     118,942     99,034     1,008

Net income

    486,197     597,033     592,322     600,039     137,005     1,395

Balance sheet data:

           

Total assets

  ¥ 9,368,236   ¥ 10,631,400   ¥ 12,036,500   ¥ 12,615,543   ¥ 11,818,917   $ 120,319

Long-term debt

    1,559,500     1,879,000     1,905,743     1,836,652     1,932,637     19,675

Stockholders’ equity

    3,289,294     4,125,750     4,488,825     4,550,479     4,007,288     40,795

Common stock

    86,067     86,067     86,067     86,067     86,067     876

Cash flow data:

           

Depreciation excluding property on operating leases

  ¥ 225,752   ¥ 262,225   ¥ 361,747   ¥ 417,393   ¥ 441,868   $ 4,498

Depreciation of property on operating leases

    —       —       9,741     101,032     195,776     1,993

Total depreciation

    225,752     262,225     371,488     518,425     637,644     6,491

Capital expenditures

    373,980     460,021     597,958     668,228     635,190     6,466

Purchase of operating lease assets

    —       —       366,795     839,261     668,128     6,802

Total capital expenditures

    373,980     460,021     964,753     1,507,489     1,303,318     13,268

 

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Weighted average number of shares outstanding

 

     (Thousands of shares)
         2005            2006            2007            2008            2009    

Weighted average number of common shares outstanding

   1,867,535    1,840,799    1,824,675    1,815,356    1,814,560

 

Net income per common share

 

     (Yen)    (US$)
         2005            2006            2007            2008            2009            2009    

Basic

   ¥ 260.34    ¥ 324.33    ¥ 324.62    ¥ 330.54    ¥ 75.50    $ 0.77

Diluted

     260.34      324.33      324.62      330.54      75.50      0.77

 

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

 

Cash dividends declared during the period per common share

 

     (Yen)    (US$)
         2005            2006            2007            2008            2009            2009    

Cash dividends declared during the period per common share

   ¥ 25.50    ¥ 38.50    ¥ 77.00    ¥ 84.00    ¥ 77.00    $ 0.78

 

Additionally, a year-end dividend of ¥8 ($0.08) per common share aggregating ¥14.5 billion ($148 million) relating to fiscal 2009 was determined by our board of directors in April 2009 and approved by our shareholders in June 2009. This dividend was paid in June 2009.

 

Stock Split

 

The Company executed a two-for-one stock split for the Company’s common stock effective July 1, 2006. All per share information has been adjusted retroactively for all periods presented to reflect this stock split.

 

Reclassification Adjustments

 

As described in Notes (1) (c) and (v) to our consolidated financial statements, certain reclassifications have been made to the consolidated financial statement periods presented above to conform to the presentation used for the fiscal year ended March 31, 2009.

 

Exchange Rates

 

In this Annual Report, yen amounts have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for these translations was ¥98.23 =$1.00, which represents the approximate exchange rate quoted on the Tokyo Foreign Exchange Market on March 31, 2009. No representation is made that yen amounts could have been, or could be, converted into U.S. dollars at that rate or any other rate on this or any other data or at all.

 

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The following table sets out information regarding the noon buying rates for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York expressed in yen per $1.00 during the periods shown. On May 29, 2009, the noon buying rate was ¥95.55 =$1.00. The average exchange rate for the period shown is the average of the month-end rates during the period.

 

     (Yen)

Years ended March 31,

   Average    Period end    High    Low

2005

   107.28    107.22    114.30    102.26

2006

   113.67    117.48    120.93    104.41

2007

   116.55    117.56    121.81    110.07

2008

   113.61    99.85    124.09    96.88

2009

   100.85    99.15    110.48    87.80

2010 (through May 29, 2009)

   97.16    95.55    100.71    94.45

Dec-2008

         93.71    87.84

Jan-2009

         94.20    87.80

Feb-2009

         98.55    89.09

Mar-2009

         99.34    93.85

Apr-2009

         100.71    96.49

May-2009

         99.24    94.45

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reason for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

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

 

Relating to Honda’s industry

 

Honda may be adversely affected by market conditions

 

Honda conducts its operations in Japan and throughout the world, including North America, Europe and Asia.

 

A sustained loss of consumer confidence in these markets, which may be caused by continued economic slowdown, recession, rising fuel prices, financial crisis or other factors could trigger a decline in demand for automobiles, motorcycles and power products that may adversely affect Honda’s results of operations.

 

Prices for 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 fierce competition, which is increasing, short-term fluctuations in demand from underlying economic conditions, changes in tariffs, import regulations and other

 

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taxes, 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.

 

Risks Relating Honda’s Business Generally

 

Currency and Interest Rate Risks

 

Honda’s operations are subject to currency fluctuations

 

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

 

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

 

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

 

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

 

Although it is impossible to hedge against all currency or interest rate risk, Honda uses derivative financial instruments in order to reduce the substantial effects of currency fluctuations and interest rate exposure on our 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 is also exposed to the risk that its counterparties to hedging contracts will default on their obligations.

 

Honda manages exposure to counterparty credit risk by limiting the counterparties to major international banks and financial institutions meeting established credit guidelines. However, any default by such counterparties might have an adverse effect on Honda.

 

Legal and Regulatory Risks

 

The automobile, motorcycle and power product industries are subject to extensive environmental and other governmental regulations

 

Regulations regarding vehicle emission levels, fuel economy, noise and safety and noxious substances, as well as levels of pollutants from production plants, are extensive within the automobile, motorcycle and power product industries. These regulations are subject to change, and are often made more restrictive. The costs to comply with these regulations can be significant to Honda’s operations.

 

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

 

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

 

Honda is subject to a number of suits, investigations and/or proceedings under relevant laws and regulations of various jurisdictions. A negative outcome in one or more of these pending legal proceedings could adversely affect Honda’s business, financial condition or results of operations.

 

Risks Relating to Honda’s Operations

 

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

 

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

 

Honda relies on 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.

 

Honda conducts its operations in various regions of the world

 

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

 

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

 

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 our 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.

 

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Honda may be adversely affected by inadvertent disclosure of confidential information

 

Although Honda maintains internal controls through established procedures to keep confidential information including personal information of its customers and relating parties, such information may be inadvertently disclosed. If this occurs, Honda may be subject to, and may be adversely affected by, claims for damages from the customers or parties affected.

 

Also, inadvertent disclosure of confidential business or technical information to third parties may result in a loss of Honda’s competitiveness.

 

Risk related to Pension and Other Postretirement Benefits

 

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

 

As a holder of ADSs, you will have fewer rights than a shareholder has and you will have to act through the depositary to exercise those rights

 

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

 

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

 

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

 

Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell your shares of our Common Stock at a particular price on any particular trading day, or at all

 

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

 

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

 

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

 

   

the political, economic and social conditions in Japan, the United States and elsewhere, including the relevant governments’ specific policies with respect to economic growth, inflation, taxation, currency conversion, imports and sources of supplies and the availability of credit, particularly to the extent such current or future conditions and policies affect the automobile, motorcycle and power product industries and markets in Japan and the United States, and the demand, sales volume and sales prices for Honda’s automobiles, motorcycles and power products;

 

   

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

 

   

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

 

   

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

 

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

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

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

 

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

 

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

 

Principal Capital Investments

 

In the fiscal years ended March 31, 2007, 2008 and 2009, Honda’s capital expenditures were ¥993.8 billion, ¥1,493.2 billion, and ¥1,302.0 billion, respectively, on an accrual basis. Also, capital expenditures excluding those with respect to property on operating leases were ¥627.0 billion, ¥654.0 billion, and ¥633.9 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2009, see “Property, Plants and Equipment” included as “Item 4.D” of this Annual Report.

 

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B. Business Overview

 

General

 

Honda’s business segments are motorcycle business, automobile business, financial services business, and power product and other businesses.

 

The following tables show the breakdown of Honda’s revenues from external customers by category of activity and by geographical markets based on the location of the customer during the fiscal years ended March 31, 2007, 2008 and 2009:

 

     Fiscal years ended March 31,
         2007            2008            2009    
     Yen (billions)

Motorcycle Business

   ¥ 1,370.6    ¥ 1,558.6    ¥ 1,411.5

Automobile Business

     8,889.0      9,489.3      7,674.4

Financial Services Business

     409.7      533.5      582.2

Power Product and Other Businesses

     417.7      421.1      343.0
                    

Total

   ¥ 11,087.1    ¥ 12,002.8    ¥ 10,011.2
                    
     Fiscal years ended March 31,
         2007            2008            2009    
     Yen (billions)

Japan

   ¥ 1,681.1    ¥ 1,585.7    ¥ 1,446.5

North America

     5,980.8      6,068.4      4,514.1

Europe

     1,236.7      1,519.4      1,186.0

Asia

     1,283.1      1,577.2      1,595.4

Other Regions

     905.1      1,251.9      1,269.0
                    

Total

   ¥ 11,087.1    ¥ 12,002.8    ¥ 10,011.2
                    

 

Motorcycle Business

 

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

 

Honda produces a wide range of motorcycles, ranging from the 50cc class to the 1800cc class in cylinder displacement. Honda’s motorcycles use internal combustion engines developed by Honda that are air- or water-cooled, two or four-cycle, and single, two, four or six-cylinder. Honda’s motorcycle line consists of sports (including trial and moto-cross racing), business and commuter models. Honda also produces all-terrain vehicles (ATVs) since 1984, personal watercraft (PWC) since 2002 and multi utility vehicles (MUVs) since 2008.

 

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The following table sets out unit sales for Honda’s motorcycle business, including motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC), and revenue from Motorcycle Business, and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2007, 2008 and 2009:

 

     Fiscal years ended March 31,  
     2007     2008     2009  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   337    ¥ 101.7      311    ¥ 93.5      232    ¥ 81.8   

North America

   503      308.2      453      265.6      320      182.2   

Europe

   329      219.7      313      226.6      276      178.6   

Asia

   7,895      383.3      6,633      484.4      7,523      460.4   

Other Regions

   1,305      357.4      1,610      488.3      1,763      508.3   
                                       

Total

   10,369    ¥ 1,370.6      9,320    ¥ 1,558.6      10,114    ¥ 1,411.5   
                                       

Motorcycle revenue as a percentage of total sales revenue

        12        13        14

 

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

 

For further information on recent operation and financial review, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”

 

Automobile Business

 

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

 

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

 

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

 

Passenger cars:

 

Legend, Accord, Inspire, Civic, Insight, City, Acura RL, Acura TL, Acura TSX, Acura CSX

 

Minivans, Multi-wagons, Sport Utility Vehicle:

 

Elysion, Odyssey, Step Wagon, Stream, FREED, Edix/FR-V, Airwave, Fit/Jazz, Partner

Pilot, Ridgeline, CR-V, Element, Crossroad, S2000, Acura MDX, Acura RDX

 

Mini cars:

 

Life, Zest, Vamos, Acty

 

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The following table sets out Honda’s unit sales of automobiles and revenue from Automobile Business and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2007, 2008 and 2009:

 

     Fiscal years ended March 31,  
     2007     2008     2009  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   672    ¥ 1,412.7     615    ¥ 1,321.0     556    ¥ 1,225.3  

North America

   1,788      5,179.1     1,850      5,209.4     1,496      3,723.8  

Europe

   324      917.1     391      1,182.6     350      923.5  

Asia

   620      861.6     755      1,048.4     793      1,079.5  

Other Regions

   248      518.4     314      727.8     322      721.9  
                                       

Total

   3,652    ¥ 8,889.0     3,925    ¥ 9,489.3     3,517    ¥ 7,674.4  
                                       

Automobile revenue a as percentage of total sales revenue

        80 %        79 %        77 %

 

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

 

For further information on recent operation and financial review, see “Operating Results” in “ Item 5. Operating and Financial Review and Prospects”

 

Financial Services Business

 

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

 

The following table sets out Honda’s revenue from Financial Services Business and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2007, 2008 and 2009:

 

     Fiscal years ended March 31,  
           2007                 2008                 2009        
     Revenue     Revenue     Revenue  
     (billions)     (billions)     (billions)  

Japan

   ¥ 21.4     ¥ 23.4     ¥ 24.0  

North America

     364.8       483.9       527.9  

Europe

     12.6       13.2       12.6  

Asia

     3.1       4.9       4.7  

Other Regions

     7.5       8.0       12.8  
                        

Total

   ¥ 409.7     ¥ 533.5     ¥ 582.2  
                        

Financial Service revenue as a percentage of total sales revenue

     4 %     4 %     6 %

 

For further information on recent operation and financial review, see “Operating Results” in “ Item 5. Operating and Financial Review and Prospects”

 

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Power Product and Other Businesses

 

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

 

 

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

 

The following table sets out Honda’s revenue from Power Product and Other Businesses and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2007, 2008 and 2009:

 

     Fiscal years ended March 31,  
     2007     2008     2009  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   527    ¥ 145.2      550    ¥ 147.7      516    ¥ 115.2   

North America

   3,103      128.5      2,415      109.4      1,893      80.1   

Europe

   1,625      87.1      1,693      96.8      1,306      71.1   

Asia

   760      35.0      915      39.4      970      50.7   

Other Regions

   406      21.8      484      27.6      502      25.8   
                                       

Total

   6,421    ¥ 417.7      6,057    ¥ 421.1      5,187    ¥ 343.0   
                                       

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

        4        4        3

 

For further information on recent operation and financial review, see “Operating Results” in “ Item 5. Operating and Financial Review and Prospects”

 

Marketing and Distribution

 

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

 

Sales in Japan

 

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

 

Motorcycles are distributed through approximately 7,700 outlets, including approximately 900 PROS, and approximately 100 Honda Dream authorized dealerships.

 

As for distribution network for automobiles, Honda integrated its three sales channels in Japan—Primo, Clio and Verno—into one Honda channel in March 2006. At present, 801 retail dealers operate 2,222 shops and sell Legend, Inspire, Accord, Civic, Insight, Elysion, Odyssey, Step Wagon, Stream, Edix, FREED, Airwave, Fit, CR-V, Crossroad, S2000, Partner, Life, Zest, Vamos, and Acty.

 

Power products are distributed in Japan to approximately 1,410 retail dealers throughout Japan, including affiliates of Honda. A number of small engines are also sold to other manufacturers for use in their products.

 

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Service and Parts Related Operations in Japan

 

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

 

Overseas Sales

 

Approximately 95% of Honda’s overseas sales are made through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

 

In the United States, Honda markets its products through a sales network of approximately 1,200 independent local dealers for motorcycles, approximately 1,300 for automobiles and approximately 7,000 for power products. Many of the motorcycle dealers and some of the automobile dealers also sell Honda’s power products. In 1986, Honda opened the first Acura automobile dealerships in the United States. The Acura network in the United States totaled 270 dealerships at the end of fiscal 2009. The Acura network offers RL, TL, TSX, MDX, RDX models, and CSX in Canada.

 

With regard to exports from North America, Honda is currently exporting such North American-built models as Civic, Accord, Odyssey, Pilot, MDX, TL, Ridgeline, RDX and Element to other markets. In fiscal 2009, Honda exported approximately 56,200 units from North America to 40 countries throughout the world.

 

In Europe, Honda’s products are distributed through approximately 1,850 independent local dealers for motorcycles, approximately 1,900 for automobiles and approximately 3,500* for power products.

 

 

* Total number represents dealers in 10 countries where Honda has foreign sales subsidiaries

 

In Asia, Honda’s products are distributed through approximately 13,500 independent local dealers for motorcycles, approximately 1,200 for automobiles and approximately 1,600* for power products.

 

 

* Total number represents dealers in 6 countries where Honda has foreign sales subsidiaries

 

The Company exports motorcycle components to 13 countries, including Indonesia, Thailand, Vietnam and Brazil, where motorcycles are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

The Company exports automobile components to 14 countries, including the United States, Canada, Thailand, China and Brazil, where automobiles are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

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

 

Service and Parts Related Operations Overseas

 

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

 

Components and Parts, Raw Materials and Sources of Supply

 

Honda manufactures the major components and parts used in its products, including engines, frames and transmissions. Other components and parts, such as shock absorbers, electrical equipment and tires, are purchased from numerous suppliers. The principal raw materials used by Honda are steel plate, aluminum,

 

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special steels, steel tubes, paints, plastics and zinc, which are purchased from several suppliers. The most important raw material purchased is steel plate, accounting for approximately 45% of Honda’s total purchases of raw materials.

 

No single supplier accounted for more than 5% of the Company’s purchases of major components and parts and principal raw materials during the fiscal year ended March 31, 2009.

 

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

 

Seasonality

 

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

 

Environmental and Safety Regulation

 

Outline of Environmental and Safety Regulation for Automobiles

 

1. Emissions

 

Japan

 

In 2005, to limit emissions into the environment, the Central Environment Council in the Ministry of Environment created new long-term targets and comprehensive requirements for gasoline and diesel vehicles which has become effective starting from 2008. New long term targets for gasoline vehicles remain unchanged except for direct injection gasoline vehicles which will be required to meet the particulate matter (PM) standard. New long-term emissions targets for diesel vehicles have been lowered by more than 50% from the current level of NOx and PM standards. Furthermore, in March 2008, to strengthen the enforcement of laws, the 2009 Exhaust Emission Standards were created after the passage of the new long-term regulation. Long-term targets for gasoline vehicles remain unchanged except for direct injection gasoline vehicles which will also be required to meet the PM standard. Post new long term emissions targets for diesel vehicles have been lowered by more than 60% from the current level of NOx and PM standards.

 

The United States

 

Increasingly stringent emission regulations under the Clean Air Act have been enacted since the 1990s by the U.S. federal government. Under the Act, the Environmental Protection Agency (EPA) in February 2000 adopted more stringent vehicle emissions regulations applicable to passenger cars and light-duty trucks produced from model year 2004. Moreover, the new standard provides for gradual decreases in sulfur levels contained in fuel in the U.S. market.

 

Under the Clean Air Act, the State of California is permitted to establish its own emission control standards to the extent they are more stringent than federal standards. Pursuant to this authority, the California Air Resources Board (CARB) adopted the “California Low Emission Vehicle Program” in 1990, aiming to establish the strictest emission regulation in the world. In late 1998, the CARB strengthened its regulatory standards through the introduction of new standards, known as the “California Low Emission Vehicle Program II” (LEV II). These new standards treat most light trucks the same as passenger cars and require both types of vehicles to meet the new emissions standards of LEV II. In January 2001, the CARB approved modifications to the “Zero-Emission Vehicles” (ZEV) requirement under LEV II, permitting gasoline Super Ultra Low Emission Vehicles

 

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(SULEV), hybrid vehicles (powered by gasoline engine and/or electric motor) and compressed natural gas (CNG) vehicles to partially meet zero-emission requirements by satisfying certain additional requirements. The modified requirements also provide incentives for continued technology development.

 

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

 

In March 2009, the CARB amended “ZEV regulation”. The CARB requires 7,500 fuel cell vehicles (FCV) in the entire industry from 2009 to 2011 instead of current requirement of 2,500 FCV. In addition, the manufacturer should sell the significant number of Enhanced Advanced Technology Partial Zero Emission Vehicles (Enhanced AT-PZEV) in the market after the 2012 model year.

 

Currently, many states have adopted or proposed the California ZEV regulation. The ZEV mandate has been implemented in some states, and will be implemented in other states.

 

Europe

 

In 1999, the European Union adopted Euro3 and Euro4 as comprehensive emissions regulations for passenger vehicles and heavy and light commercial vehicles. Euro3 was implemented in 2000 and Euro4 was implemented in 2005.

 

In each EU country, standards, such as those providing for preferential automobile tax treatment, have been established in respect of diesel vehicles that comply with the requirements prescribed in Euro4 for which the PM emission does not exceed 5mg/km. Honda has already introduced a considerable number of Euro4-compliant diesel models in Europe.

 

In 2005, the European Union created new emission standards (Euro5 and Euro6) and comprehensive requirements for gasoline vehicles and diesel vehicles. Euro5 will be implemented in September 2009. Emission limits for gasoline vehicles and diesel vehicles will be lowered by more than the Euro4 level of HC, NOx and PM. Euro6 will be implemented in 2014. Emission limits for diesel vehicles will be lowered by more than the Euro5 level HC and NOx.

 

Additionally, Euro5 and Euro6 will add the requirement of a PM number limit for diesel and petrol vehicles. A PM mass limit will also apply to gasoline vehicles which use direct injection engines.

 

Russia

 

Euro3 regulation has been in effect from January 2008. Additionally, Euro4 regulation will be implemented in January 2010.

 

Other Regions

 

China adopted Step3 and Step4 emission regulations for light-duty vehicles in 2005. These regulations are similar to European regulations (such as Euro3 and Euro4). Step3 was implemented in 2007 and Step4 will be implemented in July 2010. In the city of Beijing, Euro3 was implemented in December 2005 and Euro4 was implemented in March 2008.

 

South Korea adopted the enforcement regulation of the Special Act on Capital Region Air Quality Improvement. Accordingly, some manufacturers will be required to sell low emission vehicles which meet a more stringent emission standard than those meeting the national standard from January 2005.

 

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In addition, other several Asian countries adopted regulations which are similar to the European regulations (such as Euro2 and Euro3).

 

In Australia, Euro4-equivalent regulations were implemented in July 2008.

 

2. Fuel Economy / CO2

 

Japan

 

In 1998, an amendment was made to the Law Concerning Rationalization of Energy Usage that established a fuel efficiency standard based on weight class in Japan. This standard was tightened in 2005 for diesel-fueled automobiles. For gasoline automobiles, tighter standards, to be implemented in 2010, have also been established.

 

In light of the CO2 reduction targets promulgated under the Kyoto Protocol, the Japanese government issued a fuel regulation for an interim ethanol blending limit (less than 3%) which became effective in 2003. The Japanese government intends to further increase this limit until the final target of 10% is achieved within a decade.

 

In 2005, discussions about the “POST-2010” standard took place among the applicable ministries and industries.

 

In February 2007, the final “POST-2010” target, or the “2015 standard”, was announced. Fuel consumption will be reduced by 29.2% compared to the 2010 target for passenger cars.

 

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

 

The United States

 

The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with the Corporate Average Fuel Economy (CAFE) standards. Under the CAFE standards, manufacturers are subject to substantial penalties if automobiles produced by them in any model year do not meet the average standards for each category. The CAFE standard for passenger cars has been set at 27.5 miles per gallon (mpg) starting from the 1990 model year and for light trucks at 20.7 miles per gallon standard was established for the 1996-2004 model years. The standard for light trucks increased from the 2005 model year (21.0 miles per gallon) to the 2007 model year (22.2 miles per gallon). The National Highway Traffic Safety Administration (NHTSA) reformed the CAFE standard for light trucks in 2006. The new size-based CAFE standard for light trucks would have been implemented in the 2008 model year. However, on November 15, 2007, the United Stated Ninth Circuit Court of Appeals has made the decision to revoke the CAFE regulation concerning light-duty trucks that the NHTSA had adopted. The court held that the NHTSA failed to (1) implement the cost conversion of CO2 emission when establishing the CAFE limit values concerning the 2008-2009 model year light-duty trucks, (2) establish the Backstop Requirements, (3) the requirements concerning classification of passenger automobiles and light-duty trucks and (4) prescribe the fuel economy limit values for all vehicles with the Gross Vehicle Weight Rating class of 8,500 to 10,000 pounds, the court held that the CAFE regulation was arbitrary and capricious and that, furthermore, it violated the U.S. Energy Policy and Conservation Act. In addition, the U.S. President Obama has directed relevant U.S. federal agencies to take the first steps toward regulations that would reduce gasoline consumption and Green House Gas (GHG) emissions from vehicles by 20 percent over the next 10 years. Therefore, the NHTSA has to promptly establish new limit values conforming to the pertinent policy and to apply it in the earliest possible model year. The NHTSA issued a new CAFE regulation draft which applies to passenger cars and light trucks from the 2011 model year to the 2015 model year on May 2, 2008. The proposal requires 31.6 miles per gallon for the combined CAFE standard in the 2015 model year. However, on January 26, 2009 President Obama announced that he has directed the NHTSA to issue the CAFE standard of the 2011 model year initially, and issue the standard for the 2012 model year and subsequent model years after

 

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reconsidering the details of this standard. In March 2009, the NHTSA issued the CAFE regulation standard for passenger cars and light trucks of the 2011 model year. The CAFE standard calculation of passenger cars and light trucks of the 2011 model year use a footprint prescribed in the CAFE regulation issued in 2006. Industry-wide combined average for the 2011 model year is estimated to 27.3 mpg.

