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, 2007

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)

1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo 107-8556, Japan

(Address of principal executive offices)


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

Title of each class

      

Name of each exchange on which registered

Common Stock*     The 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, 2007

Common Stock     1,821,992,908**

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 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 financial statement item the registrant has elected to follow. Item 17  ¨    Item 18  x

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 120,199,186 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

   6

A. History and Development of the Company

   6

B. Business Overview

   6

C. Organizational Structure

   21

D. Property, Plants and Equipment

   23

Item 4A. Unresolved Staff Comments

   25

Item 5. Operating and Financial Review and Prospects

   25

A. Operating Results

   25

B. Liquidity and Capital Resources

   49

C. Research and Development

   51

D. Trend information

   53

E. Off-Balance sheet Arrangements

   53

F. Tabular Disclosure of Contractual Obligations

   54

G. Safe Harbor

   54

Item 6. Directors, Senior Management and Employees

   54

A. Directors and Senior Management

   54

B. Compensation

   69

C. Board practices

   69

D. Employees

   72

E. Share ownership

   73

Item 7. Major shareholders and Related Party Transactions

   73

A. Major shareholders

   73

B. Related party transactions

   73

C. Interests of Experts and Counsel

   73

Item 8. Financial Information

   74

A. Consolidated Statements and Other Financial Information

   74

B. Significant Changes

   75

Item 9. The Offer and Listing

   75

A. The Offer and Listing

   75

B. Plan of Distribution

   76

C. Markets

   76

D. Selling Shareholders

   76

E. Dilution

   77

F. Expenses of the Issue

   77

Item 10. Additional Information

   77

A. Share Capital

   77

B. Memorandum and Article of Association

   77

C. Material Contracts

   83

D. Exchange Controls

   84

E. Taxation

   84

F. Dividends and Paying Agents

   88


Table of Contents

G. Statement by Experts

   88

H. Documents on Display

   88

I. Subsidiary Information

   88

Item 11. Quantitative and Qualitative Disclosure about Market Risk

   88

Item 12. Description of Securities Other than Equity Securities

   91

PART II

  

Item 13. Defaults, Dividend Arrearages and Delinquencies

   91

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

   91

Item 15. Controls and Procedures

   92

Item 16A. Audit Committee Financial Expert

   92

Item 16B. Code of Ethics

   93

Item 16C. Principal Accountant Fees and Services

   93

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

   94

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

   95

PART III

  

Item 17. Financial Statements

   96

Item 18. Financial Statements

   96

Item 19. Exhibits

   97


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, 2007 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)
    2003   2004   2005   2006   2007   2007

Income statement data:

           

Net sales and other operating revenue

  ¥ 7,971,499   ¥ 8,162,600   ¥ 8,650,105   ¥ 9,907,996   ¥ 11,087,140   $ 93,919

Research and development

    436,863     448,967     467,754     510,385     551,847     4,675

Operating income

    724,527     600,144     630,920     868,905     851,879     7,216

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

    619,413     653,680     668,364     829,904     792,868     6,716

Net income

    426,662     464,338     486,197     597,033     592,322     5,018

Balance sheet data:

           

Total assets

  ¥ 7,821,403   ¥ 8,380,549   ¥ 9,368,236   ¥ 10,631,400   ¥ 12,036,500   $ 101,961

Long-term debt

    1,140,182     1,394,612     1,559,500     1,879,000     1,905,743     16,144

Stockholders’ equity

    2,629,720     2,874,400     3,289,294     4,125,750     4,482,611     37,972

Common stock

    86,067     86,067     86,067     86,067     86,067     729

Depreciation and capital expenditures data:

           

Depreciation excluding property on operating leases

  ¥ 220,874   ¥ 213,445   ¥ 225,752   ¥ 262,225   ¥ 361,747   $ 3,064

Depreciation of property on operating leases

    —       —       —       —       9,741     83

Total depreciation

    220,874     213,445     225,752     262,225     371,488     3,147

Capital expenditures

    316,991     287,741     373,980     457,841     627,066     5,312

Purchase of operating lease assets

    —       —       —       —       366,795     3,107

Total capital expenditures

    316,991     287,741     373,980     457,841     993,861     8,419

 

Weighted average number of shares outstanding

 

     (Thousands of shares)
     2003    2004    2005    2006    2007

Weighted average number of common shares outstanding

   1,941,905    1,907,276    1,867,535    1,840,799    1,824,675

 

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Net income per common share

                 
     (Yen)    (US$)
     2003    2004    2005    2006    2007    2007

Basic

   ¥ 219.71    ¥ 243.45    ¥ 260.34    ¥ 324.33    ¥ 324.62    $ 2.75

Diluted

     219.71      243.45      260.34      324.33      324.62      2.75

 

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$)
     2003    2004    2005    2006    2007    2007

Cash dividends declared during the period per common share

   ¥ 15.50    ¥ 17.50    ¥ 25.50    ¥ 38.50    ¥ 77.00    $ 0.65

 

Additionally, a year-end dividend of ¥20 ($0.17) per common share aggregating ¥36.4 billion ($309 million) relating to fiscal 2007 was determined by our board of directors in April 2007 and approved by our shareholders in June 2007. This dividend was paid in June 2007.

 

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.