 

In August 2005, the CARB finalized its Green House Gas (GHG) regulation. Under the GHG regulation, which will become effective for the 2009 model year, automobile manufacturers have to improve fuel economy from the current levels by more than 50% by the 2016 model year.

 

Many other states have adopted the GHG regulations.

 

In April 2007, the Supreme Court ruled that the EPA has the authority to regulate GHG emissions. In response to the Supreme Court’s ruling, the U.S. President Bush directed his agencies to take the first steps toward regulations that would reduce gasoline consumption and GHG emissions from motor vehicles by 20 percent over the next 10 years.

 

However, the EPA decided not to grant enforcement of the GHG regulation by the State of California on December 19, 2007. The EPA concluded that the Federal unified standard can contribute to a significant reduction of GHG emitted in all states and will be more effective than California’s approach.

 

In March 2008, the EPA denied California’s GHG regulation waiver request against the CARB. On January 26, 2009, the U.S. President Obama announced that he had directed the EPA to review California’s waiver request. The waiver is currently under consideration by the EPA. Because the GHG regulation for fuel economy is pending, the CARB is considering the suggestion to introduce technology to reduce GHG. As part of this strategy, the CARB is considering the Cool Car regulation.

 

The CARB proposed this regulation to demand that 2012 and subsequent model-year passenger cars, light-duty trucks, and medium-duty vehicles less than or equal to 10,000 pounds use a solar panel. The use of this solar panel will lower the vehicle room temperature for the purpose of reducing the frequency of air-conditioner use and improving the in-use fuel economy.

 

On May 19, 2009, the U.S. President Obama set in motion a new national policy aimed at both increasing fuel economy and reducing greenhouse gas pollution for all new cars and trucks sold in the United States. The new standards, covering model years 2012-2016, will ultimately require an average fuel economy standard of 35.5 mpg in 2016.

 

Europe

 

In 1999, the European Union reached a voluntary agreement with the European Automotive Manufacturers Association for the establishment of an average emissions target of 140 grams of carbon dioxide per kilometer for new cars offered for sale in the EU in 2008. The Japan Automobile Manufacturers Association (JAMA) and the Korean Automobile Manufacturers Association also reached a similar voluntary agreement with the European Union targeting implementation in 2009. In 2003, in an interim review, the emissions reduction efforts made by these associations were reviewed and the possibility of setting a more stringent target of above 140 grams is now being discussed. In 2003, JAMA achieved the midterm target (165-175 grams). JAMA achieved additional reduction of carbon dioxide in 2005 as compared to 2004.

 

In 2006, discussions about establishing targets for 2008 began among the European Commission, Member States and the automobile industry.

 

In 2007, the European Commission proposed “carbon dioxide emission performance standards for new passenger cars”. According to this proposal, the European Commission set a more stringent target of 130 grams

 

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of carbon dioxide per kilometer for new cars offered for sale in the EU from 2012. In addition, the proposal will provide manufacturers with the necessary incentive to reduce the CO2 emissions of their vehicles by imposing an excess emissions premium if their average emission levels are above the limit value curve. This premium will be based on the number of grams per kilometer (g/km) that an average vehicle sold by the manufacturer exceeds the limit imposed by the curve, multiplied by the number of vehicles sold by the manufacturer.

 

In 2008, the European parliament adopted CO2 regulations. The adopted CO2 regulations will be discussed in the European council, and will be published by Official Journal in June 2009.

 

The EU is also recommending the use of biomass fuel blends.

 

Other Regions

 

China adopted a fuel consumption regulation for passenger vehicles in 2004. Step 1 of this regulation was implemented in 2005 and Step 2 was implemented in 2008.

 

South Korea adopted the regulation of Corporate Average Fuel Economy for passenger vehicles in 2005. Domestic vehicles will be required to adhere to the regulations starting from 2006 and imported vehicles will need to meet the requirement from 2010. In addition, South Korea adopted a more stringent regulation in 2008 and this regulation will be implemented in 2012.

 

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

 

Japan

 

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

 

Europe

 

In September 2000, the European Union approved a directive requiring its member states to promulgate regulations implementing the following by April 21, 2002:

 

Manufacturers must be financially responsible for taking back end-of-life vehicles offered for sale after July 1, 2002 and dismantle and recycle the vehicles. Beginning on January 1, 2007, the requirement has also been applied to all vehicles offered for sale in the European Union before July 1, 2002.

 

Manufacturers must not use specified hazardous materials in vehicles offered for sale in the European Union after July 2003, and 95% of vehicle parts in new vehicle types sold in the European Union after December 15, 2008, must be designed to be re-usable and recoverable.

 

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

 

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Other Regions

 

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

 

4. Safety

 

Japan

 

In November 2007, the Ministry of Land, Infrastructure and Transport (MLIT) issued safety standards for vehicle which use high voltage electric power such as Electric Vehicles or Hybrid electric vehicles, to avoid electric shock during normal operation and crashing, from July 1, 2012 for all models.

 

In March 2008, the MLIT issued the technical standards for Event Data Recorders (EDRs). Installation of EDRs in vehicles and, if an EDRs is installed, compliance with MLIT’s technical standards are both voluntary.

 

Japan Automobile Standards Internationalization Center (JASIC), which is organized by the MLIT and JAMA, among others, has started to review a proposal for the unification of Safety/Environment Standards, vehicle categories and certification in order to promote further internationalization of standards and certifications.

 

JASIC is planning to make the proposal to other contracting parties of the 58 / 98 Agreement by 2009 and aim at reaching an agreement among the contracting parties by 2015.

 

The United States

 

In December 2003, vehicle manufacturers, including Honda, presented to the public a statement on crash vehicle compatibility, “ENHANCING VEHICLE-TO-VEHICLE CRASH COMPATIBILITY: A Set of Commitments for Progress by Automobile Manufacturers.” This report describes the recommended performance criteria and research plans developed by an international group of safety experts for enhancing vehicle-to-vehicle crash compatibility in front-to-front and front-to-side crashes. By September 1, 2007, the goal is to have at least 50% of all vehicles offered in the U.S. by participating manufacturers to meet the front-to-side performance criteria, and by September 2009, for 100% of the vehicles of participating manufacturers to meet the criteria. For the front-to-front criteria, the goal is for 100% of the vehicles of participating manufacturers to meet the criteria by September 2009, with no interim goals set. We are a participating manufacturer and intend to meet these voluntary standards.

 

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

 

In April 2007, the NHTSA issued a final rule regarding an electronic stability control system standard for light vehicles to reduce rollover crashes. The new standard will require installation of electronic stability control system. Manufacturers must comply with the standard for 55% of all vehicles produced by 2008, 75% by 2009, 95% by 2010, and 100% by 2011.

 

In May 2007, the NHTSA issued a final rule to revise some performance requirements for head restraints, to delay the effective date, and to set a phase-in compliance schedule. For front seat requirements, manufacturer must comply with the revised requirements for 80% of all vehicles produced by 2009, and 100% by 2010. For voluntarily installed rear head restraints, manufacturers also must be in compliance for 80% of all vehicles by 2010, and 100% by 2011.

 

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

 

In January 2008, the NHTSA issued a supplemental proposed rule to upgrade vehicle roof crush standard. The rule newly introduces a “Two-sided Roof Test” which imposes the strength tests for both sides of the vehicle roof as an alternative for the existing “Single-sided Roof Test”. Manufacturers must comply with either test requirement from the first September that occurs after three years have elapsed after the issuance of the final rule.

 

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

 

In October 2008, the NHTSA issued a final rule to revise the definition of Designated Seating Position (DSP) and to newly introduce the procedure for determination the number of DSPs. These are not Federal Motor Vehicle Safety Standards (FMVSS), but manufacturers must comply with all requirements related DSPs, such as equipment requirement of 3-points safety belt on and after September 2010.

 

Europe

 

The European Commission issued a new regulation for pedestrian protection, which include installation requirements of Brake Assist System. It required M1 (Passenger vehicles up to nine passengers) and N1 (Light commercial vehicles with gross vehicle weight up to 3.5 tons) vehicles to meet standards for the protection of pedestrians in the event of a collision with the front of a motor vehicle. The new regulation will be effective November 24, 2011 for new types of vehicles.

 

Additionally, the European Commission issued draft regulation for GSR (type approval requirements for the General Safety of vehicles). It includes installation requirement for advanced safety system and tire performance requirement in order to improve the safety and environment performance of vehicles.

 

In September 2008, United Nation issued a revised Economic Commission for Europe (ECE) regulation relating to installation of lighting devices to require the installation of dedicated daytime running lamp (DRL). For M1 and N1 vehicles, manufacturers must equip DRL and comply with related requirements on and after February 2011, if certified as new type vehicle.

 

5. New Car Assessment Program (NCAP)

 

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

 

In July 2008, the NHTSA issued final decision to upgrade NCAP testing and safety rating criteria with revision of frontal and side impact tests, introduction of overall rating program, and addition of ratings for crash avoidance technologies. This new tests and rating criteria will be used for vehicles tested as part of the NCAP beginning with model year 2011 vehicles.

 

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Outline of Environmental and Safety Regulation for Motorcycles

 

1. Emissions

 

Japan

 

Japan has emissions regulations for motorcycles applicable to all classes of engine displacement. Some aspects of these requirements, such as standards for hydro-carbon levels and durability, are stricter than the current European regulations, namely the Euro1 regulations. The Central Environment Council in the Ministry of Environment issued a final report on targets for fiscal year 2006. The target level is similar to those under the Euro3 standards.

 

The United States

 

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

 

Canada

 

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

 

Currently, the Canadian federal government has proposed to introduce the emission regulations for off-road motorcycles generally equivalent to the U.S. EPA regulations.

 

Europe

 

The EU maintains emissions regulations (Euro2) for motorcycles, as well as the “Motor Cycle (& Moped)-Whole Vehicle Type Approval”, a uniform certification system for two and three-wheeled motor vehicles.

 

The Euro3 regulations are the most stringent standard for motorcycles. The Euro3 regulations have been in effect from January 2006.

 

Other Regions

 

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

 

In Thailand, a fifth stage of emissions control, which is generally equivalent to or stricter than Euro2, has been implemented. A sixth stage of emissions control, which is generally equivalent to or stricter than Euro3, was introduced in 2008.

 

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

 

In China, Euro2-equivalent regulations were introduced in 2004.

 

In Korea, Euro2-equivalent regulations were implemented in 2006. In addition, Euro3-equivalent regulations will be implemented from 2008.

 

In Brazil, Euro2-equivalent regulations have been in effect from the beginning of last year. Euro3-equivalent regulations were implemented in the beginning of 2009.

 

In India, regulations based on the Indian authorities’ own test method are in effect and enhanced regulations were enacted in 2005.

 

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2. Safety

 

Japan

 

Japan introduced the ECE R78—Braking system based on the Global Technical Regulation that was promulgated by the United Nation’s World Forum for Harmonization of Vehicle Regulations. It will apply to new vehicle types on and after June 18, 2009, and to all models on and after June 18, 2011.

 

The United States

 

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

 

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

 

The Consumer Product Safety Commission (CPSC) and ATV industry updated the voluntary standard in 2007. The CPSC is now considering that the standard will be introduced in the regulation.

 

Europe

 

The number of ATVs designed to travel on four low pressure tires on non-paved surfaces has recently increased in the EU market. Most ATVs have received approval by the Whole Vehicle Type Approval (WVTA) and are permitted to run on highways. As a result, there has been an increase in the number of accidents which resulted in the establishment of the All Terrain Vehicle European industry Association (ATVEA). The ATVEA is now focusing on ATV standards rulemaking. It is expected that a standard will be completed in approximately five years at the earliest.

 

The driving licenses directive was updated, and established a new category for mopeds and changed the contents of each category. A new directive will be effective from January 19, 2013.

 

Other Regions

 

The Brazilian government issued a new regulation regarding anti-theft device and will require installing an immobilizer and a vehicle tracking system on vehicles and motorcycles sold or registered from August 1, 2009.

 

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

 

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

 

Outline of Environmental and Safety Regulation for Power Products

 

1. Emissions

 

The United States

 

The EPA enacted new engine emissions regulations applicable to model year 1997 for small non-road engines. These regulations are also applicable to engines in use from the 2001 model year. With respect to marine engines, emissions regulations for outboard engines and personal watercraft were implemented for the

 

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1998 model year products and were gradually strengthened every year until the 2006 model year. The EPA finalized enhanced exhaust emission regulations for non-road engines and marine engines and newly introduced evaporative emission standards for these products.

 

China

 

The new exhaust emission regulation is proposed in China from January 1, 2009. Its requirements are based on European exhaust emission regulation, and will apply to the small spark ignition engines for non-road mobile machinery with 19 kw or less.

 

2. Safety

 

Japan

 

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

 

The United States

 

Based on the “Consumer Product Safety Improvement Act of 2008“, walk-behind lawn mowers need to comply with the certificate requirements from November 11, 2008, and the CPSC will enhance the recall system by this Act.

 

Europe

 

The Machinery Directive was changed on May 16, 2006, and new directive will be effective from December 29, 2009. Main changes are to clarify the scope (e.g. partly completed machinery such as engine unit) and to add the concrete description of market survey and obligation to establish the penalty description for member states.

 

Preparing for the Future

 

Due to the current economic situation, there are concerns that the economies of Japan, the U.S. and Europe will experience a downturn. In addition, the pace of economic growth of Asian countries outside of Japan is expected to slow down. Moreover, given the many uncertainties in the global business environment in which Honda operates, including political and economic instability, fluctuations in oil and raw material prices, and volatility in the currency and financial markets, Honda expects that this will continue to be an extremely challenging environment in which to do business.

 

With these circumstances in mind, Honda seeks to further strengthen its corporate structure by making it more flexible and dynamic and therefore, better able to meet the needs of its customers and society as a whole as well as respond to changes in the business environment. Also, in order to improve the competitiveness of its products, Honda will endeavor to enhance its R&D, production and sales capabilities. Furthermore, Honda will continue to enhance its reputation in the community through companywide activities. Honda recognizes that further enhancing the following specific areas is essential to its success:

 

Research and Development

 

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

 

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Production Efficiency

 

Honda will establish and enhance efficient and flexible production systems at its global production bases and supply high quality products, with the aim of meeting the needs of its customers in each region.

 

Sales Efficiency

 

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

 

Product Quality

 

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

 

Safety Technologies

 

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

 

The Environment

 

Honda will step up its efforts to create better, cleaner and more fuel-efficient engine technologies and to further improve recyclables throughout its product lines. Honda will also work to advance fuel cell technology and steadily promote its new solar cell business. In addition, Honda will further its efforts to minimize its environmental impact. To this end, Honda sets global targets to reduce the environmental burden as measured by the Life Cycle Assessment*, in all areas of business, spanning production, logistics and sales.

 

 

* 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.

 

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

 

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

 

Through these Company-wide activities, Honda will strive to become a company whose presence is welcomed by our shareholders, customers and society.

 

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C. Organizational Structure

 

As of March 31, 2009, the Company had 124 Japanese subsidiaries and 272 overseas subsidiaries. The following table sets out for each of the Company’s principal subsidiaries, the country of incorporation, function and percentage ownership and voting interest held by Honda.

 

Company

   Country of
Incorporation
  

Function

   Percentage
Ownership
and
Voting Interest

Honda R&D Co., Ltd.

   Japan    Research & Development    100.0

Honda Engineering Co., Ltd.

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

Yachiyo Industry Co., Ltd.

   Japan    Manufacturing    50.5

Honda Finance Co., Ltd.

   Japan    Finance    100.0

American Honda Motor Co., Inc.

   U.S.A.    Sales    100.0

Honda North America, Inc.

   U.S.A.    Coordination of Subsidiaries Operation    100.0

Honda of America Mfg., Inc.

   U.S.A.    Manufacturing    100.0

American Honda Finance Corporation

   U.S.A.    Finance    100.0

Honda Manufacturing of Alabama, LLC

   U.S.A.    Manufacturing    100.0

Honda Manufacturing of Indiana, LLC

   U.S.A.    Manufacturing    100.0

Honda Transmission Mfg. of America, Inc.

   U.S.A.    Manufacturing    100.0

Honda R&D Americas, Inc.

   U.S.A.    Research & Development    100.0

Honda Canada Inc.

   Canada    Manufacturing and Sales    100.0

Honda Canada Finance Inc.

   Canada    Finance    100.0

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

   Mexico    Manufacturing and Sales    100.0

Honda Motor Europe Limited

   U.K.    Coordination of Subsidiaries Operation and Sales    100.0

Honda of the U.K. Manufacturing Ltd.

   U.K.    Manufacturing    100.0

Honda Finance Europe plc

   U.K.    Finance    100.0

Honda Motor Europe (South) S.A.

   France    Sales    100.0

Honda Bank GmbH

   Germany    Finance    100.0

Honda Motor Europe (North) GmbH

   Germany    Sales    100.0

Honda Italia Industriale S.p.A.

   Italy    Manufacturing and Sales    100.0

Honda Motor (China) Investment Corporation, Limited

   China
  

Coordination of Subsidiaries Operation and Sales

   100.0

Honda Automobile (China) Co., Ltd.

   China    Manufacturing    65.0

Honda Auto Parts Manufacturing Co., Ltd.

   China    Manufacturing    100.0

Honda Siel Cars India Limited

   India    Manufacturing and Sales    97.4

Honda Taiwan Co., Ltd.

   Taiwan    Sales    100.0

Asian Honda Motor Co., Ltd.

   Thailand    Coordination of Subsidiaries Operation and Sales    100.0

Honda Leasing (Thailand) Company Limited

   Thailand    Finance    100.0

Honda Automobile (Thailand) Co., Ltd.

   Thailand    Manufacturing and Sales    89.0

Thai Honda Manufacturing Co., Ltd.

   Thailand    Manufacturing    60.0

Honda Vietnam Co., Ltd.

   Vietnam    Manufacturing and Sales    70.0

Honda Motor de Argentina S.A.

   Argentina    Manufacturing and Sales    100.0

Honda South America Ltda.

   Brazil    Coordination of Subsidiaries Operation    100.0

Honda Automoveis do Brasil Ltda.

   Brazil    Manufacturing and Sales    100.0

Moto Honda da Amazonia Ltda.

   Brazil    Manufacturing and Sales    100.0

Honda Turkiye A.S.

   Turkey    Manufacturing and Sales    100.0

Honda Australia Pty. Ltd.

   Australia    Sales    100.0

 

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D. Property, Plants and Equipment

 

The following table sets out information, as of March 31, 2009, with respect to Honda’s principal manufacturing facilities, all of which are owned by Honda:

 

Location

   Number of
Employees
  

Principal Products Manufactured

Sayama, Saitama, Japan

   5,571    Automobiles

Hamamatsu, Shizuoka, Japan

   2,917    Power products and transmissions

Suzuka, Mie, Japan

   6,943    Automobiles

Ohzu-machi, Kikuchi-gun Kumamoto, Japan

   3,251    Motorcycles, all-terrain vehicles, power products and engines

Marysville, Ohio, U.S.A.

   6,842    Motorcycles and automobiles

Anna, Ohio, U.S.A.

   2,514    Engines

East Liberty, Ohio, U.S.A.

   2,304    Automobiles

Lincoln, Alabama, U.S.A.

   4,468    Automobiles and engines

Greensburg, Indiana, U.S.A.

   1,137    Automobiles

Alliston, Ontario, Canada

   4,438    Automobiles and engines

El Salto, Mexico

   2,047    Motorcycles and automobiles

Swindon, Wiltshire, U.K.

   3,744    Automobiles and engines

Atessa, Italy

   822    Motorcycles, power products and engines

Guangzhou, China

   1,064    Automobiles

Greater Noida, India

   2,030    Automobiles

Ayutthaya, Thailand

   3,550    Automobiles

Bangkok, Thailand

   2,847    Motorcycles and power products

Vinhphuc, Vietnam

   1,858    Motorcycles and automobiles

Buenos Aires, Argentina

   310    Motorcycles

Sumare, Brazil

   3,464    Automobiles

Manaus, Brazil

   8,249    Motorcycles and power products

Gebze, Turkey

   1,295    Automobiles

 

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

 

We believe our production facilities and other properties, including the principal manufacturing facilities above, are suitable and adequate for the development, manufacture and sales of Honda’s products and parts.

 

As of March 31, 2009, the Company’s property, with a net book value of approximately ¥24.7 billion, was subject to specific mortgages securing indebtedness.

 

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Capital Expenditures

 

Capital expenditures in fiscal 2009 were applied to the introduction of new models, upgrade, rationalize and renew production facilities, as well as to expand and reinforce sales and R&D facilities.

 

Total capital expenditures for the year amounted to ¥1,267.2 billion, down ¥226.0 billion from the previous year. Also, total capital expenditures, excluding property on operating leases, for the year amounted to ¥599.1 billion, down ¥54.8 billion from the previous year. Spending by business segment is shown below.

 

     Fiscal years ended March 31,  
     2008    2009    Increase
(Decrease)
 
     Yen (millions)  

Motorcycle Business

   ¥ 86,687    ¥ 90,401    ¥ 3,714   

Automobile Business

     544,922      490,760      (54,162

Financial Services Business

     839,888      669,178      (170,710

Financial Services Business (Excluding Property on Operating Leases)

     627      1,050      423   

Power Product and Other Businesses

     21,794      16,920      (4,874

Total

   ¥ 1,493,291    ¥ 1,267,259    ¥ (226,032

Total (Excluding Property on Operating Leases)

   ¥ 654,030    ¥ 599,131    ¥ (54,899

 

Intangible assets are not included in the table above.

 

In the motorcycle business, we made capital expenditures of ¥90,401 million in the fiscal year ended March 31, 2009. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of Sales and R&D facilities. The plan to consolidate motorcycle production in Japan at Kumamoto Factory was completed in August 2008.

 

In the automobile business, we made capital expenditures of ¥490,760 million in the fiscal year ended March 31, 2009. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of Sales and R&D facilities. Honda Canada Inc., which is one of the Company’s consolidated subsidiaries, completed construction of its facilities for the production of engines in September 2008. Honda Manufacturing of Indiana, LLC and Honda Automobile (Thailand) Co., Ltd completed construction of its facilities for the production of automobiles in October 2008.

 

In the financial services business segment, capital expenditures excluding property on operating leases amounted to ¥1,050 million in the fiscal year ended March 31, 2009, while capital expenditures for property on operating leases were ¥668,128 million. Capital expenditures in power products and other businesses in the fiscal year ended March 31, 2009, totaling ¥16,920 million, were deployed to upgrade, streamline, and modernize manufacturing facilities for power products, and to improve R&D facilities for power products.

 

Plans after fiscal 2009

 

We set out our original capital expenditure plans for the period from the fiscal year ended March 31, 2009 during the preceding fiscal year. We have subsequently modified these plans as follows:

 

The planned timing of the start of operation in 2010 on the new auto plant in Yorii-machi Osato-gun, Saitama, Japan has been postponed for more than two years. The planned timing of the start of operation on a new engine plant in Ogawa-machi Hiki-gun, Saitama, Japan has not been changed.

 

The planned timing of the start of operation in 2010 on the new R&D center in Sakura City, Tochigi, Japan has been postponed.

 

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The planned timing of the start of operation at the end of 2009 on the new auto plant of Honda Siel Cars India Limited, which is one of the Company’s consolidated subsidiaries, in Rajasthan, India has been postponed.

 

The planned timing of the start of operation in the latter half of 2010 on the new auto plant capable of synchronous auto production—from the engine to the entire automobile—of Yachiyo Industry Co., Ltd., which is one of the Company’s consolidated subsidiaries, in Yokkaichi City, Mie, Japan has been postponed for a little over one year.

 

The estimated amounts of capital expenditures for fiscal year ending March 31, 2010 are shown below.

 

     Fiscal year ending
March 31, 2010
     Yen (millions)

Motorcycle Business

   ¥ 47,100

Automobile Business

     316,900

Financial Services Business

     500

Power Product and Other Businesses

     25,500
      

Total

   ¥ 390,000
      

 

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

 

Intangible assets are not included in the table above.

 

Item 4A. Unresolved Staff Comments

 

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

 

Item 5. Operating and Financial Review and Prospects

 

A. Operating Result

 

Overview

 

Business Environment

 

The business environment for Honda in the fiscal year 2009 ended March 31, 2009, was marked by continued worldwide increases in oil and raw material prices in the first half of the year, followed by a decline in those prices in the second half. Although the economies in the United States and Europe continued to grow in the first half, the economy began to deteriorate triggered by the financial crisis, creating a downward spiral leading to concerns for even further deterioration of the economy.

 

In Asia outside Japan, although the economies of China and India continued to expand, the pace of growth slowed, and certain countries in the region went into recession. In Japan, signs of a rapid deterioration in economic conditions could be seen, such as decreased consumer spending, along with a decline in capital expenditures.

 

Overview of Fiscal 2009 Operating Performance

 

Honda’s consolidated revenue for fiscal 2009 decreased from the previous fiscal year, primarily due to decreased unit sales in automobile business and currency translation effects. Consolidated operating income for the period decreased compared to the previous fiscal year. This decrease in operating income was primarily due to decreased revenue, increased raw material costs, the increase in fixed costs per unit as a result of reduced production and the negative impact of currency effects caused by the appreciation of the Japanese yen, which was offset by continuing cost reduction and decreased R&D expenses.

 

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Motorcycle Business

 

Total unit sales of motorcycles increased, despite substantially lower sales in Japan, North America, Europe due to deteriorating economic conditions, as unit sales expanded in Asia and Other Regions which includes South America.

 

In Asia, where market growth is continuing, sales expanded steadily as Honda strengthened its lineup, introduced models equipped with automatic transmissions which are very popular in urban areas. In Other Regions which includes South America, sales of 125cc and 150cc core motorcycles were strong in Brazil. On the other hand, in Japan, amid a difficult operating environment, 50cc scooters declined, and, in North America, sales of off-road models and all-terrain vehicles (ATVs) in the United States decreased from the previous year.

 

Automobile Business

 

Although unit sales increased in Asia and Other Regions which includes Brazil, total unit sales were below the level of the previous fiscal year because of declines in North America and Japan. In North America, the introductions of the new Pilot, Acura TSX, Acura TL, and other models had a positive effect, but, as a result of the deterioration in the economy triggered by the financial crisis, total unit sales declined. Also, in Europe, although demand increased in Russia and Eastern Europe, overall unit sales decreased as a result of the deterioration in economic conditions in Western European markets, including the United Kingdom and Germany. In Japan, although the introduction of the new FREED, Odyssey, and Life had a positive effect, unit sales declined due to the impact of the decline in consumer confidence accompanying the downturn in the economy. In Asia outside of Japan, unit sales expanded as a result of the launch of the new City as the trend toward driving smaller cars accelerated mainly along with the rise in fuel prices. Also, in Other Regions, unit sales rose over the previous year primarily as a result of the introduction of the new Fit in South America.

 

Power Product and Other Businesses

 

Total unit sales of power products decreased from the level of the previous fiscal year, despite increases in sales of engines for OEM* use in construction machinery in Asia and Other Regions. This decline was due to lower sales of engines for OEM use in construction machinery, high-pressure washers, and lawn mowers in North America, a decrease in sales of engines for OEM use in construction machinery and generators in Europe, and other factors.

 

 

* OEM (Original equipment manufacturing): OEM refers to the manufacturing of products and components supplied for sale under a third-party brand.

 

Responding to Sudden Changes in the Business Environment

 

Amid this environment, in order to respond quickly and accurately to changes in the diverse needs of customers and society as a whole, Honda worked to strengthen its operating and financial positions. In addition, to concentrate its limited corporate resources in business domains where they are necessary in the midst of rapidly changing economic conditions, Honda has reviewed its investment and development plans.

 

Fiscal Year 2009 Compared with Fiscal Year 2008

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenues (hereafter, “net sales”) for the fiscal year ended March 31, 2009, decreased ¥1,991.5 billion, or 16.6%, to ¥10,011.2 billion from the fiscal year ended March 31, 2008, primarily due to foreign currency translation effects and decreased net sales in the automobile business. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥795.8 billion, or 6.6%, compared to the decrease as reported of ¥1,991.5 billion, which includes negative foreign currency translation effects.

 

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Net sales in Japan decreased ¥139.2 billion, or 8.8%, to ¥1,446.5 billion from the previous fiscal year and overseas net sales decreased ¥1,852.3 billion, or 17.8%, to ¥8,564.7 billion from the previous fiscal year.

 

Operating Income

 

Operating income decreased ¥763.4 billion, or 80.1%, to ¥189.6 billion from the previous fiscal year. Excluding negative foreign currency effects of ¥269.5 billion, caused by the appreciation of the Japanese yen, Honda estimates operating income decreased ¥493.8 billion, or 51.8%.

 

Factors contributing to the decrease of ¥493.8 billion in operating income excluding negative foreign currency effects can be summarized as follows (i) changes in net sales and the model mix, (ii) cost reductions and the effect of raw material cost fluctuations, (iii) changes in selling, general and administrative (SG&A) expenses and (iv) R&D expenses. Details regarding these factors are as follows.

 

Changes in net sales and the model mix had a negative impact of ¥247.7 billion, due mainly to a decrease in income attributable to the decreased net sales and changes in the model mix caused by shift of customers’ demands towards more fuel efficient (compact) models in automobile business, which was offset by price increases and reduced sales incentives in automobile business in North America.

 

Cost reductions and the effect of raw material fluctuations had a negative impact of ¥182.5 billion, due mainly to increased raw materials costs, such as steel and precious grade metals, and an increase in fixed costs per unit as a result of reduced production, which was offset by continuing cost reductions.

 

Selling, general and administrative expenses had a negative impact of ¥88.3 billion due mainly to expenses related to withdrawal from some racing activities and cancellations of development new models and an increase in provisions for credit losses and losses on lease residual values in the financial services business in North America, which was offset by a decrease in costs for product warranties.

 

R&D expenses also had a positive impact of ¥24.7 billion, due mainly to reduction of R&D expenses, which was offset by increased R&D expenses related to safety and environmental technologies and enhancement of the attractiveness of the products.

 

With respect to the discussion above of the changes in operating income, management identified the factors set forth below and used what it believes to be a reasonable method to analyze the respective changes in such factors. Each of these factors is explained below. Management analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries.

 

(1) “Foreign currency effects” consist of “translation adjustments”, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and “foreign currency adjustments”, which result from foreign-currency-denominated sales. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Canadian dollar, Euro, British pound, Brazilian real and Japanese yen, at the level of the Company and its material consolidated subsidiaries.

 

(2) With respect to “cost reduction and effects of raw material cost fluctuations”, management analyzed cost reduction and effects of raw material cost fluctuations at the levels of the Company and its material foreign manufacturing subsidiaries in North America, Europe and other regions.

 

(3) With respect to “changes in net sales and the model mix”, management analyzed changes in sales volume and the mix of product models sold in major markets which resulted in increases/decreases in profit, as well as certain other reasons for increases/decreases in net sales and cost of sales.

 

(4) With respect to “selling, general and administrative expenses”, management analyzed reasons for increases/decreases in selling, general and administrative expenses from the previous fiscal year excluding currency translation effects.

 

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Income before Income Taxes, Minority Interest and Equity in Income of Affiliates

 

Income before income taxes, minority interest and equity in income of affiliates decreased ¥734.1 billion, or 81.9%, to ¥161.7 billion. Main factors of this decrease, except factors relating to operating income, are as follows;

 

Unrealized gains and losses related to derivative instruments, such as interest rate swaps of finance subsidiaries, had a positive impact of ¥85.7 billion. On the other hand, realized losses related to derivative instruments and the losses associated with the revaluation of investment securities had a negative impact of ¥56.4 billion, which was offset by the effects of foreign currency transaction gains.

 

Income Tax Expense

 

Income tax expense decreased ¥277.6 billion, or 71.7%, to ¥109.8 billion. The effective tax rate increased 24.7 percentage points to 67.9%, from the previous year, which was higher than the Japanese statutory income tax rate of 40.0% by 27.9 percentage points. Additional detailed information is described in Note (9) to the accompanying consolidated financial statements.

 

Minority Interest in Income of Consolidated Subsidiaries

 

The amount deducted for minority interest in income of consolidated subsidiaries decreased ¥13.3 billion, or 49.0%, to ¥13.9 billion from the previous fiscal year.

 

Equity in Income of Affiliates

 

Equity in income of affiliates decreased ¥19.9 billion, or 16.7%, to ¥99.0 billion, due mainly to a decrease in income of affiliates that primarily manufacture components and parts for Honda’s products in Japan, because of a decrease in their revenues, which was partially offset by an increase in income of affiliates in Asia, because of an increase in their revenues resulting from further automobile market expansion.

 

Net Income

 

Net income decreased ¥463.0 billion, or 77.2%, to ¥137.0 billion from the previous fiscal year.

 

Business Segments

 

Motorcycle Business

 

Honda’s unit sales of motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) totaled 10,114 thousand units, increased by 8.5% from the previous fiscal year. Unit sales in Japan totaled 232 thousand units, decreased by 25.4%. Overseas unit sales totaled 9,882 thousand units, increased by 9.7%, due mainly to an increase in unit sales of parts for local production at affiliates accounted for under the equity method in Asia and an increase in unit sales in Other Regions, including Brazil. Revenue from external customers decreased ¥147.1 billion, or 9.4%, to ¥1,411.5 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was offset by increased overseas unit sales. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have increased by approximately ¥18.5 billion, or 1.2%, compared to the decrease as reported of ¥147.1 billion, which includes negative foreign currency translation effects.

 

Operating income decreased ¥51.3 billion, or 34.0%, to ¥99.9 billion from the previous fiscal year, due mainly to increased raw material costs, the negative foreign currency effects and increased SG&A expenses, which was offset by price increases and decreased R&D expenses.

 

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Japan

 

Total industry demand for motorcycles in Japan* in fiscal 2009 was approximately 550 thousand units. Although sales of motorcycles in the 51cc-125cc class were solid because of the increased use of motorcycles for commuting, overall demand was about 21% lower than in the previous year for a number of reasons. These included restrictions on emissions of motorcycles, demographic factors as the decline in the number of younger people, the decline in the number of people who acquire motorcycle driving licenses and the shortage of motorcycle parking spaces in city areas.

 

Amid these difficult operating conditions, Honda newly launched the CB223S, a road sports model and introduced the all-new Monkey, a 50cc recreational model for the first time in 30 years. In addition, Honda launched the all-new CBR1000RR and the CBR1000RR ABS, equipped with the world’s first electronically controlled “Combined ABS” for super sports models.

 

In fiscal 2009, although unit sales of new models and the Lead110 scooter were strong, sales in all categories were lackluster because of more-intense market competition and other factors. As a result, sales for the year were down 25.4%, to 232 thousand units.

 

In production activities, based on its concept of a “people-friendly and environmentally-responsible plant,” Honda introduced its latest, highly efficient manufacturing technologies at its new Kumamoto Factory. Also, Honda began production at the Factory in April 2008, which will be a new leader plant for Honda motorcycle production on a global basis.

 

 

* Source: JAMA (Japan Automobile Manufacturers Association )

 

North America

 

Total demand for motorcycles and all-terrain vehicles (ATVs) in the United States* during calendar 2008 declined 16% from the previous year, to approximately 1.33 million units. Although demand for medium-class motorcycles and scooters appears to have increased because of the increase in gasoline prices during the first half of the year, expenditures on recreational products had been shrinking along with the emergence of the subprime loan issue, and market conditions deteriorated sharply following the financial crisis in September.

 

Amid this operating environment, Honda entered a new market segment with the introduction of the Big Red multi-utility vehicle. In addition, in September 2008, Honda strengthened its product lineup by launching the FourTrax Rancher AT, a utility ATV.

 

Unit sales of motorcycles in North America declined 29.4% compared with the previous fiscal year, to 320 thousand units. Although sales of the Shadow cruiser model, the Ruckus scooter, and the Metropolitan scooter increased, sales of off-road and sports motorcycles decreased to 188 thousand units, a decrease of 22.3%. Moreover, unit sales of ATVs, including recreational-style sport use and utility types also declined to 132 thousand units, a decline of 37.4% from the previous fiscal year.

 

 

* Source: MIC (Motorcycle Industry Council)

 

Europe

 

Total demand for motorcycles in Europe* during calendar 2008 declined 6% from the previous year, to about 1.25 million units as a result of the economic downturn, such as deterioration in consumer sentiment beginning in September 2008.

 

Amid this difficult operating environment, Honda newly introduced the CB1000R naked sports model offering a powerful and dynamic performance.

 

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In fiscal 2009, although unit sales of the 110cc LEAD scooter, the XL700V dual-purpose sports model and the CB1000R were strong, unit sales of super sports models, small motorcycles and larger scooters declined. As a result, total unit sales in Europe were down 11.8%, to 276 thousand units.

 

 

* The total for 10 European countries: including the United Kingdom, Germany, France, Italy, Spain, Switzerland, Portugal, the Netherlands, Belgium, and Austria.

 

Asia

 

Demand for motorcycles is continuing to expand in Asia, where motorcycles are an essential form of daily transportation. In calendar 2008, total demand*1 in the principal countries of Asia rose 6%, to about 37.9 million units, supported by favorable economic growth in the first half of the year offsetting negative impact of declines in agricultural product prices in the latter half of the year. By country, sales in India amounted to about 7.4 million units, approximately the same as in the previous year. In Indonesia, sales for the year were up 33%, to about 6.5 million units. Sales in Thailand increased 7%, to about 1.7 million units.

 

Amid these operating conditions, in Thailand, Honda launched the new CZ–i 110 Cub type model in Thailand, which offers an eco-friendly performance and low fuel consumption, followed by the introduction of the Wave110i.

 

Unit sales in Asia*2 for the fiscal 2009 increased 13.4%, to 7,523 thousand units, due mainly to the favorable sales of the all-new CBF Stunner in India, 125cc motorcycle and the all-new Air Blade, 110 cc scooter in Vietnam.

 

In India, an affiliate accounted for under the equity method, began operations at its third factory in April 2008, thus bringing the total annual capacity to 6.15 million units together with the capacity of Honda’s consolidated subsidiary. In Vietnam, Honda began the production of scooters and 125cc Cub-type motorcycles at its second motorcycle plant in that country, and had brought Honda’s total annual production capacity in Vietnam to 1.5 million units.

 

 

*1:

The total for eight countries: including Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China.

 

*2:

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

 

Other Regions

 

In Brazil, the principal market within Other Regions, the total demand in calendar 2008 amounted to approximately 1.91 million units, due to favorable economic growth in the first half of the year.

 

Also in Brazil, Honda newly launched its CG150 TITAN MIX small motorcycle, equipped with the world’s first Mix Fuel Injection System, which accommodates any ratio of bio-ethanol and gasoline fuels.

 

Unit sales in Other Regions (South America, the Middle & Near East, Africa and Oceania) increased 9.5% over the previous fiscal year to 1,763 thousand units, due mainly to the favorable sales of the all-new CG 125 FAN motorcycle and CG 150 TITAN in Brazil.

 

Automobile Business

 

Honda’s unit sales of automobiles totaled 3,517 thousand units, decreased by 10.4% from the previous fiscal year. Unit sales in Japan totaled 556 thousand units, decreased by 9.6%. Overseas unit sales totaled 2,961 thousand units, decreased by 10.5%, due mainly to a decrease in unit sales in North America, which was offset by an increase in unit sales in Asia and Other Regions including Brazil.

 

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Revenue from external customers decreased ¥1,814.9 billion, or 19.1%, to ¥7,674.4 billion from the previous fiscal year, due to the negative foreign currency translation effects and decreased unit sales. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥889.9 billion, or 9.4%, compared to the decrease as reported of ¥1,814.9 billion, which includes negative foreign currency translation effects.

 

Operating income decreased ¥637.1 billion, or 96.3%, to ¥24.5 billion, from the previous fiscal year, due mainly to a decrease in income attributable to the decreased net sales in North America and Japan, the negative foreign currency effects, an increase in fixed costs per unit as a result of reduced production, increased raw material costs, changes in the model mix caused by shift of customers’ demands towards more fuel efficient (compact) models and expenses related to withdrawal from some racing activities and cancellations of development of new models, which was offset by continuing cost reduction, price increases, a decrease in costs for product warranties, decreased R&D expenses and reduced sales incentives in North America.

 

Japan

 

Total automobile demand in Japan* for the fiscal year showed approximately 12% decline compared with the same period of the previous year to 4.7 million units, reflecting the decline in demand as the financial crisis began to have an impact on the economy from September 2008 onward.

 

Amid these operating conditions, Honda worked to strengthen its product lineup and expand sales by introducing the new FREED, Life and Insight hybrid car, which features a lightweight, compact hybrid system that combines exceptional fuel economy with fun-to-drive performance.

 

Although registrations of the Honda Fit, FREED and Insight were strong, as a result of severe market conditions, overall unit sales dropped 9.6% below the level of the previous fiscal year, to 556 thousand units.

 

In production, Honda reduced output in response to the worldwide decline in unit sales and the need to make adjustments in inventories. As a consequence, the number of automobiles manufactured by Honda during the fiscal year was down 11.4%, to 1,148 thousand units in Japan. In response to sudden changes in global markets, Honda transferred all production of the Stream from the Suzuka Factory to the Saitama Factory. Also, production of the Fit for the North American market began at the Saitama Factory in addition to the Suzuka Factory. The start-up of production at the Yorii Factory, which was scheduled for 2010, has been postponed for two years or more. Also, plans for beginning the manufacturing of mini-vehicles at the Yokkaichi Factory of Yachiyo Industry Co., Ltd., which was scheduled for 2010, have been postponed for one year or more.

 

 

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

 

North America

 

In calendar 2008, total demand in the United States* declined 18% from the previous year, to about 13.19 million units. The automobile market experienced a major decline with the impact of the financial crisis on the economy, the deterioration in employment conditions, deterioration in consumer sentiment and other factors.

 

Amid this operating environment, Honda introduced new models such as the mid-size SUV Pilot, the Acura TL and the Insight hybrid car.

 

For the fiscal year, unit sales in North America as a whole declined 19.1%, to 1,496 thousand units. Although sales of the all-new TSX remained solid, the sales of the Odyssey, the Pilot and the Acura MDX, as well as the Acura TL declined.

 

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Manufacturing activities started at the auto production plant in Indiana in October 2008 with the Civic. Although, because of the sudden slowing of automobile demand, Honda slashed production in all plants in North America. As a result, the number of automobiles manufactured declined 13.2% from the previous fiscal year, to 1,251 thousand units.

 

 

* Source: Ward’s Auto

 

Europe

 

During calendar 2008, total demand in Spain, Italy, and the United Kingdom declined along with the negative impact of the financial crisis from September 2008 onward. As a consequence, total demands in Europe*1 fell 8%, to about 14.71 million units. At the same time, total demand in Russia*2 for calendar 2008 rose 13%, to about 2.93 million units.

 

Amid this environment, Honda introduced the all-new Accord. Unit sales in this region were down 10.5% from the previous year and amounted to 350 thousand units due to decreased total demands.

 

Honda made production adjustments in response to the sudden decline in automobile demand. As a result, production at Honda’s U.K. plant decreased 29.4%, to 175 thousand units compared to the same period of previous fiscal year.

 

 

*1:

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

 

*2:

Source: AEB (The Association of European Businesses)

 

Asia

 

In Asia, total demand in principal countries* in calendar 2008 increased over the previous year to approximately 15,100 thousand units, despite the negative impact of the financial crisis from September 2008 onward.

 

Amid this environment, Honda introduced the all-new Fit in Taiwan. Honda also introduced the all-new City, a small sedan initially in Thailand and subsequently to India and other countries in Asia.

 

During fiscal 2009, total unit sales (comprised of finished automobiles of Honda and its consolidated subsidiaries and unit sales of parts to Honda’s affiliates accounted for under the equity method) rose 5.0% over the level of the previous fiscal year, to 793 thousand units. In the mean time, sales of the City and Jazz models held strong primarily in Thailand, Indonesia, Malaysia, and elsewhere. Similarly, sales of the all-new Accord and the CR-V were also strong in China.

 

With an eye to future growth in Asia, Honda began production at its second plant in Thailand in October 2008, which has an annual production capacity of 60 thousand units. Honda postponed its plan for the start-up of the final assembly line at its second plant in India, in view of the major changes in the market environment.

 

 

* The total for 11 countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, South Korea, India, Pakistan, and China

 

Other Regions

 

Principal markets in the Other Regions increased due to economic expansion during the first half of 2008, although conditions became stagnant as a result of the financial crisis from September 2008. Overall demand for the region increased in 2008.

 

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Total demand in Brazil*1 in calendar 2008 was approximately 2.67 million units, 14% higher than in the previous year. On the other hand, total demand in Australia*2 decreased 4% from the previous year, to about 1.01 million units.

 

Honda’s unit sales in Other Regions increased 2.5%, to 322 thousand units. During fiscal 2009, unit sales in Brazil and Argentina increased due to the launch of the all-new Fit although unit sales in Australia and the Middle East declined.

 

 

*1:

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

 

*2:

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

 

Power Product and Other Businesses

 

Honda’s unit sales of power products totaled 5,187 thousand units, decreased by 14.4% from the previous fiscal year. Unit sales in Japan totaled 516 thousand units, decreased by 6.2%. Overseas unit sales totaled 4,671 thousand units, decreased by 15.2%, due mainly to decreased unit sales in North America and Europe. Revenue from external customers decreased ¥78.1 billion, or 18.5%, to ¥343.0 billion from the previous fiscal year, due mainly to the decreased unit sales and negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥49.0 billion, or 11.7%, compared to the decrease as reported of ¥78.1 billion, which includes negative foreign currency translation effects.

 

Operating loss was ¥15.4 billion, a decrease of ¥37.8 billion of operating income from the previous fiscal year, due mainly to a decrease in income attributable to the decreased net sales and increased in R&D expenses in other businesses, which was offset by decreased SG&A expenses.

 

Japan

 

In Japan, Honda newly launched the Yukios SB800, which is compact and lightweight and clears snow with a blade. Honda also newly introduced the Pianta FV200, a gas-powered mini tiller that uses the same butane gas canisters that are used in households for powering portable gas stoves. In addition, Honda introduced its original thin-film solar cells that reduce CO2 emissions in the manufacturing process, and satisfy specifications for use in public and industrial applications.

 

Unit sales were down 6.2%, to 516 thousand units for this fiscal year, because of lower sales of GX series engines for water pumps and generators sold to OEM, and other products.

 

North America

 

Unit sales in North America declined 21.6%, to 1,893 thousand units. Weakness in the sales of engines for OEM use in construction machinery, high-pressure washers, and lawn mowers as well as weakness in the sales of lawn mowers, mainly due to the downturn in the U.S. economy.

 

Europe

 

In Europe, unit sales declined 22.9%, to 1,306 thousand units. Sales of GX and GC series engines for OEM use in construction machinery and generators declined.

 

Asia

 

Honda newly launched engines specially designed for long tail boats, the GX160, GX200 and GX390. In addition, in China, Honda newly introduced HRJ196 lawn mowers that are compact, lightweight and easy to use.

 

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Unit sales in Asia, excluding Japan, increased 6.0% from the previous fiscal year, to 970 thousand units, as a result of expansion in sales of WB20XT pumps in Indonesia and increases in sales of general-purpose engine, GX160 for OEM use in water pumps in China.

 

Other Regions

 

In Other Regions, unit sales rose 3.7% over the previous fiscal year, to 502 thousand units, as a result of higher unit sales in the Middle East of general-purpose engine, GX390 for OEM use in construction machinery and generators, increased sales in South America of general-purpose engine, GX series, and other factors.

 

Financial Services Business

 

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

 

In North America, the financial crisis had a severe impact on the economy, the deterioration in employment conditions, deterioration in consumer sentiment and other factors. As a result, the environment for financial services business remained under pressure.

 

Total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries decreased by 2.2%, to ¥4,860.1 billion from the previous fiscal year, due mainly to the currency translation effects.

 

Revenue from external customers in a financial services business increased ¥48.7 billion, or 9.1%, to ¥582.2 billion from the previous fiscal year, due mainly to an increase in operating lease revenue, which was offset by negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, revenue for the year would have increased by approximately ¥124.7billion, or 23.4%, compared to the increase as reported of ¥48.7 billion, which includes negative foreign currency translation effects.

 

Operating income decreased ¥37.1 billion, or 31.5%, to ¥80.6 billion from the previous fiscal year, due mainly to an increase in provisions for credit losses and losses on lease residual values in North America and negative foreign currency translation effects, which was offset by an increase in income attributable to higher revenue. In North America, prices of SUVs and minivans in the used car market dropped during the fiscal first half, and losses on lease residual values of these models increased. In addition, from September onward, losses on lease residual values of compact and mid-sized sedans and other passenger vehicles also increased. In addition, provisions for credit losses also increased as the ability of certain customers to pay their debts declined.

 

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

 

Information about credit losses and losses on lease residual values is provided at Item 5. Operating and Financial Review and Prospects A. Operating Results, Application of Critical Accounting Policies. Information about finance subsidiaries-receivables and securitizations is described in Note (2) to the accompanying consolidated financial statements.

 

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Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales decreased 726.4 billion, or 14.9%, to ¥4,162.5 billion from the previous fiscal year, due mainly to a decrease in revenue in automobile business. Operating loss was ¥161.6 billion, a decrease of ¥354.1 billion of operating income from previous fiscal year, due mainly to negative foreign currency effects, a decrease in income attributable to the decreased revenue, increased raw material costs, an increase in fixed costs per unit as a result of reduced production and expenses related to withdrawal from some racing activities and cancellations of development of new models, which was offset by continuing cost reductions, decreased SG&A and R&D expenses.

 

North America

 

In North America, which mainly consists of the United States, revenue decreased ¥1,486.1 billion, or 23.7%, to ¥4,779.1 billion from the previous fiscal year, due mainly to negative foreign currency translation effects and a decrease in revenue in automobile business. Operating income decreased ¥352.9 billion, or 81.6%, to ¥79.7 billion from the previous fiscal year, due mainly to a decrease in income attributable to the decreased revenue, an increase in fixed costs per unit as a result of reduced production, negative foreign currency effects, and increased raw material costs, which was offset by continuing cost reductions and decreased SG&A expenses.

 

Europe

 

In Europe, revenue decreased ¥315.3 billion, or 19.8% to ¥1,278.9 billion from the previous fiscal year, due mainly to negative foreign currency translation effects and a decrease in revenue in the motorcycle business and automobile business. Operating income decreased ¥41.3 billion, or 80.2%, to ¥10.2 billion from the previous fiscal year, due mainly to a decrease in income attributable to the decreased revenue, increased SG&A expenses, an increase in fixed costs per unit as a result of reduced production and increased raw material costs, which was offset by continuing cost reductions.

 

Asia

 

In Asia, revenue decreased ¥30.0 billion, or 1.8% to ¥1,608.2 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was offset by increase in revenue in automobile business. Operating income decreased ¥27.1 billion, or 20.7%, to ¥103.6 billion from the previous fiscal year, due mainly to negative foreign currency effects, increased raw material costs and increased SG&A expenses.

 

Other Regions

 

In Other Regions, revenue increased ¥51.4 billion, or 4.7%, to ¥1,144.2 billion from the previous fiscal year, due mainly to an increase in revenue in all businesses, which was offset by a decrease in negative foreign currency translation effects. Operating income increased ¥18.5 billion, or 16.0%, to ¥135.0 billion from the previous fiscal year, due mainly to an increase in income attributable to an increase in revenue and continuing cost reductions, which was offset by increased SG&A expenses and increased raw material costs.

 

Initiatives Going Forward

 

Because of the sudden changes in the operating environment, Honda has made changes in some of its scheduled plans. However, Honda has not made any changes in our policy of emphasizing the responsiveness to environmental and energy-related issues. The Company, therefore, continues to pursue the challenges of developing new products and technologies that will delight our customers and society.

 

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Advanced Environmental Technologies

 

Honda was one of the first companies to position a reduction in CO2 emissions as a major issue linked to environmental preservation on a global scale. Honda is moving ahead with initiatives to attain the goals the Company set for itself for reducing CO2 emissions by 2010 in all of its products and manufacturing activities worldwide. There are many methods for reducing CO2 emissions, but in the automobile business, the Company believes that advancing hybrid car technology will be the most realistic and beneficial of various alternatives.

 

In Honda’s new Insight hybrid car, which the Company introduced in February 2009, its originally developed IMA (integrated motor assist) hybrid system incorporated in the vehicle is designed for use in small cars and is light, compact, and features superior fuel economy.

 

As a result of the development of a new platform, the Insight realizes the goals of offering both high performance as a hybrid car and substantial cost reductions necessary for a vehicle that will appeal to a wider market. Honda plans to strengthen its lineup of models with an eye to also offering medium- and large-sized hybrid automobiles.

 

In the field of motorcycles for traveling relatively short distances, the Company is proceeding with the development of an electric-powered motorcycle that will run on batteries, and, taking advantage of special features of this power source, will have zero CO2 emissions. Honda has a goal to introduce these electric-powered motorcycles in about two years.

 

Further Advancement of the Motorcycle Business

 

Honda’s motorcycles business has performed solidly, even in the midst of the severe economic environment following the financial crisis. Historically speaking, motorcycles have been strong in challenging times, and they have been a propelling force for Honda’s growth and expansion and one of its major strengths. Especially in Asia and South America, motorcycles are essential for meeting daily transportation needs, and they are expected to show solid growth in the long term. The Company is working to increase its capabilities to respond flexibly to changes in the business environment by further strengthening its motorcycle business. In its motorcycle business, Honda offers many models ranging from commuter bikes that provide daily transportation needs to large-scale models that meet individual rider tastes and preferences. Among these, the Super Cub 110 series is a regular part of riders’ daily lives in a total of 160 countries. Production of the Cub series achieved a cumulative, worldwide total of 60 million motorcycles in April 2008 and it has become the model that symbolizes Honda.

 

Going forward, the Company will offer models worthy of the Honda brand that, following in the Super Cub tradition, will enable the Company to create new categories and new markets.

 

Advancement of Honda’s Global Flexible Production System

 

During the first half of the first decade of the 21st century, Honda introduced a manufacturing system that could respond flexibly to demand for a diverse range of models in Japan. After that, Honda expanded its overseas production bases to create a global, mutually complementary production system. Last year, in North America, Honda began operations at its Indiana plant in the United States and at its new engine plant in Canada. Also, in Asia, production began at a second automobile plant in Thailand.

 

Honda’s goal is to focus on creating a “mature, flexible production system” that will provide the Company with advanced flexibility to respond nimbly, first, to fluctuations in the economy as well as to other changes and developments in the operating environment. In addition to offering even higher-quality, more-attractive products to Honda’s customers around the world in the years ahead, the Company will be working to innovate with technologies and production systems that maintain its excellent and high quality standards.

 

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Fiscal Year 2008 Compared with Fiscal Year 2007

 

Overview

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenues (hereafter, “net sales”) for the fiscal year ended March 31, 2008, grew ¥915.6 billion, or 8.3%, compared with fiscal 2007, to ¥12,002.8 billion. Factors behind this increase were higher unit sales in the motorcycle business in Other Regions, higher unit sales in the automobile business in all overseas regions, and higher unit sales of power products in Asia, as well as the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged against other currencies from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥743.0 billion, or 6.7%, compared to the increase as reported of ¥915.6 billion, which includes a positive foreign currency effect.

 

Domestic net sales decreased by ¥95.4 billion, or 5.7%, to ¥1,585.7 billion, but overseas net sales were up ¥1,011.1 billion, or 10.7%, to ¥10,417.0 billion.

 

Operating Income

 

Operating income increased ¥101.2 billion, or 11.9% to ¥953.1 billion when compared with the preceding year. After considering the net effect of the positive impact of foreign currency effects of ¥37.6 billion, Honda estimates operating income increased ¥63.5 billion, or 7.5%.

 

Factors contributing to the remaining increase of ¥63.5 billion in operating income, after consideration of foreign currency effects can be summarized as follows (i) changes in net sales and the model mix, (ii) cost reductions and the effect of raw material cost fluctuations, (iii) changes in selling, general and administrative (SG&A) expenses and (iv) R&D expenses. Details regarding these factors are as follows.

 

Changes in net sales and the model mix was a positive impact of ¥170.0 billion due mainly to an increase of income because of higher sales and an effect of price increase. On the other hand, higher incentives payment in North America and change in model mix caused by shift of customers’ demands towards more fuel efficient (compact) models for automobiles segment because of the higher fuel prices negatively affected operating income.

 

Because of the positive impact of continuing cost reduction effects which offset the negative impacts of surging raw materials prices, such as steel and precious grade metals used as catalyst, as well as an increase in depreciation, cost of sales had a positive impact of ¥11.5 billion.

 

Selling, general and administrative expenses had a negative impact of ¥81.8 billion due to higher transportation and storage costs accompanying the increase in unit sales, an increase of provisions for credit losses mainly in financial services business in North America, and higher advertising and sales promotion costs.

 

R&D expenses also had a negative impact of ¥36.1 billion, as we spent more on safety and environmental technologies and worked to enhance the attractiveness of our products.

 

With respect to the discussion above of the change in operating income, management has identified the factors set forth below and used what it believes to be a reasonable method to analyze the respective changes in such factors. Each of these factors is explained below. Management has analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries.

 

(1) “Foreign currency effects” consist of translation adjustments, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and foreign currency adjustments, which result from foreign-currency-denominated sales. At the levels of the Company and those consolidated subsidiaries which have been analyzed, such foreign currency adjustments primarily relate to the following currencies: U.S. dollar, Canadian dollar, Euro, British pound, Brazilian real and Japanese yen.

 

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(2) With respect to “cost reduction and effects of raw material cost fluctuations,” management has analyzed cost reduction and effects of raw material cost fluctuations at the levels of the Company and its material foreign manufacturing subsidiaries in North America, Europe and Other Regions.

 

(3) With respect to “changes in net sales and model mix,” management has analyzed changes in sales volume and in the mix of product models sold in major markets which have resulted in increases/decreases in profit, as well as certain other reasons for increases/decreases in net sales and cost of sales.

 

(4) With respect to “selling, general and administrative expenses,” management has analyzed reasons for an increase/decrease in selling, general and administrative expenses from the previous fiscal year excluding currency translation effects.

 

Income before Income Taxes, Minority Interest and Equity in Income of Affiliates

 

Income before income taxes, minority interest and equity in income of affiliates increased ¥102.9 billion, or 13.0%, to ¥895.8 billion. Main factors of this increase, except factors relating operating income, are as follows;

 

Losses on the valuation of interest rate swaps and other derivatives of our finance subsidiaries had a negative impact of ¥13.4 billion. The other factors had a net positive impact of ¥15.1 billion. Among such other factors, the effects of transaction gains and losses had a positive impact, but this was offset by the negative impact of various factors, including the net loss associated with the revaluation of assets and liabilities denominated in foreign currencies, and the absence of gains on sale of investment securities which were recorded in the fiscal year ended March 31, 2007.

 

Income Tax Expense

 

Income tax expense increased ¥103.5 billion, or 36.5%, to ¥387.4 billion. The effective tax rate was 43.2%, an increase of 7.4 percentage points from the previous fiscal year. The increase in the effective tax rate was mainly due to the recognition of liabilities for unrecognized tax benefits as a result of an ongoing examination of the Company’s tax filings by the Tokyo Regional Taxation Bureau with regard to transfer pricing matters.

 

Additional detailed information is described in Note (9) to the accompanying consolidated financial statements.

 

Minority Interest in Income of Consolidated Subsidiaries

 

The amount deducted for minority interest in income of consolidated subsidiaries grew ¥7.1 billion, or 35.7% from the previous year, to ¥27.3 billion.

 

Equity in Income of Affiliates

 

Equity in income of affiliates grew ¥15.5 billion, or 15.0%, to ¥118.9 billion, due mainly to an increase of income at equity method affiliates in Asia accompanying an increase in their sales along with market expansion.

 

Net Income

 

Net income rose ¥7.7 billion, or 1.3% from the previous year, to ¥600.0 billion.

 

Business Segments

 

Motorcycle Business

 

Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) in fiscal 2008 totaled 9,320,000 units, a decrease of 10.1%, from the previous fiscal year. Unit sales in Japan were 311,000

 

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units, a decrease of 7.7%. Overseas unit sales in the motorcycle totaled 9,009,000 units, a decrease of 10.2%, due mainly to a decrease in unit sales of parts for local production at affiliates accounted for under equity method in Asia, which offset the increase in unit sales in Other Regions, especially in South America. Revenue from external customers increased ¥188.0 billion, or 13.7%, to ¥1,558.6 billion, from the previous fiscal year, due mainly to increased unit sales in Asia and Other Regions, and the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥94.8 billion, or 6.9%, compared to the increase as reported of ¥188.0 billion, which includes a positive foreign currency effect.

 

Operating income increased ¥50.6 billion, or 50.4%, to ¥151.2 billion, from the previous fiscal year, due mainly to a positive foreign currency effects caused by an appreciation of Brazilian real and a positive impact of changes in the model mix, which offset the increased R&D expenses and higher SG&A expenses.

 

Japan

 

In Japan, total demand* for motorcycles in fiscal 2008 was approximately 710,000 units, a decline from the previous fiscal year. Although sales of small, two-wheeled motor vehicles (over 251cc) were strong—due to certain factors, including the decline in the population of younger people and those obtaining first-class motorcycle driver’s licenses, the shortage of motorcycle parking space in urban areas and other factors—sales of first-class motor-driven cycles (up to 50cc) and mini-sized two-wheeled motor mini-vehicles (126cc to 250cc) declined.

 

Amid these market conditions, Honda’s unit sales of motorcycles declined 7.7% from the previous fiscal year, to 311,000 units, despite an increase in sales of second-class motor-driven cycles (51cc to 125cc) for business use from replacement demands of corporate customers, as sales of scooters and other first-class motor-driven cycles as well as mini-sized two-wheeled motor mini-vehicles declined.

 

To accelerate initiatives to reduce the load on the natural environment, Honda newly adopted its fuel-injection system on its Today motor-driven cycles, its Super Cub 50 business bike and other models. In addition, to stimulate new demand, Honda introduced the DN-01, a large super sport cruiser equipped with its new automatic transmission.

 

 

* Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

In calendar 2007, total demand in the United States for motorcycles and ATVs declined. Although sales of on-road bikes remained stable, sales of off-road bikes and sport ATVs, which are recreational products, declined as a result of such factors as the turmoil in financial markets stemming from the subprime mortgage crisis.

 

Amid these conditions, Honda’s unit sales in this market for fiscal 2008 declined 9.9%, to 453,000 units. Among motorcycle sales, although the number of super sport bikes such as CBR600RR increased, sales of cruiser models and off-road bikes declined. As a result, Honda’s motorcycle sales in this market fell 14.2%, to 242,000 units. Sales of ATVs decreased 4.5%, to 211,000 units, despite favorable sales of models in the FourTrax Rancher utility ATV series, as the number of sport ATVs declined.

 

Europe

 

In calendar 2007, total demand in Europe*1 increased over the previous year, to approximately 1,320,000 units as every country except Italy saw an increase from the growth in sales of large scooters, which are the largest market sub-segment in Europe.

 

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In this operating environment, Honda’s motorcycle sales in this region for fiscal 2008 decreased 4.9% from the previous year, to 313,000 units. This occurred in spite of approximately the same level of sales of large scooters as in the previous fiscal year, because of weakness in unit sales of 125cc scooters as well as naked*2 and dual-purpose*3 models.

 

 

*1

Total for ten countries: United Kingdom, Germany, the Netherlands, Belgium, France, Spain, Italy, Switzerland, Portugal and Hungary

 

*2

Naked: models not equipped with a cowl (a front guard to protect against the wind)

 

*3

Dual-purpose: motorcycles used mainly for off-road riding but also designed to run on paved roads (public roads)

 

Asia

 

In Asia, demand for motorcycles as an essential mode of transportation has continued to grow. During calendar 2007, total demand in principal Asian countries outside Japan* increased from the previous year, to approximately 35,500,000 units, as a result of stable economic growth and other factors.

 

Amid this environment, unit sales of completed products of Honda and its consolidated subsidiaries and unit sales of parts to Honda affiliate companies accounted for under the equity method for use in local production by such companies declined 16.0%, to 6,633,000 units.

 

Honda is working to expand local businesses in the region through actively promoting the local procurement of parts used in overseas production. In Asia, this strategy has resulted in an increase in sales of Honda-brand motorcycles that are manufactured and sold by affiliated companies accounted for under the equity method in India and China, but do not include any parts supplied by Honda or its consolidated subsidiaries, and, therefore, are not included in Honda’s consolidated unit sales.

 

By country, although sales of the Wave series in Thailand were favorable, sales of existing models weakened. As a result, Honda’s unit sales in Thailand declined 8.2% from the previous fiscal year, to 1,286,000 units.

 

In Vietnam, unit sales in fiscal 2008 climbed 42.9% over the previous fiscal year, to 1,125,000 units. Factors accounting for this were mainly the introduction in April 2007 of the first fuel-injection model, the Future Neo FI, and the Air Blade, with an automatic transmission.

 

In Indonesia, P.T. Astra Honda Motor, an affiliate accounted for under the equity method, added a new model of the Revo to its lineup of 100cc Cub-type models in April 2007 and introduced a version of the Fit X with disk brakes in August 2007. P.T. Astra Honda Motor also added another new model, the Supra X125, a Cub-type model, to its line in September 2007. However, these initiatives were not sufficient to make up for the slump in the first half of the year, and unit sales to affiliate(s) accounted for under the equity method declined 16.7%, to 2,056,000 units.

 

Our Indian consolidated subsidiary, Honda Motorcycle and Scooter India Private Limited, reported robust sales of the Shine, a 125cc motorcycle that had undergone a model change; the Unicorn, a 150cc motorcycle; the Activa scooter, with an automatic transmission, and the Dio motorcycle. In addition, Hero Honda Motors Ltd., an affiliate accounted for under the equity method, reported robust sales of the low-priced CD Deluxe 100cc motorcycle; the Splendor-NXG, which it introduced in May 2007; and the Glamour, a 125cc motorcycle with cast wheel specifications. For the fiscal year under review, total unit sales of completed motorcycles of Honda and its consolidated subsidiaries and unit sales of parts to Honda affiliate companies accounted for under the equity method for use in local production by such companies declined 47.5%, to 1,120,000 units.

 

 

* Total for eight countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China

 

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Other Regions

 

In Other Regions—including South America, the Middle & Near East, Africa and Oceania—unit sales increased 23.4%, to 1,610,000 units.

 

In Brazil, where economic performance continued to be strong, total demand in calendar 2007 increased to 1,690,000 units. Amid this operating environment, Honda posted growth in sales of its core models, the CG150 Titan, the CG125 Fan and the Biz 125 models, and unit sales in Brazil expanded.

 

Automobile Business

 

Honda’s unit sales of automobiles amounted to 3,925,000 units, up 7.5% from the previous fiscal year. In Japan, unit sales decreased 8.5%, to 615,000 units. Overseas unit sales increased 11.1%, to 3,310,000 units, due mainly to increased unit sales in North America, Europe, Asia and Other Regions.

 

Revenue from external customers increased ¥600.3 billion, or 6.8%, to ¥9,489.3 billion, from the previous fiscal year, due to increased unit sales and the positive impact of the foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥514.4 billion, or 5.8%, compared to the increase as reported of ¥600.3 billion, which includes a positive foreign currency effect.

 

Operating income increased ¥62.1 billion, or 10.4%, to ¥661.6 billion, from the previous fiscal year, due mainly to the positive impacts of higher revenue attributable to the increased unit sales, continuing cost reduction effects, increased prices, and the positive foreign currency effects, while offsetting the negative impacts of increased sales incentives in North America, substantially increased raw material costs, increased SG&A expenses, changes in the model mix, higher R&D expenses, and increased depreciation expenses.

 

Japan

 

Total automobile demand in Japan* (as measured by the number of registrations of regular vehicles (661cc or higher) and mini-vehicles (660cc or lower)) through December 2007 was below the level of the previous year for 21 consecutive months, thus creating severe market conditions. In fiscal 2008, total demand declined from the previous fiscal year, to 5,320,000 units. Of this total, regular vehicle registrations remained below the level of the previous year throughout the fiscal year and amounted to approximately 3,430,000 units, despite the positive impact on sales of the Tokyo Motor Show in the latter half of fiscal 2008 and the introduction of new models by various automakers. Registrations of mini-vehicles amounted to about 1,890,000 units, also below the level of the previous fiscal year, despite continued interest among drivers in owning these vehicles, in part because of a decline of the positive impact of the introduction of new types of mini-vehicles.

 

Within this operating environment, although sales of Honda vehicles in the regular vehicle category during fiscal 2008, including the Stream and CR-V continued to be strong, and sales of the new Fit and Inspire models were robust, in the mini-vehicle category sales were lackluster due to the decline in sales of Zest and Life. As a result of this and other factors, overall automobile sales declined 8.5%, to 615,000 units.

 

 

* Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

In calendar 2007, total demand in the United States declined from the previous year to 16,150,000 units. A decline in new car demand became clear toward the end of the year as consumer interest in purchasing new automobiles declined substantially due to such factors as the increase in oil prices, the turmoil in financial markets stemming from the subprime mortgage crisis. In addition, the market continued to shift from large sport utility vehicles (SUVs) and light trucks including pickup trucks, and toward small-size vehicles and crossover utility vehicles (CUVs) because of their fuel efficiency and smaller size.

 

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Amid these operating conditions, unit sales of Honda automobiles in North America during the fiscal year under review rose 3.5%, to 1,850,000 units, despite a decline in sales of the Pilot, as sales of the small-size Fit and the CR-V in the CUV category continued to be strong, and a favorable sales performance was recorded for the core Accord and Civic models.

 

Europe

 

Total demand in Germany, Europe’s largest market, were below the levels of the previous year for 12 consecutive months. However, markets in Eastern and Central European countries continued to expand. As a result, total demand in Europe* in calendar 2007 amounted to approximately 15,960,000 units, about the same as in calendar 2006.

 

Total demand in Russia in calendar 2007 showed strong growth, to about 2,580,000 units as a result of strong economic conditions accompanying the rise in prices of crude oil and other resources that Russia possesses as well as the rapid expansion of automobile loan financing in that country.

 

Amid this operating environment, during the fiscal year under review, Honda’s automobile sales increased 20.7%, to 391,000 units. Factors accounting for this performance were the expansion in sales of diesel-powered cars as well as favorable sales for the new model CR-V, which was introduced in January 2007, and the three-door Type S as well as Type R models in the Civic series. Especially in Russia, sales of the Accord and Civic four-door sedans recorded strong sales.

 

 

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

 

Asia

 

In Asia outside Japan, total demand in principal countries* in calendar 2007 increased, to 14,330,000 units, as a result of stable economic expansion.

 

In Asia in fiscal 2008, total sales of finished automobiles of Honda and its consolidated subsidiaries and unit sales of parts to Honda affiliate companies accounted for under the equity method for use in local production by such companies expanded 21.8%, to 755,000 units.

 

By country, sales of the Civic and the new CR-V models that were introduced in early 2007 showed favorable expansion in Indonesia, India and other countries. In China, sales were strong for the City and Odyssey by Guangzhou Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, and for the Civic and the CR-V, which was introduced in April 2007 by Dongfeng Honda Automobile Co., Ltd., also an equity-method affiliate.

 

 

* The total includes Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, Korea, India, Pakistan and China.

 

Other Regions

 

In calendar 2007, other major markets in the Other Regions geographical segment expanded against a background of increasing crude oil and other raw material prices. Compared with the previous year, the Brazilian automobile market*1 grew, to approximately 2,460,000 units, while the Australian market*2 expanded to approximately 1,050,000 units. Markets in the Middle & Near East and South American markets other than Brazil also experienced overall expansion.

 

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Amid these operating conditions, Honda’s unit sales in the Other Regions expanded 26.6%, to 314,000 units. In Brazil, sales of Civic and Fit flexible fuel vehicle (FFV) models which are able to operate on 100% ethanol or a mixture of gasoline and ethanol were quite robust, while in other countries, sales of the CR-V and Civic were strong.

 

 

*1

Source: ANFAVEA (Associação Nacional dos Fabricantes de Veículos Automotores (the Brazilian automobile association))

 

*2

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

 

Power Product and Other Businesses

 

Honda’s unit sales of power products totaled 6,057,000 units, down 5.7% from the previous fiscal year. In Japan, unit sales totaled 550,000 units, an increase of 4.4%. Overseas unit sales came to 5,507,000 units, a decrease of 6.6%, due mainly to decreased unit sales in North America. Revenue from external customers increased ¥3.4 billion, or 0.8%, to ¥421.1 billion, from the previous fiscal year, due mainly to the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have decreased by approximately ¥3.3 billion, or 0.8%, compared to the increase as reported of ¥3.4 billion, which includes a positive foreign currency effect.

 

Operating income was ¥22.3 billion, a decrease of ¥13.8 billion, or 38.2% from the previous fiscal year, due mainly to the negative impact of the increased SG&A expenses and an increase of R&D expenses in other businesses, which offset the positive impact of the foreign currency effects caused by the appreciation of the European currencies.

 

Japan

 

In Japan, unit sales grew 4.4%, to 550,000 units. These gains were due primarily to higher sales of pumps, sales of GX series engines for electric power generators and other products on an original equipment manufacturer (OEM*1) basis and sales of compact, home-use cogeneration systems for household use.*2

 

 

*1

OEM (Original equipment manufacturing): OEM refers to a manufacturing of products and components supplied for sale under a third-party brand.

 

*2

Compact, home-use cogeneration systems: Honda has applied its original electromagnetic inverter technologies to create small and light-weight electronic power generation systems built with an efficient layout.

 

North America

 

Sales in North America declined 22.2%, to 2,415,000 units. Factors accounting for these declines were weakness in sales of engines for OEM use in high-pressure washers and lawn mowers and weakness in sales of lawn mowers, generators and other products, due mainly to the slowdown in the housing market caused by the subprime loan issue mainly in the United States.

 

Europe

 

In Europe, sales expanded 4.2%, to 1,693,000 units. Sales of GCV series engines for OEM use in lawn mowers and sales of GX series engines for OEM use in generators, construction machinery and other applications expanded.

 

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Asia

 

Unit sales in Asia, excluding Japan, increased 20.4% from the previous fiscal year, to 915,000 units, as a result of higher sales of general-purpose engines in China, general-purpose engines and pumps in Indonesia and India as well as other factors.

 

Other Regions

 

In Other Regions, unit sales for the fiscal year under review rose 19.2%, to 484,000 units, mainly as a result of increased sales of general-purpose engines in Brazil and higher sales of electric power generators in Australia and South Africa.

 

Financial Services Business

 

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

 

As a result of increased sales of automobiles, mainly in North America, credit assets and property on operating leases of financial subsidiaries rose 3.4% from the previous fiscal year, to ¥4,967.5 billion.

 

In fiscal year 2008, revenue from external customers in a financial services business increased ¥123.8 billion, or 30.2%, to ¥533.5 billion from the previous fiscal year due mainly to an increase in operating lease revenue. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥137.0 billion, or 33.4%, compared to the increase as reported of ¥123.8 billion, which includes a negative foreign currency effect.

 

Operating income also expanded ¥2.2 billion, or 2.0%, to ¥117.7 billion from the previous fiscal year, due mainly to the increased profit attributable to higher revenue benefiting from a higher loan balance in North America, which offset the negative impact of the increased SG&A expenses caused by an increase of provisions for credit losses.

 

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

 

Information about allowance for credit losses is provided at Item 5. Operating and Financial Review and Prospects A. Operating Results, Application of Critical Accounting Policies. Information about finance subsidiaries-receivables and securitizations is described in Note (2) to the accompanying consolidated financial statements.

 

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Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales was ¥4,889.0 billion, up ¥114.9 billion, or 2.4% compared to the previous fiscal year, due primarily to the increased revenue from exports in automobile business which offset the negative impact of the decreased revenue in domestic automobile business. Operating income was ¥192.5 billion, down ¥35.5 billion, or 15.6%, compared to the previous fiscal year, due primarily to the increased R&D expenses, increased depreciation expenses, and substantially increased raw material costs, which offset the positive impact of the continuing cost reduction effects, increased profit attributable to higher revenue, and the decreased SG&A expenses.

 

North America

 

In North America, which mainly consists of the United States, revenue increased ¥92.6 billion, or 1.5%, to ¥6,265.2 billion, due mainly to increased revenue in the automobile business, which offset the negative impact of foreign currency translation effects.

 

Operating income decreased ¥24.1 billion, or 5.3%, to ¥432.6 billion, from the previous fiscal year, due primarily to the negative impacts of increased sales incentives in the automobile business, substantially increased raw material costs, the change in the model mix in the automobile business, increased SG&A expenses caused by an increase of provisions for credit losses in the financial services business, increased depreciation expenses, and the negative impact of foreign currency effect because of the depreciation of U.S. dollars, which offset the positive impacts of increased profit attributable to higher revenue, continuing cost reduction effects, and increased prices.

 

Europe

 

In Europe, revenue increased ¥246.4 billion, or 18.3%, to ¥1,594.2 billion, compared to the previous fiscal year, due primarily to increased revenue in the automobile business and the positive impact of foreign currency translation effects.

 

Operating income increased ¥19.5 billion, or 61.1%, to ¥51.5 billion, from the previous fiscal year, due mainly to the positive impacts of increased profit attributable to higher revenue, continuing cost reduction effects and the foreign currency effects, which offset the negative impacts of the increased SG&A expenses.

 

Asia

 

In Asia, revenue increased ¥366.8 billion, or 28.9%, to ¥1,638.2 billion from the previous fiscal year, due primarily to increased revenue in the motorcycle and automobile businesses and the positive impact of foreign currency translation effects.

 

Operating income increased ¥53.5 billion, or 69.4%, to ¥130.7 billion, from the previous fiscal year, due mainly to the positive impacts of increased profit attributable to higher revenue and the foreign currency effects, which offset the negative impact of increased SG&A expenses.

 

Other Regions

 

In Other Regions, revenue increased ¥295.1 billion, or 37.0%, to ¥1,092.8 billion, compared to the previous fiscal year, due mainly to increased revenue in all of the business segments and the positive impact of foreign currency translation effects.

 

Operating income rose ¥44.2 billion, or 61.2%, to ¥116.4 billion, from the previous fiscal year, due mainly to the positive impact of the increased profit attributable to higher revenue, the foreign currency effects, and continuing cost reduction effects which offset the negative impact of increased SG&A expenses.

 

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Application of Critical Accounting Policies

 

Critical accounting policies are those which require us to apply the most difficult, subjective or complex judgments, often requiring us to make estimates about the effect of matters that are inherently uncertain and which may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial condition and results of operations. A sustained loss of consumer confidence which may be caused by continued economic slowdown, recession, rising fuel prices, financial crisis or other factors have combined to increase the uncertainty inherent in such estimates and assumptions.

 

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

 

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

 

Product Warranty

 

We warrant our products for specific periods of time.

 

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

 

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

 

We believe our accrued warranty liability 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 cost accruals to determine the adequacy of the accrual. Therefore, warranty expense accruals are maintained at an amount we deem adequate to cover estimated warranty expenses.

 

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

 

The changes in provisions for those product warranties and net sales and other operating revenue for each business segment for each of the years in the three-year period ended March 31, 2009 are as follows:

 

     Yen (millions)  
     2007     2008     2009  

Provisions for product warranties

      

Balance at beginning of year

   ¥ 283,947      ¥ 317,103      ¥ 293,760   

Warranty claims paid during the period

   ¥ (113,454   ¥ (137,591   ¥ (123,509

Liabilities accrued for warranties issued during the period

     143,280        136,355        79,576   

Changes in liabilities for pre-existing warranties during the period

     605        (1,476     2,233   

Foreign currency translation

     2,725        (20,631     (18,081
                        

Balance at end of year

   ¥ 317,103      ¥ 293,760      ¥ 233,979   
                        

Net sales and other operating revenue

   ¥ 11,087,140      ¥ 12,002,834      ¥ 10,011,241   

 

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Credit Losses

 

Our finance subsidiaries provide wholesale financing to dealers and retail lending and leasing to customers mainly in order to support sales of our products, principally in North America. We classify retail and direct financing lease receivables derived from those services as finance subsidiaries-receivables. Operating leases are classified as property on operating leases. Certain finance receivables related to sales of inventory are included in trade receivables and other assets in the consolidated balance sheets.

 

The majority of the credit risk is with consumer financing and to a lesser extent with dealer financing. To determine the overall allowance for credit loss amount, receivables are segmented into pools with common characteristics such as product and collateral types, credit grades, and original loan terms. 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. Estimated losses due to customer defaults on operating leases are not recognized in the allowance for credit losses. These losses are recognized as a component of impairment losses on operating leases.

 

We believe our 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 incurred on our owned portfolio of finance receivables. However, actual losses may differ from the original estimates as a result of actual results varying from those assumed in our estimates.

 

As an example of the sensitivity of the allowance calculation, the following scenario demonstrates the impact that a deviation in one of the primary factors estimated as a part of our allowance calculation would have on the provision and allowance for credit losses. If we had experienced a 10% increase in net credit losses during fiscal 2009 in our North America portfolio, the provision for fiscal 2009 and the allowance balance at the end of fiscal 2009 would have increased by approximately ¥7.6 billion and ¥3.1 billion, respectively. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2009.

 

Additional Narrative of the Change in Credit Loss

 

The following table shows information related to our credit loss experience in our North American portfolio:

 

     Yen (billions)  
           2007                 2008                 2009        

Charge-offs (net of recoveries)

   26.2      39.9      44.4   

Provision for credit losses

   25.5      44.8      49.7   

Allowance for credit losses

   28.7      28.4      31.4   

Ending receivable balance

   4,351.8      3,890.4      3,396.4   

Average receivable balance, net

   4,330.8      4,317.0      3,864.7   

Charge-offs as a % of average receivable balance

   0.61   0.93   1.15

Allowance as a % of ending receivable balance

   0.66   0.73   0.93

 

Fiscal Year 2009 Compared with Fiscal Year 2008

 

The provision for credit losses increased by ¥4.9 billion, or 11%, reflecting the continued deterioration of the U.S. economy which has negatively affected certain customers’ ability to meet their contractual obligations despite the effect of exchange rate changes. Net charge-offs increased by ¥4.5 billion, or 11%. The ending allowance balance increased by ¥3.0 billion, or 11%, reflecting the higher estimate of losses incurred despite the effect of exchange rate changes.

 

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Losses due to customer defaults on operating leases are not recognized in the provision for credit losses. These losses are recognized as a component of impairment losses on operating leases. Impairment losses recognized totaled ¥8.7 billion and ¥5.8 billion for fiscal years 2009 and 2008, respectively. Higher losses are due to the increasing volume of leases that are accounted for as operating leases.

 

Fiscal Year 2008 Compared with Fiscal Year 2007

 

The provision for credit losses increased by ¥19.3 billion, or 75% primarily as a result of the weakening U.S. economy brought upon by the subprime mortgage crisis. The weakening economy has negatively affected certain customers’ ability to pay their contractual obligations. Net charge-offs in our North American portfolio increased by ¥13.7 billion, or 52%. The increase in charge-offs was experienced primarily in the lower range of credit quality customers. The Company has focused collection efforts to minimize the losses on delinquent and defaulted contracts.

 

The allowance for credit losses decreased by ¥0.3 billion, or 1%, despite the reflection of the higher estimated losses incurred as of March 31, 2008 in the North American portfolio. The decrease was primarily due to the effect of exchange rate changes on the allowance for credit losses.

 

Losses on Lease Residual Values

 

End-customers of leased vehicles typically have an option to buy the leased vehicle for the contractual residual value of the vehicle or to return the vehicle to our finance subsidiaries through the dealer at the end of the lease term. Likewise, dealers have the option to buy the vehicle returned by the customer or to return the vehicle to our finance subsidiaries. The likelihood that the leased vehicle will be purchased varies depending on the difference between the actual market value of the vehicle at the end of the lease term and the contractual value determined at the inception of the lease. Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases.

 

We initially determine the contract residual values by using our estimate of future used vehicle values, taking into consideration data obtained from third parties. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of the lease term. We periodically review the estimate of residual values. Downward adjustments are made for declines in estimated residual values that are deemed to be other-than-temporary. For direct financing leases, our finance subsidiaries in North America purchase insurance to cover a portion of the estimated residual value. The adjustments on the uninsured portion of the vehicle’s residual value are recognized as a loss in the period in which the estimate changed.

 

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

 

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

 

We also periodically test our operating leases for impairment under Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

 

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

 

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

 

If future auction values for all Honda and Acura vehicles in our North American direct financing lease portfolio as of March 31, 2009, were to decrease by approximately ¥10,000 per unit from our present estimates, holding all other assumption constant, the total impact would be an increase in losses on lease residual values by approximately ¥0.6 billion. Similarly, if future return rates for our existing portfolio of all Honda and Acura vehicles were to increase by one percentage point from our present estimates, the total impact would be an increase in losses on lease residual values by approximately ¥0.1 billion. With the same prerequisites shown above, the impacts to the operating lease portfolio would be approximately ¥2.5 billion and ¥0.6 billion, which would be recognized over the remaining lease terms. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2009. Also, declines in auction values are likely to have a negative effect on return rates which could affect the sensitivities.

 

Fiscal Year 2009 Compared with Fiscal Year 2008

 

Despite a declining portfolio of direct financing leases and the effect of exchange rate changes, losses on lease residual values increased by ¥11.1 billion or 94% as a result of the declines in used vehicle prices. Despite the effect of exchange rate changes, incremental depreciation increased by ¥11.6 billion or 545% due to the increase in operating lease assets and declines in estimated residual values.

 

Impairment losses of ¥9.7 billion were recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” during the year.

 

Pension and Other Postretirement Benefits

 

We have various pension plans covering substantially all of our employees in Japan and certain employees in foreign countries. Benefit obligations and pension costs are based on assumptions of many factors, including the discount rate, the rate of salary increase and the expected long-term rate of return on plan assets. The discount rate is determined mainly based on the rates of high quality corporate bonds or governmental bonds currently available and expected to be available during the period to maturity of the defined benefit pension plans. The salary increase assumptions reflect our actual experience as well as near-term outlook. Honda determines the expected long-term rate of return based on the investment policies. Honda considers the eligible investment assets under investment policies, historical experience, expected long-term rate of return under the investing environment, and the long-term target allocations of the various asset categories. Our assumed discount rate and rate of salary increase as of March 31, 2009 were 2.0% and 2.3%, respectively, and our assumed expected long-term rate of return for the year ended March 31, 2009 was 4.0% for Japanese plans. Our assumed discount rate and rate of salary increase as of March 31, 2009 were 6.9-8.0% and 1.5-6.4%, respectively, and our assumed expected long-term rate of return for fiscal 2009 was 6.5-8.0% for foreign plans.

 

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

 

Actual results may differ from our assumptions, and the difference is accumulated and amortized over future periods. Therefore, the difference generally will be reflected as our recognized expenses and recorded obligations

 

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in future periods. We believe that the assumptions currently used are appropriate, however, differences in actual expenses or changes in assumptions could affect our pension costs and obligations, including our cash requirements to fund such obligations.

 

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

 

Japanese Plans                    
     Yen (billions)

Assumptions

   Percentage
Point
Change (%)
   Funded
status
   Equity    Pension expense

Discount rate

   +0.5/-0.5    -87.0/+88.6    +40.9/-46.8    -4.5/+5.5

Expected long-term rate of return

   +0.5/-0.5    —      —      -3.8/+3.8
Foreign Plans                    
     Yen (billions)

Assumptions

   Percentage
Point
Change (%)
   Funded
status
   Equity    Pension expense

Discount rate

   +0.5/-0.5    -14.0/+16.9    +18.7/-20.9    -3.7/+4.2

Expected long-term rate of return

   +0.5/-0.5    —      —      -2.1/+2.1

 

 

(*1)

Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions at March 31, 2009.

 

(*2)

Funded status for fiscal 2009 is affected by March 31, 2009 assumptions.

 

     Pension expense for fiscal 2009 is affected by March 31, 2008 assumptions.

 

Income Taxes

 

Honda adopted the provision of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN No. 48) on April 1, 2007. Honda is subject to income tax examinations in many tax jurisdictions because Honda conducts its operations in various regions of the world. We recognize the tax benefit from an uncertain tax position based on the technical merits of the position when the position is more likely than not to be sustained upon examination. Benefits from tax positions that meet the more likely than not recognition threshold are measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate resolution. We performed a comprehensive review of any uncertain tax positions in accordance with FIN No. 48.

 

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

 

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

 

New Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R), “Business Combinations.” This statement replaces SFAS No. 141. This statement requires an acquirer to recognize the assets acquired, liabilities assumed, and any noncontrolling

 

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interest in the acquiree at the acquisition date measured at that date. The statement shall be applied prospectively to business combinations for which the acquisition date is on and after an entity’s first fiscal year that begins after December 15, 2008, with early adoption not permitted. It is not anticipated that adoption will have a material impact on the Company’s consolidated financial position or results of operations.

 

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This statement requires that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements, and requires that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions. This statement is effective as of an entity’s first fiscal year that begins after December 15, 2008, with early adoption not permitted. It is not anticipated that the initial adoption will have a material impact on the Company’s consolidated financial position or results of operations.

 

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140”, and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which change the accounting for transfers of financial assets and the criteria for determining whether to consolidate a variable interest entity (VIE). SFAS No. 166 eliminates the concept of a qualifying special-purpose entity (“QSPE”), establishes conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the financial-asset derecognition criteria, revises how interests retained by the transferor in a sale of financial assets initially are measured and requires additional disclosures. SFAS No. 167 requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining a VIE’s primary beneficiary from a mainly quantitative assessment to an exclusively qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. SFAS No. 166 and SFAS No. 167 are effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2009 and for subsequent interim and annual reporting periods. Honda periodically securitizes and sells pools of receivables to a special purpose entity. Management is currently evaluating the impact of SFAS No. 166 and SFAS No. 167 on the Company’s consolidated financial position or results of operations.

 

B. Liquidity and Capital Resources

 

Overview of Capital Requirements, Sources and Uses

 

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

 

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

 

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

 

Honda meets its operating capital requirements primarily through cash generated by operations, bank loans and the issuance of commercial paper. Year-end balance of liabilities associated with the Company and its subsidiaries’ funding for non-financial services businesses was ¥766.6 billion as of March 31, 2009. In addition, the Company’s finance subsidiaries fund those financial programs for customers and dealers primarily from corporate bonds, medium-term notes, commercial paper, securitization of finance receivables and intercompany loans. Year-end balance of liabilities associated with these finance subsidiaries’ funding for financial services business was ¥4,515.8 billion as of March 31, 2009.

 

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Cash Flows

 

Consolidated cash and cash equivalents for the year ended March 31, 2009 decreased by ¥360.5 billion from March 31, 2008, to ¥690.3 billion. The reasons for the increases or decreases for each cash flow activity are as follows.

 

Net cash provided by operating activities amounted to ¥383.6 billion of cash inflows. Cash inflows from operating activities decreased by ¥743.2 billion compared with the previous fiscal year, due mainly to a decrease in cash received from customers, primarily due to lower unit sales in the automobile business in North America and an increase in inventories, which was offset by decreased payments for parts and raw materials primarily due to a decrease in automobile production and decreased payments for operating expenses.

 

Net cash used in investing activities amounted to ¥1,133.3 billion of cash outflows, due mainly to capital expenditures and the purchase of operating lease assets (which exceeds proceeds from sales of operating lease assets), which was offset by collections of and proceeds from sales of finance subsidiaries-receivables (which exceeded acquisitions of finance subsidiaries-receivables). Cash outflows from investing activities decreased by ¥553.0 billion compared with the previous fiscal year, due mainly to a decrease in acquisitions of finance subsidiaries-receivables and the purchases of operating lease assets and an increase in proceeds from sales of finance subsidiaries-receivables and operating lease assets.

 

Net cash provided by financing activities amounted to ¥530.8 billion of cash inflows, due mainly to proceeds from long-term debt and increase in short-term debt (which exceeded repayment of long-term debt), which was offset by cash dividends paid. Cash inflows from financing activities decreased by ¥157.1 billion compared with the previous fiscal year.

 

Liquidity

 

The ¥690.3 billion in cash and cash equivalents at the end of year corresponds to approximately 0.8 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, finance subsidiaries that carry total short-term borrowings of ¥1,697.4 billion have committed lines of credit equivalent to ¥864.5 billion that serve as alternative liquidity for the commercial paper issued regularly to replace debt. Honda believes it currently has sufficient credit limits, extended by prominent international banks as of the date of the filing of Honda’s form 20-F.

 

Honda’s short- and long-term debt securities are rated by credit rating agencies, such as Moody’s Investors Service, Inc., Standard & Poor’s Rating Services, and Rating and Investment Information, Inc. The following table shows the ratings of Honda’s unsecured debt securities by Moody’s, Standard & Poor’s and Rating and Investment Information as of March 31, 2009.

 

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

Moody’s Investors Service

   P-1    A1

Standard & Poor’s Rating Services

   A-1    A+

Rating and Investment Information

   a-1+    AA

 

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

 

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C. Research and Development

 

Honda and its consolidated subsidiaries use the most advanced technologies to 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 significant freedom. Product-related R&D is spearheaded by Honda R&D Co., Ltd.; Honda R&D Americas, Inc. in the United States; and Honda R&D Europe (Deutschland) GmbH in Germany. R&D on production technologies centers around 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 businesses in their respective regions.

 

Total consolidated R&D expenses for the year ended March 31, 2009 amounted to ¥563.1 billion.

 

Motorcycle Business

 

In the motorcycle business, Honda is committed to developing products with new value-added features that meet the individual needs of customers around the world, and to implementing the timely local development of products tailored to specific regions at its overseas locations. At the same time, we are focusing on developing industry-leading technologies that address safety and environmental issues.

 

Major developments in Japan in fiscal 2009 included the development of Japan’s first built-in type navigation system for motorcycles. The system is designed to be positioned below the meters for best legibility and visibility for the driver and, for safety, the navigation system can be operated as the rider continues to hold the handles. These systems have been installed on a limited basis on Honda’s GOLDWING AIRBAG NAVI sports touring motorcycle. In addition, Honda has introduced its PGM-FI electronic fuel injection systems on its fully redesigned 50cc Monkey leisure model and its SHADOW Classic 400 cruiser model as well as its new model SHADOW Custom 400. These systems further improve environmental performance and contribute to a superior start-up and a smooth ride. Moreover, Honda has converted both its combined brake system for front and rear wheels and its anti-lock braking system to electronic operation for more-precise control and developed the world’s first electronically controlled “Combined ABS,” which is an advanced system that greatly increases the feeling of security when braking. This system has been installed on the CBR1000RR ABS super sports model and the CBR600RR ABS, which have been newly introduced on the market. In addition, in Brazil, Honda has newly launched the CG150 TITAN MIX motorcycle equipped with its flexible-fuel technology that makes possible the use of any ratio of bioethanol and gasoline. This is the first motorcycle in the world to offer this feature.

 

R&D expenses in the Motorcycle Business segment in fiscal 2009 totaled ¥83.6 billion.

 

Automobile Business

 

In the Automobile Business segment, we work to develop innovative technologies and products through creativity-oriented development in response to customer needs. We are also actively developing technologies that address environmental issues and provide advanced safety performance.

 

Major achievements in Japan during the fiscal year 2009 included the introduction of the new FREED, a compact minivan that offers a compact body size as well as a roomy and comfortable interior. Also, Honda implemented full model changes for the Odyssey and Accord and equipped these models with its Motion Adaptive Electric Power Steering Assist system, which provides driving stability support by stabilizing the steering motion when vehicle behavior becomes unstable due to cornering or changes in road conditions. In addition, Honda carried out a full model change on the Life and equipped it with the world’s first i—SRS air-bag system for the driver’s seat with continuously staged inflation, which offers a high degree of protection and low impact for passengers through continuous variability of the air-bag capacity and emission control. Moreover, Honda introduced the Insight, its new model hybrid car, equipped with Honda’s lightweight, compact hybrid system and Eco Assist Ecological Drive Assist System, which offer superior eco-performance and a comfortable

 

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ride. Additionally, Honda commenced the production of the FCX Clarity, a new model fuel cell vehicle, and began to lease these vehicles in Japan in November 2008 and in the United States in July 2008.

 

R&D expenses in the Automobile Business segment in fiscal 2009 totaled ¥422.3 billion.

 

Power Product and Other Businesses

 

In the Power Product Business, we are seeking to develop products that match customers’ lifestyles and needs while strengthening our lineup of offerings that address environmental issues.

 

Important developments in this segment in Japan during the fiscal year included expanding the product lineup and sales coverage of solar cell batteries manufactured by a Honda subsidiary, which is engaged in the production and marketing of these batteries. In view of the rising concern in Japan about environmental issues, coverage was extended on a nationwide basis to include not only units for use in households but also thin-film solar batteries for the public sector and industry. Also in the power product operations in Japan, Honda introduced the Yukios SB800, which is a compact and lightweight snow removal device that clears snow without blowing it from one place to another and can be used easily, even by beginners. Also, in Japan, Honda introduced the Pianta FV200, a gas-powered mini-tiller that uses the same butane gas canisters that are already in wide use among households for powering portable gas stoves. This mini-tiller is easy to use, even for beginners, and is suited to making home gardening easier and more fun.

 

R&D expenses in this segment in fiscal 2009 totaled to ¥57.2 billion.

 

Fundamental Research

 

In the area of fundamental research, Honda is pursuing steady and varied research activities into technologies that may lead to innovative applications.

 

One of Honda’s research initiatives is developmental work on a Walking Assist Drive, which can provide support for persons whose legs have become weak. Honda is conducting this research jointly with medical institutions and has announced a test model. Going forward, Honda will be verifying the effectiveness of these devices in actual use.

 

In another research area, Honda has decided to build a new research facility with the aim of commercializing manufacturing technologies for bioethanol produced from cellulose materials, including caulome, leaves, and other substances that are not suited for consumption as food.

 

Additionally, Honda’s subsidiary, Honda Research Institute Japan Co., Ltd., is conducting joint research on brain machine interface (BMI) technology. These research activities are the first in the world to combine electroencephalography and near-infrared spectroscopy technologies as well as newly developed information extraction technology to devise systems that will enable the control of robots by human thought alone. Looking to the future, this technology will be further developed for application to human-friendly products by integrating it with intelligent technologies and/or robotic technologies.

 

Expenses incurred in fundamental research are distributed among Honda’s business segments.

 

Patents and Licenses

 

At March 31, 2009, Honda owned more than 13,900 patents in Japan and more than 21,400 patents abroad. Honda also had applications pending for more than 17,700 patents in Japan and for more than 19,000 patents abroad. 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.

 

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D. Trend Information

 

See Item 5. A “Operating and Financial Review and Prospects” for information required by this item.

 

E. 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. Information about finance subsidiaries-receivables and securitizations is described in Note (2) to the accompanying consolidated financial statements.

 

(Guarantee)

 

At March 31, 2009, we guaranteed ¥33.6 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 ¥33.6 billion. As of March 31, 2009, 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.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table shows our contractual obligations at March 31, 2009:

 

Contractual Obligations

 

     At March 31, 2009
Yen (millions)
     Payments due by period
     Total    Less than
1 year
   1-3
years
   3-5
years
   After
5 years

Long-term debt

   2,910,160    977,523    1,037,624    798,944    96,069

Operating leases

   128,673    26,776    34,700    19,142    48,055

Purchase commitments *1

   144,874    144,874    —      —      —  

Interest payments *2

   326,718    159,012    120,991    44,140    2,575

Contributions to defined benefit pension plans *3

   82,795    82,795    —      —      —  
                        

Total

   3,593,220    1,390,980    1,193,315    862,226    146,699
                        

 

*1

Honda had commitments for purchases of property, plant and equipment at March 31, 2009.

 

*2

To estimate the schedule of interest payments, the company utilized the balances and average interest rates of borrowings and debts and derivative instruments as of March 31, 2009.

 

*3

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

 

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If our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our consolidated financial statements could be materially affected in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Since it is difficult to estimate actual payment in the future related to our uncertain tax positions, unrecognized tax benefit totaled ¥125,771 million is not represented in the table above.

 

At March 31, 2009, we had no material capital lease obligations or long-term liabilities reflected on our balance sheet under U.S. GAAP other than those set forth in the table above.

 

G. Safe Harbor

 

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

 

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

 

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

Honda’s articles of incorporation provide for a Board of Directors of not more than 30 Directors and for a Board of Corporate Auditors of not more than seven Corporate Auditors. Directors and Corporate Auditors are elected by resolution of the general meetings of shareholders. The Corporate Auditors are nominated by the Board of Directors as candidates for election with an approval by the Board of Corporate Auditors. The normal term of office of a Director is one year and that of a Corporate Auditor is four years. Directors and Corporate Auditors may serve any number of consecutive terms.

 

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

 

Under the Company Law, the Corporate Auditors of the Company have the duty to audit the Director’s execution of their duties. Corporate Auditors are not required to be, and the Corporate Auditors of the Company are not, certified public accountants, and may not at the same time be Directors or employees of the Company or any of its subsidiaries. They are entitled to participate in meetings of the Board of Directors but are not entitled to vote. Corporate Auditors of the Company form the Board of Corporate Auditors, which must consist of at least three Corporate Auditors. Not less than half of the members of the Board of Corporate Auditors must be outside Corporate Auditors, each of whom has never served as a director, accounting councilor, operating officer, manager or employee of the Company or any of its subsidiaries. Corporate Auditors are required to elect from among themselves at least one Standing Corporate Auditor. Corporate Auditors also have a statutory duty to provide their report to the Board of Corporate Auditors, which must submit its audit report to the Representative Director each year. A Corporate Auditor may note his or her opinion in the audit report if his or her opinion is different from the opinion expressed in the audit report. The Board of Corporate Auditors is empowered to establish audit principles, methods of investigation by Corporate Auditors of the status of the corporate affairs,

 

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and assets of the Company and other matters concerning the performance of the Corporate Auditors’ duties. In addition, the Company is required to appoint independent certified public accountants as accounting auditor. Such independent certified public accountants have their primary statutory duties to audit the consolidated and non-consolidated financial statements of the Company prepared in accordance with the Company Law to be submitted by the Representative Director to general meetings of shareholders to prepare an accounting audit report thereon and to notify the contents of such report to the specified Corporate Auditor and the specified Director in charge.

 

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

 

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Representative Directors

        

Satoshi Aoki

(August 19, 1946)

  

Director of the Company from June 1995

 

Chairman and Director of the Company,

appointed in June 2007

 

Executive Vice President and Director of the Company,

appointed in June 2005

 

Compliance Officer,

appointed in April 2004

 

Senior Managing Director of the Company,

appointed in June 2000

 

Managing Director of the Company,

appointed in June 1998

 

Chief Operating Officer for Business Management Operations,

appointed in June 1998

 

Director of the Company,

appointed in June 1995

 

General Manager of Finance Division for Business

Management Operations,

appointed in June 1994

 

Joined Honda in April 1969

   *3    20,100

Takanobu Ito

(August 29, 1953)

  

Director of the Company from June 2000

 

President and Director of the Company,

appointed in June 2009

 

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

appointed in April 2009 (presently held)

 

Senior Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Automobile Operations,

appointed in April 2007

 

Managing Officer of the Company,

appointed in June 2005

   *3    8,800

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

General Manager of Suzuka Factory of Production Operations,

appointed in April 2005

 

General Supervisor, Motor Sports,

appointed in April 2004

 

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

appointed in June 2003

 

Motor Sports,

appointed in June 2003

 

Managing Director of the Company,

appointed in June 2003

 

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

appointed in June 2001

 

Director of the Company,

appointed in June 2000

 

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

appointed in April 1998

 

Joined Honda in April 1978

     

Koichi Kondo

(February 13, 1947)

  

Director of the Company from June 1997

 

Executive Vice President and Director of the Company,

appointed in June 2007

 

Chairman and Director of American Honda Motor Co., Inc.,

appointed in April 2007

 

Chief Operating Officer for Regional Sales Operations (Japan),

appointed in April 2007

 

Senior Managing Director of the Company,

appointed in June 2005

 

President and Director of Honda North America, Inc.,

appointed in April 2005

 

Chief Operating Officer for Regional Operations

(North America),

appointed in April 2004

 

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

appointed in June 2003

 

Executive Vice President and Director of

American Honda Motor Co., Inc.,

appointed in April 2003

 

Managing Director of the Company,

appointed in June 2002

 

Chief Operating Officer for Regional Operations

(Latin America),

appointed in April 2000

   *3    12,700

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Director of the Company,

appointed in June 1997

 

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in June 1996

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in June 1996

 

President and Director of Honda Motor do Brasil Ltda.

(presently Honda South America Ltda.),

appointed in June 1996

 

Joined Honda in April 1970

     

Directors

        
Atsuyoshi Hyogo (January 2, 1949)   

Director of the Company from June 1995

 

Senior Managing Director of the Company,

appointed in June 2005

 

President of Honda Motor (China) Investment

Corporation, Limited,

appointed in February 2004 (presently held)

 

Chief Operating Officer for Regional Operations (China),

appointed in April 2003 (presently held)

 

Managing Director of the Company,

appointed in June 1998

 

Executive Vice President and Director of

American Honda Motor Co., Inc.,

appointed in June 1996

 

Director of the Company,

appointed in June 1995

 

President and Director of Honda Canada Inc.,

appointed in October 1993

 

Joined Honda in April 1972

   *3    20,500
Mikio Yoshimi (September 6, 1947)   

Director of the Company from June 1998

 

Senior Managing Director of the Company,

appointed in June 2006

 

Government & Industrial Affairs,

appointed in April 2006 (presently held)

 

Chief Officer of Driving Safety Promotion Center,

appointed in April 2006

 

Compliance Officer,

appointed in April 2005 (presently held)

 

Managing Director of the Company,

appointed in June 2004

   *3    10,200

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Chief Operating Officer for Business Support Operations,

appointed in April 2004

 

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

appointed in April 2003

 

Human Resources and Associate Relations for Business Support Operations,

appointed in April 2002

 

President and Director of Honda Manufacturing of Alabama, LLC,

appointed in April 2000

 

Director of the Company,

appointed in June 1998

 

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

appointed in June 1998

 

Joined Honda in April 1970

     

Shigeru Takagi

(February 4, 1952)

  

Director of the Company from June 1998

 

Senior Managing Director of the Company,

appointed in June 2008

 

Managing Director of the Company,

appointed in June 2004

 

President and Director of Honda Motor Europe Limited,

appointed in April 2004 (presently held)

 

Chief Operating Officer for Regional Operations (Europe, the Middle & Near East and Africa),

appointed in April 2004 (presently held)

 

Director of the Company,

appointed in June 1998

 

President and Director of Honda Canada Inc.,

appointed in June 1998

 

Joined Honda in April 1974

   *3    12,400

Akio Hamada

(December 2, 1948)

  

Director of the Company from June 1999

 

General Supervisor, Quality,

appointed in April 2009 (presently held)

 

Senior Managing Director of the Company,

appointed in June 2008

 

General Supervisor, Information Systems,

appointed in April 2008 (presently held)

 

Risk Management Officer,

appointed in April 2008 (presently held)

   *3    8,800

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Chief Operating Officer for Production Operations,

appointed in April 2008 (presently held)

 

Managing Officer of the Company,

appointed in June 2005

 

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

appointed in April 2005

 

President and Director of Honda Engineering Co., Ltd.,

appointed in June 2001

 

Director of the Company,

appointed in June 1999

 

Stationed at Honda Canada Inc. in June 1998

 

Joined Honda in April 1971

     

Tetsuo Iwamura

(May 30, 1951)

  

Director of the Company from June 2000

 

Senior Managing Director of the Company,

appointed in June 2008

 

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

appointed in April 2007 (presently held)

 

President and Director of Honda North America, Inc.,

appointed in April 2007 (presently held)

 

Chief Operating Officer for Regional Operations

(North America),

appointed in April 2007 (presently held)

 

Managing Director of the Company,

appointed in June 2006

 

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in April 2003

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in April 2003

 

President and Director of Honda South America Ltda.,

appointed in April 2003

 

Chief Operating Officer for Regional Operations

(Latin America),

appointed in April 2003

 

Director of the Company,

appointed in June 2000

 

Chief Operating Officer for Parts Operations,

appointed in April 2000

 

Joined Honda in April 1978

   *3    10,000

 

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Table of Contents

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Tatsuhiro Oyama

(July 9, 1950)

  

Director of the Company from June 2001

 

Chief Operating Officer for Motorcycle Operations,

appointed in April 2008 (presently held)

 

Managing Director of the Company,

appointed in June 2006

 

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

appointed in April 2006

 

Chief Operating Officer for Regional Operations

(Asia & Oceania),

appointed in April 2006

 

Chief Operating Officer for Parts Operations,

appointed in April 2003

 

President and Director of Honda Motorcycle Japan

Co., Ltd.,

appointed in August 2001

 

Director of the Company,

appointed in June 2001

 

General Manager of Motorcycle Sales Division for

Regional Sales Operations (Japan),

appointed in April 2001

 

Joined Honda in April 1969

   *3    12,400

Fumihiko Ike

(May 26, 1952)

  

Director of the Company from June 2003

 

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

appointed in April 2008 (presently held)

 

Chief Operating Officer for Regional Operations

(Asia & Oceania),

appointed in April 2008 (presently held)

 

Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Business Management Operations,

appointed in April 2006

 

Director of the Company,

appointed in June 2003

 

Chief Operating Officer for Power Product Operations,

appointed in April 2003

 

Joined Honda in February 1982

   *3    11,300

 

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Table of Contents

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Masaya Yamashita

(April 5, 1953)

  

Director of the Company from June 2003

 

Managing Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Purchasing Operations,

appointed in April 2008 (presently held)

   *3    8,800
  

General Manager of Kumamoto Factory of Production

Operations,

appointed in April 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Director of the Company,

appointed in June 2003

 

General Manager of Automobile Purchasing Division 1 in

Purchasing Operations,

appointed in April 2002

 

Joined Honda in April 1977

     

Kensaku Hogen

(August 2, 1941)

  

Director of the Company from June 2005

 

Director of the Company,

appointed in June 2005

 

Ambassador to Canada,

appointed in April 2001

   *3    300

Nobuo Kuroyanagi

(December 18, 1941)

  

Director of the Company from June 2009

 

Director of the Company,

appointed in June 2009

 

Chairman of The Bank of Tokyo-Mitsubishi UFJ, Ltd.

(BTMU),

appointed in April 2008 (presently held)

 

President of BTMU,

appointed in January 2006

 

President and CEO of Mitsubishi UFJ Financial Group, Inc.

(MUFG),

appointed in October 2005 (presently held)

 

President and CEO of Mitsubishi Tokyo Financial Group, Inc.

(MTFG; presently, MUFG),

appointed in June 2004

 

President of The Bank of Tokyo-Mitsubishi, Ltd.

(BTM; presently, BTMU),

appointed in June 2004

 

Director of MTFG (presently, MUFG),

appointed in June 2003

   *3    None

 

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Table of Contents

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Deputy President of BTM (presently, BTMU),

appointed in June 2002

 

Managing Officer of BTM (presently, BTMU),

appointed in June 2001

 

Managing Director of BTM (presently, BTMU),

appointed in June 1996

 

Director of BTM (presently, BTMU),

appointed in April 1996

 

Director of Mitsubishi Bank, Ltd. (presently, BTMU),

appointed in June 1992

 

Joined Mitsubishi Bank, Ltd. (presently, BTMU) in April 1965

     

Takeo Fukui

(November 28, 1944)

  

Director of the Company from June 1988

 

Director and Advisor of the Company,

appointed in June 2009

 

President and Director of the Company,

appointed in June 2003

 

Senior Managing Director of the Company,

appointed in June 1999

 

Motor Sports,

appointed in June 1999

 

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

appointed in June 1998

 

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

appointed in June 1996

 

Managing Director of the Company,

appointed in June 1996

 

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

appointed in June 1994

 

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

appointed in June 1990

 

Director of the Company,

appointed in June 1988

 

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

appointed in May 1987

 

President and Director of Honda Racing Corporation,

appointed in May 1987

 

Joined Honda in April 1969

   *3    27,700

 

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Table of Contents

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Hiroshi Kobayashi

(November 12, 1954)

  

Director of the Company from June 2009

 

Director of the Company,

appointed in June 2009

 

Chief Operating Officer for Regional Sales Operations (Japan),

appointed in April 2009 (presently held)

 

Deputy Chief Operating officer for Regional Sales Operations (Japan); General Manager of Automobile Sales Operations for Regional Sales Operations (Japan); General Manager of Aftermarket Operations in Regional Sales Operations (Japan); General Manager of ASIMO Business Office in Regional Sales Operations (Japan),

appointed in April 2008

 

Operating Officer of the Company,

appointed in June 2005

 

President and Director of Honda Canada Inc.,

appointed in April 2004

 

Director of the Company,

appointed in June 2003

 

Executive Vice President and Director of Honda Motor Europe Limited,

appointed in April 2003

 

Joined Honda in April 1978

   *3    12,500

Sho Minekawa

(October 27, 1954)

  

Director of the Company from June 2007

 

Director of the Company,

appointed in June 2007

 

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in April 2007 (presently held)

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in April 2007 (presently held)

 

President and Director of Honda South America Ltda.,

appointed in April 2007 (presently held)

 

Chief Operating Officer for Regional Operations (Latin America),

appointed in April 2007 (presently held)

 

Operating Officer of the Company,

appointed in June 2005

 

Director of the Company,

appointed in June 2004

 

President of Guangzhou Honda Automobile Co., Ltd.
(presently, Guangqi Honda Automobile Co., Ltd.),

appointed in April 2004

 

Joined Honda in April 1978

   *3    10,600

 

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Table of Contents

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Hiroshi Soda

(September 14, 1956)

  

Director of the Company from June 2008

 

Corporate Communications,

appointed In April 2009 (presently held)

 

Director of the Company,

appointed in June 2008

 

Chief Officer of Driving Safety Promotion Center,

appointed in April 2008 (presently held)

 

Chief Operating Officer for Business Support Operations,

appointed in April 2008 (presently held)

 

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

appointed in December 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Executive Vice President of Honda North America, Inc.,

appointed in January 2000

 

Joined Honda in April 1979

   *3    10,000

Takuji Yamada

(September 28, 1956)

  

Director of the Company from June 2008

 

Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Power Product Operations,

appointed in April 2008 (presently held)

 

President and Director of Honda Motor Europe (North) GmbH,

appointed in April 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Executive Vice President of American Honda

Motor Co., Inc.,

appointed in December 2004

 

Joined Honda in April 1980

   *3    8,800

Yoichi Hojo

(February 17, 1956)

  

Director of the Company from June 2008

 

Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Business Management Operations,

appointed in April 2008 (presently held)

 

Operating Officer of the Company,

appointed in June 2006

 

General Manager of Automobile Purchasing Division 2 in Purchasing Operations,

appointed in April 2006

 

Joined Honda in April 1978

   *3    9,400

 

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Table of Contents

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Tsuneo Tanai

(January 24, 1957)

  

Director of the Company from June 2009

 

Director of the Company,

appointed in June 2009

 

Chief Operating Officer for Automobile Operations,

appointed in April 2009 (presently held)

 

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

appointed in April 2008

 

Operating Officer of the Company,

appointed in June 2006

 

Executive Vice President of Honda of America Mfg., inc.,

appointed in April 2006

 

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

appointed in June 2004

 

Joined Honda in April 1981

   *3    9,400

Hiroyuki Yamada

(December 14, 1956)

  

Director of the Company from June 2009

 

Director of the Company,

appointed in June 2009

 

Chief Operating Officer for Customer Service Operations,

appointed in April 2009 (presently held)

 

Stationed at American Honda Motor Co., Inc. in April 2004

 

Joined Honda in April 1982

   *3    3,000

Corporate Auditors

        

Toru Onda

(March 18, 1949)

  

Corporate Auditor of the Company (full-time),

appointed in June 2008

 

Managing Director of the Company,

appointed in June 2002

 

Chief Operating Officer for Purchasing Operations,

appointed in April 2000

 

Director of the Company,

appointed in June 1999

 

General Manager of Automobile Purchasing Division 1 in Purchasing Operations,

appointed in June 1998

 

Joined Honda in January 1977

   *5    10,800

Hideki Okada

(June 1, 1953)

  

Corporate Auditor of the Company (full-time),

appointed in June 2009

 

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

appointed in April 2007

 

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

appointed in April 2007

   *6    8,900

 

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Table of Contents

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Operating Officer of the Company,

appointed in June 2006

 

General Manager of Accounting Division for Business

Management Operation,
appointed in June 2004

 

Joined Honda in April 1977

     

Koukei Higuchi

(March 14, 1936)

  

Corporate Auditor of the Company,

appointed in June 2003

 

Advisor of the Board of The Tokio Marine & Fire Insurance Co., Ltd.

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

appointed in June 2003 (presently held)

 

Chairman of The Tokio Marine & Fire Insurance Co., Ltd.

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

appointed in June 2001

 

Joined The Tokio Marine and Fire Insurance Co., Ltd.

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

in April 1960

   *4    300

Fumihiko Saito

(June 9, 1945)

  

Corporate Auditor of the Company,

appointed in June 2004

 

Representative of the Saito Law Office

in February 2006 (presently held)

 

Partner of Haarmann Hemmelrath Saito Law Office

in June 2003

 

Registered as a lawyer in April 1973

   *5    300

Yuji Matsuda

(August 27, 1951)

  

Corporate Auditor of the Company,

appointed in June 2007

 

President and Director of Mitsubishi UFJ Trust Investment Technology Institute Co., Ltd.,

appointed in June 2006 (presently held)

 

Joined The Mitsubishi Trust and Banking Corporation

(presently The Mitsubishi UFJ Trust and Banking Corp.)

in April 1975

   *4    1,300

 

*1. Mr. Kensaku Hogen and Mr. Nobuo Kuroyanagi satisfy the required conditions for the outside director provided for in Article 2, Paragraph 1, Item 15 of the Company Law.
*2. Corporate Auditors Mr. Koukei Higuchi, Mr. Fumihiko Saito and Mr. Yuji Matsuda are outside corporate auditors as provided for in Article 2, Paragraph 1, Item 16 of the Company Law.
*3. The term of office of a Director is one year after his/her election to office at the close of the ordinary general meeting of shareholders on June 23, 2009.
*4. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 22, 2007.
*5. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 24, 2008.

 

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*6. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 23, 2009.
*7. 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. Managing Officers and Operating Officers under operating officer system are not statutory positions under the Japanese Company Law and do not conform to the definition of “Directors and Senior Management” as defined in Form 20-F. The Company’s Managing Officers and Operating Officers, as voluntarily disclosed in Japan, are listed below.

 

Managing Officers   
Suguru Kanazawa   

Executive Vice President and Director of Honda Motor Europe Limited

 

President and Director of Honda of the U.K. Manufacturing Ltd.

Hidenobu Iwata   

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

Operating Officers   
Manabu Nishimae    President and Director of Honda Canada Inc.
Koichi Fukuo    Quality, Certification & Regulation Compliance
Masahiro Takedagawa   

President and Director of Honda Siel Cars India Limited

 

President and Director of Honda Motor India Private Ltd.

Yoshiyuki Matsumoto    General Manager of Suzuka Factory of Production Operations
Eiji Okawara    President and Director of Honda Engineering Co., Ltd.
Ko Katayama    General Manager of Saitama Factory of Production Operations
Masahiro Yoshida    General Manager of Hamamatsu Factory of Production Operations
Seiji Kuraishi    President of Dongfeng Honda Automobile Co., Ltd.
Takashi Nagai    Executive Vice President of Asian Honda Motor Co., Ltd.
Katsushi Watanabe    General Manager of Kumamoto Factory of Production Operations
Toshiaki Mikoshiba   

Russia and other CIS countries for Regional Operations (Europe, the Middle & Near East and Africa)

 

Executive Vice President and Director of Honda Motor Europe Limited

Yoshi Yamane   

General Manager of Corporate Project of the Company

 

Production for Regional Operations (China)

Takashi Sekiguchi    Executive Vice President of American Honda Motor Co., Inc.
Takahiro Hachigo    General Manager of Automobile Purchasing Division 2 in Purchasing Operations
Hiroshi Sasamoto    Manufacturing of Honda Canada Inc.
Chitoshi Yokota    Automobile Products for Automobile Operations
Michimasa Fujino    President and Director of Honda Aircraft Company, Inc.

 

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

 

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B. Compensation

 

Directors and Corporate Auditors receive monthly remuneration, the aggregate maximum monthly amount of which is approved at the annual general meeting of shareholders. Also, Directors and Corporate Auditors receive bonuses, the aggregate amount of which is approved at the annual general meeting of shareholders and is based on the Company’s performance for prior fiscal year. The amounts of the remuneration and bonuses approved to pay to Directors and Corporate Auditors are allocated among them at meetings of the Board of Directors and Corporate Auditors.

 

The total amount of remuneration paid to the Company’s directors and corporate auditors during the fiscal year ended March 31, 2009 was ¥1,181 million, including ¥1,058 million paid to 25 directors (who include four directors who retired during that fiscal year) and ¥123 million paid to seven corporate auditors (who include two corporate auditors who retired during that fiscal year). The amount of remuneration paid to the directors includes amount of wages paid to those directors who were also directors of subsidiaries of the Company.

 

The total amount of bonuses that were paid during the year ended March 31, 2009 was ¥587 million, including ¥510 million to our 20 directors as of the end of the year ended March 31, 2008 and ¥77 million to our six corporate auditors as of the end of the year ended March 31, 2008.

 

The amount of retirement allowances paid to three retired directors and two retired corporate auditors totaled ¥1,041 million, both of which payments were in accordance with a resolution of the Ordinary General Meeting of Shareholders held in June 2008. The company abolished its system for the payment of retirement benefits to corporate officers as of the conclusion of the Ordinary General Meeting of Shareholders held in June 2008, and the decision was taken to make a final payment of such allowances for retirement benefits that had accrued through the date of the general meeting.

 

C. Board Practices

 

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

 

D. Employees

 

The following tables list the number of Honda full-time employees as of March 31, 2009, 2008 and 2007.

 

As of March 31, 2009

 

Total

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

181,876

   35,908    133,114    2,071    10,783
                     

 

At March 31, 2009, Honda had 181,876 full-time employees, including 111,581 local nationals employed in its overseas operations.

 

As of March 31, 2008

 

Total

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

178,960

   36,059    130,457    2,014    10,430
                     

 

At March 31, 2008, Honda had 178,960 full-time employees, including 109,213 local nationals employed in its overseas operations.

 

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As of March 31, 2007

 

Total

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

167,231

   33,137    121,691    1,988    10,415
                     

 

At March 31, 2007, Honda had 167,231 full-time employees, including 98,493 local nationals employed in its overseas operations.

 

Most of the Company’s regular employees in Japan, except management personnel, are required by the terms of the Company’s collective bargaining agreement with its labor union to become members of the Federation of All Honda Workers’ Union (AHWU), which is affiliated with the Japan Council of the International Metalworkers’ Federation. Approximately 85% of the employees of the Company and its Japanese subsidiaries were members of AHWU at March 31, 2009.

 

In Japan, basic wages are negotiated annually and the average increases in wages of the Company’s employees in fiscal 2007, 2008 and 2009 were 2.0%, 2.0% and 1.9%, respectively. In addition, in accordance with Japanese custom, each employee is paid a semi-annual bonus. Bonuses are negotiated during wage negotiations and are based on the overall performance of the Company or the applicable subsidiary in the previous year, the outlook for the current year and other factors.

 

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

 

E. Share Ownership

 

The total amount of the Company’s voting securities owned by its officers, directors and corporate auditors as a group as of June 23, 2009 is as follows.

 

Title of Class   Amount Owned   % of Class  
Common Stock   249,300 shares   0.014 %

 

The Company’s full-time employees are eligible to participate in the Honda Employee Shareholders’ Association, whereby participating employees contribute a portion of their salaries to the Association and the Association purchases shares of the Company’s Common Stock on their behalf. As of March 31, 2009, the Association owned 4,890,346 shares of the Company’s common stock.

 

Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

 

As of March 31, 2009, 1,834,828,430 shares of Honda’s Common Stock were issued and 1,814,609,000 shares were outstanding.

 

The following table shows the shareholders that owned of record 5% or more of the issued shares of Honda’s Common Stock as of March 31, 2009:

 

Name

   Shares owned
(thousands)
   Ownership (%)  

Japan Trustee Services Bank, Ltd. (trust account 4G)

   95,401    5.20 %

Japan Trustee Services Bank, Ltd. (trust account)

   95,138    5.19 %

 

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According to a statement on Schedule 13G (Amendment No. 5) filed by Mitsubishi UFJ Financial Group, Inc. with the Securities and Exchange Commission on February 6, 2009, Mitsubishi UFJ Financial Group, Inc. directly and indirectly held, as of December 31, 2008, 146,935,534 shares, or 8.1% of the then issued shares, of Honda’s Common Stock.

 

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

 

ADSs representing American Depositary Shares are issued by JPMorgan Chase Bank, N.A., as Depositary. The normal trading unit is 100 American Depositary Shares. Total issued shares of Honda as of the close of business on March 31, 2009 were 1,834,828,430 shares of Common Stock, of which 81,804,835 shares represented by ADSs and 256,973,523 shares not represented by ADSs were owned by residents of the United States. The number of holders of record of the Company’s shares of Common Stock in the United States was 251 at March 31, 2009.

 

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

 

B. Related Party Transactions

 

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

 

During the fiscal year ended March 31, 2009, Honda had sales of ¥403.3 billion and purchases of ¥948.4 billion with equity affiliates accounted under the equity method. As of March 31, 2009, Honda had receivables of ¥104.3 billion from affiliated companies, and had payables of ¥96.3 billion to affiliated companies.

 

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

 

C. Interests of Experts and Counsel

 

Not applicable.

 

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

 

1 – 3. Consolidated Financial Statements

 

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

 

4. Not applicable.

 

5. Not applicable.

 

6. Export Sales.

 

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

 

7. Legal Proceedings.

 

Various legal proceedings are pending against us. We believe that such proceedings constitute ordinary routine litigation incidental to our business. With respect to product liability, personal injury claims or lawsuits, we believe that any judgment that may be recovered by any plaintiff for general and special damages and court costs will be adequately covered by our insurance and accrued liabilities. Punitive damages are claimed in certain of these lawsuits. We are also subject to potential liability under other various lawsuits and claims including 71 purported class actions in the United States.

 

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Honda records a contingent liability when it is probable that an obligation has been incurred and the amount of loss can be reasonably estimated. Honda reviews these pending lawsuits and claims periodically and adjusts the amounts recorded for these contingent liabilities, if necessary, by considering the nature of lawsuits and claims, the progress of the case and the opinions of legal counsel. Honda does not record liabilities for lawsuits or potential claims that it believes an unfavorable outcome is not probable or when a reasonable estimate of the amount or range of loss cannot be determined. After consultation with legal counsel, and taking into account all known factors pertaining to existing lawsuits and claims, Honda believes that the ultimate outcome of such lawsuits and pending claims including 71 purported class actions in the United States should not result in liability to Honda that would be likely to have an adverse material effect on its consolidated financial position, results of operations or cash flows.

 

8. Profit Redistribution Policy

 

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

 

The Company’s basic policy for dividends is to make quarterly distributions. The Company may determine dividends from surplus by a resolution of the Board of Directors. Also, please note that the year-end cash dividends for the year ended March 31, of each year are matters to be resolved at general meeting of shareholders.

 

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

 

The Company distributed year-end cash dividends of ¥8 per share for the year ended March 31, 2009. As a result, total cash dividends for the year ended March 31, 2009, together with the first quarter cash dividends of ¥22, the second quarter cash dividends of ¥22 and the third quarter cash dividends of ¥11, were ¥63 per share, a decrease of ¥23 from the annual dividends paid for the year ended March 31, 2008.

 

The Company plans to distribute quarterly cash dividends of ¥8 per share for each quarter for the year ending March 31, 2010. As a result, total cash dividends for the year ending March 31, 2010 are planned to be ¥32 per share, a decrease of ¥31 from the annual dividends paid for the year ended March 31, 2009.

 

Details of Distribution of Surplus (Record dates of the fiscal year ended March 31, 2009)

 

    Resolution of
the Board of
Directors
  Resolution of
the Board of
Directors
  Resolution of
the Board of
Directors
  Resolution at
General Meeting of
Shareholders
    July 25, 2008   October 28, 2008   January 30, 2009   June 23, 2009

Dividend per Share of Common Stock (yen)

  22.00   22.00   11.00   8.00

Total Amount of Dividends Yen (millions)

  39,921   39,921   19,960   14,516

 

B. Significant Changes

 

Except otherwise disclosed in this Annual Report on Form 20-F, no significant change has occurred since the date of the annual financial statements.

 

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Item 9. The Offer and Listing

 

A. Offer and Listing Details

 

Honda’s shares have been listed on the Tokyo Stock Exchange (TSE) since 1957 and as of March 31, 2009, Honda’s shares were traded over two stock exchanges in Japan.

 

Since February 11, 1977, American Depositary Shares (each representing one share of Common Stock and evidenced by American Depositary Receipts (ADRs)) have been listed and traded on the New York Stock Exchange (the NYSE), having been traded on the over-the-counter markets in the United States since 1962. In addition, European Shares (each representing ten shares of Common Stock and evidenced by European Depositary Receipts (EDRs)) have been traded in bearer form on the over-the-counter markets in several European countries since 1963. In June 1981, the shares of Common Stock were admitted to the official list of The Stock Exchange of London. In May 1983, the Company listed its shares on the stock exchanges in Zurich, Geneva and Basel in the form of Swiss Bearer Depositary Receipts. In June 1985, the shares of Common Stock were admitted to trading on the Paris Stock Exchange. As for the stock exchanges in Switzerland, the floor exchanges in Zurich, Basel and Geneva were consolidated to form a single national bourse—the Swiss Exchange, in 1995. The Paris Stock Exchange was merged with the exchanges in Amsterdam and Brussels and created Euronext in September 2000. The Company delisted itself from Euronext Paris and SWX Swiss Exchange and terminated European Depositary Receipts during fiscal year 2008.

 

The monthly average turnover of Honda’s shares of Common Stock and American Depositary Shares for the fiscal year ended March 31, 2009 was approximately 224,721,500 shares of Common Stock on the TSE and approximately 26,090,900 American Depositary Shares on the NYSE.

 

The following table sets out, for the periods indicated, the reported high and low sales prices of Honda’s shares on the TSE in yen and its American Depositary Shares on the NYSE in the U.S. dollars.

 

     Yen per share of
Common Stock on
the TSE*
   U.S. dollars per
American
Depositary Share on
the NYSE

Fiscal year

       High            Low            High            Low    

2005

   ¥ 2,850    ¥ 2,185    $ 27.30    $ 19.25

2006

     3,750      2,510      31.74      23.75

2007

     4,940      3,270      40.82      29.13

2008

           

1st quarter

   ¥ 4,520    ¥ 3,950    $ 36.59    $ 33.30

2nd quarter

     4,600      3,430      37.80      31.29

3rd quarter

     4,400      3,530      37.64      32.14

4th quarter

     3,660      2,610      33.61      27.01

2009

           

1st quarter

   ¥ 3,910    ¥ 2,765    $ 36.40    $ 27.69

2nd quarter

     3,850      3,000      35.67      28.20

3rd quarter

     3,190      1,643      30.08      17.35

4th quarter

     2,515      1,860      25.58      20.28

CY 2009

           

Jan

   ¥ 2,310    ¥ 1,860    $ 25.15    $ 20.28

Feb

     2,515      2,015      25.58      21.95

Mar

     2,510      2,030      25.03      20.72

Apr

     2,920      2,390      29.59      24.83

May

     3,070      2,585      31.00      27.45

 

* The Company executed a two-for-one stock split for the Company’s common stock effective July 1, 2006. The reported high and low sales prices of Honda’s shares on the TSE in yen have been adjusted based on the shares after stock split.

 

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B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

See Item 9.A, “Offer and Listing Details”

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

Item 10. Additional Information

 

A. Share Capital

 

Not applicable

 

B. Memorandum and Articles of Association

 

Set forth below is information relating to Honda’s common stock, including brief summaries of the relevant provisions of Honda’s articles of incorporation and share handling regulations as currently in effect, and of the Company Law of Japan and related legislation.

 

General

 

Honda’s authorized share capital as of the date of the filing of this Form 20-F is 7,086,000,000 shares of common stock, of which 1,834,828,430 shares were issued. Effective as of July 1, 2006, Honda implemented a two for one stock split. The registered beneficial holder of shares underlying the ADSs is the depositary for the ADSs. Accordingly, holders of ADSs will not be able directly to assert shareholders’ rights.

 

On January 5, 2009, a new central clearing system for shares of Japanese listed companies was established pursuant to the Law Concerning Book-Entry Transfer of Corporate Bonds, Shares, Etc. of Japan (including the cabinet order and ministerial ordinances promulgated thereunder; the “Book-Entry Law”), and since then the shares of all Japanese companies listed on any Japanese financial instruments exchange, including Honda’s shares, have become subject to this new system. On the same day, all existing shares were dematerialized and all existing share certificates for such shares became null and void. At present, the Japan Securities Depository Center, Inc. (“JASDEC”) is the sole institution that is designated by the relevant authorities as a book-entry transfer institution which is permitted to engage in the clearing operations of shares of Japanese listed companies under the Book-Entry Law. Under the new clearing system, in order for any person to hold, sell or otherwise dispose of shares of Japanese listed companies, such person must have an account at an account management institution unless such person has an account directly at JASDEC. “Account management institutions” are, in general, financial instruments firms engaged in type 1 financial instruments business (i.e., securities brokers/dealers), banks, trust companies and certain other financial institutions which meet the requirements prescribed by the Book-Entry Law.

 

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Under the Book-Entry Law, any transfer of shares is effected through book entry, and title to the shares passes to the transferee at the time when the transferred number of the shares is by an application for book entry recorded in the transferee’s account at an account management institution. The holder of an account at an account management institution is presumed to be the legal owner of the shares recorded in such account.

 

Under the Company Law and the Book-Entry Law, in order to assert shareholders’ rights against Honda, a shareholder must have its name and address registered in the register of shareholders, except in limited circumstances. Although, in general, holders of an account with shares recorded are to be registered in the register of shareholders on the basis of information notified by JASDEC to Honda at certain prescribed time, in order to exercise minority shareholders’ rights (other than those the record dates for which are fixed) against Honda, a holder of an account with shares needs to make an application through an account management institution to JASDEC, which will then give a notice of the name and address of such holder, the number of shares held by such holder and other requisite information to Honda, and to exercise rights within four weeks from such notice.

 

Non-resident shareholders are required to appoint a standing proxy in Japan or provide a mailing address in Japan. Each such shareholder must give notice of such standing proxy or mailing address to the relevant account management institution. Such notice will be forwarded to Honda through JASDEC. Japanese financial instruments firms and commercial banks customarily act as standing proxies and provide related services for standard fees. Notices from Honda to non-resident shareholders are delivered to such standing proxies or mailing addresses.

 

Objects and Purposes

 

Article 2 of the articles of incorporation of Honda states that its purpose is to engage in the following businesses:

 

   

Manufacture, sale, lease and repair of motor vehicles, ships and vessels, aircrafts and other transportation machinery and equipment.

 

   

Manufacture, sale, lease and repair of prime movers, agricultural machinery and appliances, generators, processing machinery and other general machinery and apparatus, electric machinery and apparatus and precision machinery and apparatus.

 

   

Manufacture and sale of fiber products, paper products, leather products, lumber products, rubber products, chemical industry products, ceramic products, metal products and other products.

 

   

Overland transportation business, marine transportation business, air transportation business, warehousing business, travel business and other transport business and communication business.

 

   

Sale of sporting goods, articles of clothing, stationary, daily sundries, pharmaceuticals, drink and foodstuffs and other goods.

 

   

Financial business, nonlife insurance agency business, life insurance agency business, construction business including building construction work and real estate business including real estate brokerage.

 

   

Publishing business, advertising business, translation business, interpretation business, management consultancy business, information services including information processing, information and communication and information provision, industrial planning and design, comprehensive security business and labor dispatch services.

 

   

Management of parking garages, driving schools, training and education facilities, racecourses, recreation grounds, sporting facilities, marina facilities, hotels, restaurants and other facilities.

 

   

Manufacture, sale and licensing of equipment, parts and supplies and all other relevant business activities and investments relating to each of the foregoing items.

 

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Dividends

 

Under its articles of incorporation, Honda’s financial accounts will be closed on March 31 of each year. The record date for dividends is June 30, September 30, December 31 and March 31 of each year. In addition, the Company may distribute dividends from surplus by determining any record date.

 

Under the Company Law, a company is permitted to make distributions of surplus to the shareholders any number of times per fiscal year pursuant to resolutions of a general meeting of shareholders, subject to certain limitations provided by the Law and the Ordinances of the Ministry of Justice thereunder. Distributions of surplus are required, in principle, to be authorized by a resolution of a general meeting of shareholders. However, if the articles of incorporation so provide and certain other requirements under the Company Law are met, distributions of surplus may be made pursuant to a board resolution. Pursuant to the provisions of the Company Law and its articles of incorporation, the board of directors of Honda may determine distributions of its surplus.

 

Distributions of surplus may be made in cash or in-kind in proportion to the number of shares held by each shareholder. If a distribution of surplus is to be made in-kind, a special resolution of a general meeting of shareholders is required, except in the case that a right to receive cash distribution instead of distribution in-kind is granted to shareholders. If such right is granted, distributions in-kind may be made pursuant to an ordinary resolution of a general meeting of shareholders or, as the case may be, a board resolution.

 

Under the Company Law, Honda is permitted to prepare non-consolidated extraordinary financial statements consisting of a balance sheet as of any date subsequent to the end of the previous fiscal year and an income statement for the period from the first day of the current fiscal year to the date of such balance sheet. If such extraordinary financial statements are prepared and approved in accordance with the provisions of the Company Law and the Ordinances of the Ministry of Justice thereunder, the results of such extraordinary financial statements may be considered in the calculation of distributable amount.

 

Under its articles of incorporation, Honda is not obligated to pay any dividends which are left unclaimed for a period of three full years after the date on which they first became payable.

 

Capital and Reserves

 

The entire amount of the issue price of the shares to be issued in the future will generally be required to be accounted for as stated capital. However, Honda may account for an amount not exceeding one-half of such issue price as additional paid-in capital by resolution of the board of directors in accordance with the Company Law. Honda may at any time reduce the whole or any part of its additional paid-in capital or transfer them to stated capital by resolution of a general meeting of shareholders. The whole or any part of surplus may also be transferred to stated capital, additional paid-in capital or legal reserve by resolution of a general meeting of shareholders.

 

Stock Splits

 

Honda may at any time split its shares into greater number of shares by resolution of the board of directors. When the board of directors approves a stock split, it may also amend the articles of incorporation of Honda without approval of shareholders to increase the number of its authorized shares in proportion to the stock split, so long as Honda does not issue more than one class of shares.

 

Under the Book-Entry Law, Honda must give notice to JASDEC regarding a stock split at least two weeks prior to the relevant record date. On the effective date of the stock split, the numbers of shares recorded in all accounts held by its shareholders at account management institutions or at JASDEC will be increased in accordance with the applicable ratio.

 

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Consolidation of Shares

 

Honda may at any time consolidate the shares into a smaller number of shares by a special resolution of the general meeting of shareholders. A representative director of Honda must disclose the reason for the consolidation of the shares at the general meeting of shareholders.

 

Under the Book-Entry Law, Honda must give notice to JASDEC regarding a consolidation of shares at least two weeks prior to the relevant record date. On the effective date of the consolidation of shares, the number of shares recorded in all accounts held by its shareholders at account management institutions or at JASDEC will be decreased in accordance with the applicable ratio.

 

Japanese Unit Share System

 

Consistent with the requirements of the Company Law, the articles of incorporation of Honda adopts unit share system called as “tan-gen-kabu”, under which 100 shares constitute one voting unit of shares. The board of directors of Honda by itself may reduce, but not to increase, the number of shares that constitute a voting unit or abolish the unit share system entirely by amendments to the articles of incorporation by a board resolution. An increase in the number of shares that constitute one voting unit requires an amendment to the articles of incorporation by a special resolution of a general shareholders’ meeting. In any case, the number of shares constituting one voting unit may not exceed 1,000 shares or 0.5% of the total issued shares.

 

Under the Book-Entry Law, shares constituting less than one unit are transferable. Under the rules of the Japanese financial instruments exchanges, however, shares constituting less than one unit do not comprise a trading unit, except in limited circumstances, and accordingly may not be sold on the Japanese financial instruments exchanges.

 

The holder of shares constituting less than one voting unit may at any time require Honda to purchase or sell such shares to constitute a voting unit at the market price in accordance with the Company’s share handling regulations (see below). Because the transfer of ADRs does not require changes in the ownership of the underlying shares, holders of ADRs evidencing ADSs that constitute less than one voting unit of shares are not affected by these restrictions in their ability to transfer the ADRs. However, because transfers of less than one voting unit of the underlying shares are normally prohibited under the unit share system, under the deposit agreement, the right of ADR holders to surrender their ADRs and withdraw the underlying shares for sale in Japan may only be exercised as to whole voting units.

 

Right of a Holder of Shares Representing Less Than One Voting Unit to Require Honda to Purchase or Sell Its Shares

 

A holder of Honda’s shares representing less than one voting unit may at any time require Honda to purchase its shares. These shares will be purchased at (a) the closing price of the shares reported by the Tokyo Stock Exchange on the day when the request for purchase reaches the share handling agent, or (b) if no sale takes place on the Tokyo Stock Exchange on that day, then the price at which the first sale of shares is effected on the Tokyo Stock Exchange thereafter. In each case, Honda will request the payment of an amount determined by Honda as an amount equal to the brokerage commission required for the sale and purchase of the shares. A holder of shares representing less than one voting unit may, in accordance with the provisions of the share handling regulations, also make a request to the effect that such number of shares should be sold to it that will, when added to the shares less than one voting unit already held by that shareholder, constitute one voting unit. However, because holders of ADSs representing less than one unit are not able to withdraw the underlying shares from deposit, these holders will not be able to exercise many shareholder rights as a practical matter.

 

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Other Rights of a Holder of Shares Representing Less Than One Voting Unit

 

In addition to the right described in the preceding paragraph, a holder of shares representing less than one voting unit also has the rights including the followings and these rights may not be restricted by the articles of incorporation:

 

   

rights to receive any consideration for acquisition by a corporation of special shares all of which may be acquired by such corporation (zembu shutoku joukou tsuki shurui kabushiki) as provided by Article 171, paragraph 1, item 1 of the Company Law,

 

   

rights to receive any cash or other consideration for acquisition by a corporation of shares which may be acquired by such corporation on occurrence of certain event (shutoku joukou tsuki shurui kabushiki) as provided by Article 107, paragraph 1, item 3 of the Company Law,

 

   

rights to be allocated any shares without consideration as provided by Article 185 of the Company Law,

 

   

rights to receive distribution of any residual assets of a corporation, and

 

   

any other rights provided in the relevant Ordinance of the Ministry of Justice, including rights to receive cash or other distribution derived from consolidation of shares, stock split, allocation of stock acquisition rights without consideration, distribution of surplus or reorganization of a corporation.

 

Other rights of a holder of shares constituting less than one voting unit may be restricted if the articles of incorporation so provide.

 

Voting rights under the unit share system

 

Under the unit share system, the shareholders shall have one voting right for each voting unit of shares that they hold. A shareholder who owns shares representing less than one voting unit will not be able to exercise voting rights and any other rights relating thereto.

 

Voting Rights

 

Honda holds its ordinary general meeting of shareholders in June of each year. In addition, Honda may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks’ advance notice. Under the Company Law, notice of any shareholders’ meeting must be given to each shareholder having voting rights or, in the case of a non-resident shareholder, to his resident proxy or mailing address in Japan in accordance with Honda’s share handling regulations, at least two weeks prior to the date of the meeting.

 

A shareholder of Honda is generally entitled to one vote per voting unit of shares as described in this paragraph and under “Japanese Unit Share System” above. In general, under the Company Law and the articles of incorporation of Honda, a resolution may be adopted at a meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Company Law and Honda’s articles of incorporation require a quorum for the election of directors and corporate auditors of not less than one-third of the total number of voting rights of all shareholders and the resolution shall be adopted by majority voting. Honda’s shareholders are not entitled to cumulative voting in the election of directors. A corporate shareholder whose voting rights are in turn more than one-quarter directly or indirectly owned by Honda does not have voting rights.

 

Shareholders may exercise their voting rights through proxies, provided that those proxies are also shareholders who have voting rights. Shareholders who intend to be absent from a general meeting of shareholders may exercise their voting rights in writing. In addition, they may exercise their voting rights by electronic means if the board of directors decides to accept such means.

 

Under the Company Law, in order to approve certain significant matters of a corporation, more strict requirement for the quorum or the number of voting rights to approve is provided. The articles of incorporation

 

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of Honda provide that such resolution may be adopted at a meeting of shareholders by two thirds of the voting rights of the shareholders present at the meeting representing at least one third of all the shareholders having voting rights. Such significant matters include, but not limited to:

 

   

the determination of the matters relating to acquisition of its own shares from a specific shareholder,

 

   

the determination as to acquisition of special shares all of which may be acquired by a corporation (zembu shutoku joukou tsuki shurui kabushiki),

 

   

the determination of consolidation of the shares,

 

   

the determination of discharge of a part of responsibilities of directors, corporate auditors or accounting auditors,

 

   

the determination of the matters concerning distribution of surplus by property other than cash (only in the case that no cash distribution is allowed to shareholders),

 

   

the determination of the matters concerning amendments to the articles of incorporation, transfer of whole or important part of business or dissolution of a corporation,

 

   

the determination of the matters concerning reorganization of a corporation.

 

Pursuant to the terms of the Deposit Agreement, upon receipt of notice of any meeting of holders of Common Shares of the Registrant, the Depositary will mail to the record holders of ADRs and publish a notice which will contain the information in the notice of the meeting. The record holders of ADRs at the close of business on a date specified by the Depositary will be entitled to instruct the Depositary as to the exercise of the voting rights pertaining to the amount of Common Stock of the Registrant represented by their respective Depositary Receipts. The Depositary will endeavor, in so far as practicable, to vote the amount of Common Stock of the Registrant represented by such Depositary Receipts in accordance with such instructions, and the Registrant has agreed to take all action which may at any time be deemed necessary by the Depositary in order to enable the Depositary to so vote such Common Stock. In the absence of such instructions, the Depositary has agreed to use its best efforts to give a discretionary proxy to a person designated by the Registrant. However, such proxy may not be given with respect to any proposition of which the Depositary has knowledge regarding any contest related to the action to be taken at the meeting, or the purpose of which is to authorize a merger, consolidation or any other matter which may substantially affect the rights or privileges of the Common Stock of the Registrant or other securities, property or cash received by the Depositary or the Custodian in respect thereof.

 

Subscription Rights and Stock Acquisition Rights

 

Holders of shares have no preemptive rights under Honda’s articles of incorporation. Under the Company Law, the board of directors may, however, determine that shareholders be given subscription rights in connection with a particular issue of new shares. In this case, such rights must be given to all shareholders as of a specified record date by at least two weeks’ prior public notice to shareholders of the record date. In addition, individual notice must be given to each of these shareholders at least two weeks prior to the date of expiration of the subscription rights.

 

Honda also may decide to grant the stock acquisition rights (shinkabu-yoyakuken), with or without bonds, to any person including shareholders, by resolution of its board of directors unless issued under specially favorable conditions. The holder of such rights may exercise its rights within the exercise period by paying subscription moneys all as prescribed in the terms of such rights.

 

Liquidation Rights

 

In the event of a liquidation of Honda, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among the shareholders in proportion to the number of shares they own.

 

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Liability to Further Calls or Assessments

 

All of Honda’s currently issued shares, including shares represented by the ADSs, are fully paid and nonassessable.

 

Shareholders’ Register Manager

 

The Chuo Mitsui Trust and Banking Company, Limited is the Shareholders’ Register Manager for the shares. Chuo Mitsui’s office is located at 33-1, Shiba 3-chome, Minato-ku, Tokyo, 105-8574, Japan. Chuo Mitsui maintains Honda’s register of shareholders and records the names and addresses of its shareholders and other relevant information in its register of shareholders upon notice thereof from JASDEC, as described in “—Record Date” below.

 

Record Date

 

As mentioned above, the record date for Honda’s dividends is June 30, September 30, December 31 and March 31, if paid. A holder of shares constituting one or more whole voting units who is registered as a holder on Honda’s register of shareholders at the close of business as of March 31 is entitled to exercise shareholders’ voting rights at the ordinary general meeting of shareholders with respect to the fiscal year ended on March 31. In addition, Honda may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks’ prior public notice.

 

Under the Book-Entry Law, Honda is required to give notice of each record date to JASDEC at least two weeks prior to such record date. JASDEC is required to promptly give notice to Honda of the names and addresses of all of its shareholders of record, the numbers of shares held by them and other relevant information as of such record date.

 

The shares generally trade ex-dividend or ex-rights on the Japanese financial instruments exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings. On April 1, 2009, the Tokyo Stock Exchange announced that, with respect to record dates on or after November 19, 2009, shares will trade ex-dividend or ex-rights on the Tokyo Stock Exchange on the second business day prior to such record date.

 

Acquisition by Honda of Shares

 

Under the Company Law, Honda is generally required to obtain authorization for any acquisition of its own shares by means of:

 

(i) a resolution at a general meeting of shareholders, which may be effective for one year at the most from the date thereof;

 

(ii) a resolution of the board of directors if the acquisition is in accordance with its articles of incorporation; or

 

(iii) a resolution of the board of directors if the acquisition is to purchase its shares from a subsidiary.

 

Honda may only dispose of shares so acquired in accordance with the procedures applicable to a new share issuance under the Company Law.

 

Upon due authorization, Honda may acquire its own shares:

 

   

in the case of (i) and (ii) above, from stock markets or by way of tender offer;

 

   

in the case of (i) above, from a specific person, but only if its shareholders approve such acquisition by special resolution; and

 

   

in the case of (iii) above, from such subsidiary.

 

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In the event Honda is to acquire its own shares from a specific person other than its subsidiary at a price which is higher than the higher of (i) the final market price on the market trading such shares as of the date of such request or (ii) in the event that such shares are subject to a tender offer, etc., the price set in the contract regarding such tender offer, any shareholder may request that Honda includes such shareholder’s shares in the proposed purchase.

 

Acquisitions described in (i) through (iii) above must satisfy certain other requirements, including the restriction of the source of consideration in which the total amount of the purchase price of such own shares may not exceed the distributable amount of the corporation.

 

Reports to Shareholders

 

Honda currently furnishes shareholders with notices of shareholders’ meetings, business reports, including financial statements, and notices of resolutions adopted at the shareholders’ meetings, all of which are in Japanese. Such notices as described above may be furnished by electronic means to those shareholders who have approved such way of furnishing notices. Pursuant to its articles of incorporation, Honda must publish notices to shareholders in Japanese in the Nihon Keizai Shimbun, a Japanese newspaper of general circulation.

 

Report of Substantial Shareholdings

 

The Financial Instruments and Exchange Law of Japan and regulations under such Law require any person who has become a holder (together with its related persons) of more than 5% of the total issued shares of a corporation listed on any Japanese financial instruments exchange or whose shares are traded on the over-the-counter market (including ADSs representing such shares) to file with the Director of a competent Local Finance Bureau, within five business days, in general, a report concerning those shareholdings. A similar report must also be filed to reflect any change of 1% or more in any shareholding or any change in material matters set out in reports previously filed. Copies of any report must also be furnished to the corporation and to all Japanese financial instruments exchanges on which the corporation’s shares are listed or in the case of shares traded on the over-the-counter market, the Japan Securities Dealers Association. For this purpose, shares issuable or transferable to such person upon exercise of exchangeable securities, conversion of convertible securities or exercise of warrants or stock acquisition rights are taken into account in determining both the number of shares held by that holder and the corporation’s total issued share capital.

 

Daily Price Limits under Japanese Financial Instruments Exchange Rules

 

Share prices on Japanese financial instruments exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges set daily price limits, which limit the maximum range of fluctuation within a single trading day. Daily price limits are set in absolute yen according to the previous day’s closing price or special quote. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his shares at such price on a particular trading day, or at all.

 

C. Material Contracts

 

All contracts concluded by Honda during the two years preceding this filing were entered into in the ordinary course of business.

 

D. Exchange Controls

 

There are no laws, decrees, regulations or other legislation which materially affect our ability to import or export capital for our use or our ability to pay dividends to nonresident holders of our shares.

 

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E. Taxation

 

Japanese Taxes

 

The following is a summary of the principal Japanese tax consequences as of the date of the filing of this Form 20-F to owners of Honda’s shares or ADSs who are non-resident individuals or non-Japanese corporations without a permanent establishment in Japan to which income from Honda’s shares is attributable. The tax treatment is subject to possible changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive of all possible tax considerations that may apply to a particular investor. Potential investors should consult their own tax advisers as to:

 

   

the overall tax consequences of the acquisition, ownership and disposition of shares or ADSs, including specifically the tax consequences under Japanese law;

 

   

the laws of the jurisdiction of which they are resident; and

 

   

any tax treaty between Japan and their country of residence.

 

Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations.

 

In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to a non-resident of Japan or a non-Japanese corporation is 20%. With respect to dividends paid on listed shares issued by Japanese corporations (such as Honda’s shares) to a non-resident of Japan or a non-Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends to be paid until December 31, 2011, and (ii) 15% for dividends to be paid thereafter, except for dividends paid to any individual shareholder who holds 5% or more of the issued shares of that corporation. Japan has entered into income tax treaties, conventions or agreements, whereby the maximum withholding tax rate is generally set at 15% for portfolio investors with, among others, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, and Switzerland.

 

Pursuant to the Convention Between the United States of America and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “U.S.-Japan Tax Treaty”), a portfolio investor that is a U.S. holder is generally subject to Japanese withholding tax on dividends on shares at a rate of 10%. A similar withholding tax treatment applies under the new tax treaty between the United Kingdom and Japan for dividends taxed on or after January 1, 2007 due to the renewal of such treaty. The tax treaty between France and Japan was renewed, effective from December 1, 2007, under which the standard treaty withholding rate for portfolio investors on dividends taxed on or after January 1, 2008 was reduced from 15% to 10%. In addition, the tax treaty between Australia and Japan has also been renewed, effective from December 3, 2008, under which the standard treaty withholding rate on dividends taxed on or after January 1, 2009 will be reduced in general from 15% to 10%. Under Japanese tax law, the maximum rate applicable under the tax treaties, conventions or agreements shall be applicable except when such maximum rate is more than the Japanese statutory rate.

 

Gains derived from the sale outside Japan of common stock or Depositary Receipts by a non-resident of Japan or a non-Japanese corporation, or from the sale of common stock within Japan by a non-resident of Japan or by a non-Japanese corporation not having a permanent establishment in Japan, are in general not subject to Japanese income or corporation taxes. Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired common stock or Depositary Receipt as a legatee, heir or donee, even if the individual is not a Japanese resident.

 

United States Taxes

 

This section describes the material U.S. federal income tax consequences of the ownership of shares or ADSs by U.S. holders, as defined below. It applies only to persons who hold shares or ADSs as capital assets for tax purposes.

 

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This section is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the U.S.-Japan Tax Treaty. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.

 

For purposes of the U.S.-Japan Tax Treaty and the Code, U.S. holders of ADRs evidencing ADSs will be treated as the owners of the Shares represented by those ADRs. Exchanges of shares for ADRs and ADRs for shares, generally will not be subject to U.S. federal income tax. For purposes of this discussion, a “U.S. holder” is a beneficial owner of shares or ADSs that is for U.S. federal income tax purposes, (i) a citizen or resident individual of the United States, (ii) a domestic corporation, (iii) an estate whose income is subject to United States federal income tax regardless of its source, or (iv) a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust; and that, for purposes of the U.S.-Japan Tax Treaty, (i) holds the shares and ADSs that do not form part of the business property of a permanent establishment through which the beneficial owner carries on or has carried on business and (ii) is not otherwise ineligible for benefits under the U.S.-Japan Tax Treaty, as the case may be, with respect to income and gain from the shares or ADSs.

 

This section does not apply to a person who is a member of a special class of holders subject to special rules, including a dealer in securities, a trader in securities that elects to use a mark-to-market method of accounting for its securities holdings, a tax-exempt organization, a life insurance company, a person liable for alternative minimum tax, a person that actually or constructively owns 10% or more of the voting stock of Honda, a person that holds shares or ADSs as part of a straddle or a hedging or conversion transaction, or a person whose functional currency is not the U.S. dollar.

 

This summary is not a comprehensive description of all the tax considerations that may be relevant with respect to a U.S. holder’s shares or ADSs. Each beneficial owner of shares or ADSs should consult its own tax advisor regarding the U.S. federal, state and local and other tax consequences of owning and disposing of shares and ADSs in its particular circumstances.

 

Taxation of Dividends

 

Under the U.S. federal income tax laws and subject to the passive foreign investment company, or PFIC, rules discussed below, the gross amount of any dividend paid by Honda out of its current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) is subject to U.S. federal income taxation. A U.S. holder must include any Japanese tax withheld from the dividend payment in this gross amount even though it does not in fact receive it.

 

Dividends paid to a noncorporate U.S. holder in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to such holder at a maximum tax rate of 15% provided that the noncorporate U.S. holder holds shares or ADSs for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends that Honda pays with respect to the shares or ADSs generally will be qualified dividend income. A U.S. holder must include the dividend in its taxable income when the holder, in the case of shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The amount of the dividend distribution that a U.S. holder must include in its income will be the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date of the dividend distribution, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the U.S. holder includes the dividend payment in income to the date it converts the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income.

 

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The gain or loss generally will be income or loss from sources within the U.S. for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of U.S. holder’s basis in the shares or ADSs and thereafter as capital gain.

 

Subject to certain limitations, the Japanese tax withheld in accordance with the U.S.-Japan Tax Treaty and paid over to Japan will be creditable against a U.S. holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to a U.S. holder under Japanese law or under the U.S.-Japan Tax Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder’s United States federal income tax liability. Please see “Japanese Taxation,” above, for the procedures for obtaining a reduced rate of withholding under a treaty or a tax refund.

 

Dividends will be income from sources outside the United States. Dividends will, depending on your circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to a U.S. holder.

 

Taxation of Capital Gains

 

Subject to the PFIC rules discussed below, if a U.S. holder sells or otherwise disposes of its shares or ADSs, it will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that it realizes and its tax basis, determined in U.S. dollars, in its shares or ADSs. Capital gain of a noncorporate U.S. holder that is recognized before January 1, 2011 will generally be taxed at a maximum rate of 15% where the property is held for more than one year. The gain or loss will generally be income or loss from sources within the U.S. for foreign tax credit limitation purposes.

 

Passive Foreign Investment Company (PFIC) Rules

 

Honda believes its shares and ADSs are not stock of a PFIC for United States federal income tax purposes. This conclusion is a factual determination that is made annually and thus may be subject to change.

 

In general, Honda will be a PFIC with respect to a U.S. holder if for any taxable year in which such holder held our shares or ADSs:

 

   

at least 75% of Honda’s gross income for the taxable year is passive income; or

 

   

at least 50% of the value, determined on the basis of a quarterly average, of Honda’s assets is attributable to assets that produce or are held for the production of passive income.

 

Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

 

If Honda is treated as a PFIC, and a U.S. holder does not make a mark-to-market election, as described below, that U.S. holder will be subject to special rules with respect to:

 

   

any gain it realizes on the sale or other disposition of its shares or ADSs; and

 

   

any excess distribution that Honda makes to the U.S. holder (generally, any distributions to it during a single taxable year that are greater than 125% of the average annual distributions received by it in respect of the shares or ADSs during the three preceding taxable years or, if shorter, its holding period for the shares or ADSs).

 

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Under these rules:

 

   

the gain or excess distribution will be allocated ratably over the U.S. holder’s holding period for the shares or ADSs,

 

   

the amount allocated to the taxable year in which it realized the gain or excess distribution will be taxed as ordinary income,

 

   

the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and

 

   

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

 

Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.

 

If a U.S. holder owns shares or ADSs in a PFIC that are treated as marketable stock, such holder may make a mark-to-market election. If a U.S. holder makes this election, it will not be subject to the PFIC rules described above. Instead, in general, a U.S. holder will include as ordinary income each year the excess, if any, of the fair market value of its shares or ADSs at the end of the taxable year over its adjusted basis in its shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. A U.S holder will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. holder’s basis in the shares or ADSs will be adjusted to reflect any such income or loss amount.

 

In addition, notwithstanding any election that a U.S. holder makes with regard to the shares or ADSs, dividends that a U.S. holder receives from Honda will not constitute qualified dividend income to such holder if Honda is a PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, shares or ADSs held by a U.S. holder will be treated as stock in a PFIC if Honda was a PFIC at any time during the U.S. holder’s holding period in its shares or ADSs, even if Honda is not currently a PFIC. For purposes of this rule, if a U.S. holder makes a mark-to-market election with respect to its shares or ADSs, the U.S. holder will be treated as having a new holding period in its shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that a U.S. holder receives that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, the U.S. holder must include the gross amount of any such dividend paid by Honda out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in the U.S. holder’s gross income, and it will be subject to tax at rates applicable to ordinary income.

 

If a U.S. holder owns shares or ADSs during any year that Honda is a PFIC with respect to such U.S. holder, it must file Internal Revenue Service Form 8621. U.S. holder should consult their own tax advisors regarding the PFIC rules and potential filing and other requirements.

 

F. Dividends and Paying Agents

 

Not applicable.

 

G. Statement by Experts

 

Not applicable.

 

H. Documents on Display

 

Honda is subject to the information requirements of the Securities Exchange Act of 1934 and, in accordance therewith, it will file annual reports on Form 20-F within six months of its fiscal year-end and furnish other reports and information on Form 6-K with the Securities and Exchange Commission. These reports and other

 

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information can be inspected without charge at the public reference room at the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You can also obtain copies of such material by mail from the public reference room of the Securities and Exchange Commission at prescribed fees. You may obtain information on the operation of the Securities and Exchange public reference room by calling the Securities and Exchange Commission in the United States at 1-800-SEC-0330. The Securities and Exchange Commission also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. Also, as a foreign private issuer, Honda is exempt from the rules under the Securities Exchange Act of 1934 prescribing the furnishing and content of proxy statements to shareholders.

 

I. Subsidiary Information

 

Not applicable.

 

Item 11. 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 exchange rates and in interest rates. Honda does not hold any derivative financial instruments for trading purposes.

 

Honda adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” effective April 1, 2008. This statement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, and emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability. The adoption of this statement did not have a material impact on the Company’s consolidated financial position or results of operations. Additional detailed information is described in Note (14) to the accompanying consolidated financial statements.

 

Foreign Currency Exchange Rate Risk

 

Foreign currency forward exchange contracts and purchased option contracts are used to hedge currency risk of sale commitments 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.

 

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The tables below provide information about our derivatives related to foreign currency exchange rate risk as of March 31, 2008 and 2009. For forward exchange contracts and currency options, the table presents the contract amounts and fair value. All forward exchange contracts and currency contracts to which we are a party have original maturities of less than one year.

 

Foreign Exchange Risk

 

     2008    2009
     Yen (millions)     Average
contractual
rate
   Yen (millions)     Average
contractual
rate

Forward Exchange Contracts

   Contract
amount
   Fair value        Contract
amount
   Fair value    

To sell US$

   ¥ 214,797    9,199      104.25    ¥ 182,941    (8,966   93.33

To sell EUR

     40,963    64      157.99      42,324    (2,086   123.40

To sell CA$

     14,146    560      101.72      379    (5   76.99

To sell GBP

     70,227    2,739      207.07      49,681    (2,673   133.42

To sell other foreign currencies

     12,147    362      various      16,549    (387   various

To buy US$

     7,104    (196   102.92      3,287    131      94.26

To buy other foreign currencies

     2,272    (29   various      1,933    (11   various

Cross-currencies

     254,189    (517   various      234,521    94      various
                               

Total

   ¥ 615,845    12,182         ¥ 531,615    (13,903  
                               
     Yen (millions)     Average
contractual
rate
   Yen (millions)     Average
contractual
rate

Currency Option Contracts

   Contract
amount
   Fair value        Contract
amount
   Fair value    

Option purchased to sell US$

   ¥ 96,720    877      various    ¥ 24,548    304      various

Option written to sell US$

     136,005    (502   various      51,551    (1,743   various

Option purchased to sell other currencies

     17,378    409      various      —      —        —  

Option written to sell other currencies

     22,101    (457   various      —      —        —  
                               

Total

   ¥ 272,204    327         ¥ 76,099    (1,439  
                               

 

Interest Rate Risk

 

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 rate swap agreements are mainly used to manage interest rate risk exposure and to convert floating rate financing (normally three-five years) to 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 exchange risk as well as interest rate risk.

 

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The following tables provide information about Honda’s financial instruments that were sensitive to changes in interest rates at March 31, 2008 and 2009. 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 and 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+a and an index.

 

Interest Rate Risk

 

Finance Subsidiaries-Receivables

 

    2008   2009  
    Yen (millions)   Yen (millions)      
                Expected maturity date       Average
interest
rate
 
    Total   Fair
value
  Total   Within
1 year
  1-2
year
  2-3
year
  3-4
year
  4-5
year
  There-
after
  Fair
value
 

Direct financing leases

                     

JP¥

  ¥ 23,580   *   ¥ 24,720   14,156   5,364   3,035   1,438   725   2   *   4.83

US$

    657,278   *     199,172   179,717   19,115   339   1   —     —     *   6.00

Other

    531,776   *     475,409   136,583   144,600   110,581   71,899   11,729   17   *   3.92
                                             

Total—Direct Financing Leases

  ¥ 1,212,634   *   ¥ 699,301   330,456   169,079   113,955   73,338   12,454   19   *  
                                             

Other Finance Receivables

                     

JP¥

  ¥ 441,695   437,032   ¥ 450,177   150,408   114,770   83,856   51,594   31,828   17,721   445,588   4.83

US$

    2,515,518   2,645,690     2,561,667   904,796   577,081   494,761   375,378   175,880   33,771   2,481,293   5.55

Other

    610,201   524,144     504,599   234,525   121,639   82,669   45,841   17,083   2,842   499,198   6.10
                                             

Total—Other Finance Receivables

  ¥ 3,567,414   3,606,866   ¥ 3,516,443   1,289,729   813,490   661,286   472,813   224,791   54,334   3,426,079  
                                             

Retained interests in securitizations**

    54,636   54,636     45,648               45,648  
                                 

Total***

  ¥ 4,834,684     ¥ 4,261,392                
                             

 

* : Under U.S. generally accepted accounting principles, disclosure of fair values of direct financing leases is not required.
** : The retained interests in securitizations is accounted for as “trading” securities and is reported at fair value.
*** : The finance subsidiaries-receivables include finance subsidiaries-receivables included in trade receivables and other assets in the consolidated balance sheets. Additional detailed information is described in Note (2) to the accompanying consolidated financial statements.

 

Long-Term Debt (including current portion)

 

 

 

2008

 

 

2009

 

 

Yen (millions)

 

 

Yen (millions)

 
                Expected maturity date       Average
interest
    Total   Fair
value
  Total   Within
1 year
  1-2
year
  2-3
year
  3-4
year
  4-5
year
  There-
after
  Fair
value
 

Japanese yen bonds

  ¥ 250,080   251,166   ¥ 260,000   60,000   60,000   70,000   30,000   40,000   —     290,411   1.18

Japanese yen medium-term notes (Fixed rate)

    321,600   324,504     220,263   74,645   77,425   33,650   25,113   6,452   2,978   213,717   1.18

Japanese yen medium-term notes (Floating rate)

    165,000   166,308     125,865   20,647   28,687   16,378   58,168   1,985   —     118,553   1.01

U.S. dollar medium-term notes (Fixed rate)

    274,346   286,869     390,098   73,511   50,968   34,305   —     143,101   88,213   359,107   5.57

U.S. dollar medium-term notes (Floating rate)

    1,005,456   1,010,974     796,545   632,125   65,915   98,505   —     —     —     780,050   1.45

Loans and others—primarily fixed rate

    691,220   701,228     1,117,389   116,595   320,430   181,361   219,545   274,580   4,878   1,023,938   3.92
                                             

Total

  ¥ 2,707,702   2,741,049   ¥ 2,910,160   977,523   603,425   434,199   332,826   466,118   96,069   2,785,776  
                                             

 

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Interest Rate Swaps

 

    2008     2009  
        Yen (millions)     Yen (millions)              

Notional

principal
currency

 

Receive/Pay

                Expected maturity date         Average
receive
rate
    Average
pay rate
 
    Contract
amount
  Fair
value
    Contract
amount
  Within
1 year
  1-2
year
  2-3
year
  3-4
year
  4-5
year
  Thereafter   Fair
value
     

JP¥

  Float/Fix   ¥ 2,330   (4   ¥ 510   110   400   —     —     —     —     (3   1.02   1.55

US$

  Float/Fix     2,885,355   (81,730     2,866,860   1,226,632   938,069   562,758   119,804   19,597   —     (88,322   1.34   3.95
 

Fix/Float

    403,333   13,135        599,600   146,528   112,343   58,373   1,418   192,531   88,407   36,867      5.35   2.81
 

Float/Float

    67,127   (36     24,558   24,558   —     —     —     —     —     (76   1.12   1.56

CA$

  Float/Fix     658,179   (9,924     570,945   206,140   166,961   104,088   70,434   22,847   475   (25,298   0.85   3.69
 

Fix/Float

    154,287   4,418        210,427   7,714   39,022   46,769   46,769   70,153   —     17,372      5.22   2.03
 

Float/Float

    100,876   (325     32,222   21,901   10,321   —     —     —     —     (143   0.64   1.00

GBP

 

Float/Fix

    23,469   83        22,002   11,377   10,625   —     —     —     —     (691   2.33   5.00
                                                     

Total

  ¥ 4,294,956   (74,383   ¥ 4,327,124   1,644,960   1,277,741   771,988   238,425   305,128   88,882   (60,294    
                                                     

 

Currency & Interest Rate Swaps

 

    2008     2009  
            Yen (millions)     Yen (millions)            

Receiving

side

currency

 

Paying side
currency

                    Expected maturity date