 

Misclassification Adjustments

 

As described in Note (1) (v) and Note (2) to our consolidated financial statements, certain revisions for misclassifications have been made. Also, 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, 2007.

 

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 ¥118.05 =$1.00, which represents the approximate exchange rate quoted on the Tokyo Foreign Exchange Market on March 31, 2007. 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.

 

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 June 29, 2007, the noon buying rate was ¥123.39 =$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

2003

   121.10    118.07    133.40    115.71

2004

   112.75    104.18    120.55    104.18

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 (through June 29, 2007)

   121.53    123.39    124.09    117.69

Dec-2006

         119.02    114.98

Jan-2007

         121.81    118.49

Feb-2007

         121.77    118.33

Mar-2007

         118.15    116.01

Apr-2007

         119.84    117.69

May-2007

         121.79    119.77

June-2007

         124.09    121.08

 

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

 

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 import regulations, shortages of certain supplies, high material prices and sales incentives by Honda or other manufacturers or dealers. There can be no assurance that such price volatility will not continue or intensify or that price volatility will not occur in markets that to date have not experienced such volatility. Overcapacity within the industry has increased and will likely continue to increase if the economic downturn continues in Honda’s major markets or worldwide, leading, potentially, to further increased price pressure. Price volatility in any or all of Honda’s markets could adversely affect Honda’s results of operations in a particular period.

 

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.

 

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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 regulation

 

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.

 

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.

 

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 risks relating to residual value, credit risk and cost of capital. Competition for customers and/or these risks may affect Honda’s results of operations in the future.

 

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Honda relies on various suppliers for the provision of certain raw materials and component

 

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.

 

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.

 

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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 to specialty sports cars that incorporate Honda’s highly efficient internal combustion engine technology. Approximately 20.4 million Honda engines were sold worldwide during the fiscal year ended March 31, 2007.

 

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, 2005, 2006 and 2007, Honda’s capital expenditures were ¥373.9 billion, ¥457.8 billion, and ¥993.8 billion, respectively, on an accrual basis. Also, capital expenditures excluding those with respect to property on operating leases were ¥373.9 billion, ¥457.8 billion, and ¥627.0 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2007, see “Property, Plants and Equipment” included as “Item 4.D” of this Annual Report.

 

B. Business overview

 

Motorcycle Business

 

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 its motorcycle business during the fiscal years ended March 31, 2003, 2004, 2005, 2006 and 2007:

 

     Fiscal years ended March 31,  
     2003     2004     2005     2006     2007  

Units (in thousands)

     8,080       9,206       10,482       10,271       10,369  

Revenue in billions of Japanese yen

   ¥ 978     ¥ 996     ¥ 1,097     ¥ 1,225     ¥ 1,370  

Revenue as a Percentage of total sales revenue

     12 %     12 %     13 %     12 %     12 %

 

Honda produces a wide range of motorcycles, ranging from the 50cc class to the 1800cc class in cylinder displacement. Honda’s motorcycles use gasoline 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’s motorcycles are produced at two sites in Japan: Hamamatsu and Kumamoto. In fiscal 2007, the annual production output of these sites was 567,871 units. Honda’s motorcycles are also produced by subsidiaries in the United States, Italy, Spain, Brazil, Thailand, Vietnam, the Philippines and India. Annual output in those countries in fiscal 2007 was approximately 324,000, 165,000, 38,500, 1,214,000, 2,690,000, 865,000, 312,000 and 713,000 units, respectively. Certain motorcycle components are manufactured in Japan and shipped to foreign plants for assembly. Each plant also buys locally made parts or manufactures parts using Honda’s intellectual property and technical guidance.

 

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Automobile Business

 

The following table sets out Honda’s unit sales of automobiles and revenue from its automobile business during the fiscal years ended March 31, 2003, 2004, 2005, 2006 and 2007:

 

     Fiscal years ended March 31,  
     2003     2004     2005     2006     2007  

Units (in thousands)

     2,888       2,983       3,242       3,391       3,652  

Revenue in billions of Japanese yen

   ¥ 6,440     ¥ 6,592     ¥ 6,963     ¥ 8,004     ¥ 8,889  

Revenue as a percentage of total sales revenue

     81 %     81 %     80 %     81 %     80 %

 

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

 

Passenger cars:

 

Legend, Accord, Civic, City, Acura RL, Acura TL, Acura TSX

 

Multi-wagons, Minivans, Sport Utility Vehicle, Sports coupe:

 

Elysion, Odyssey, Step Wagon, Edix, FR-V, Stream, Mobilio, Fit, Jazz, Airwave, Pilot, Ridgeline, Element, CR-V, Crossroad, Acura MDX, Acura RDX

 

Mini cars:

 

Life, That’s, Vamos, Zest, Acty

 

Automobiles are produced by Honda at two sites in Japan: the Saitama factory and the Suzuka factory. Our major production sites overseas are located in Ohio (U.S.A.), Alabama (U.S.A.), Alliston (Canada), Swindon (U.K.) and Ayutthaya (Thailand).

 

Yachiyo Industry Co., Ltd., one of our consolidated subsidiaries, assembles the Life, Vamos and Vamos-Hobio, Zest, Acty-Truck and Acty-Van. The automobile assembled at Yachiyo Industry undergo final tests at the Suzuka factory. For this reason, for our management purposes, those automobile products are deemed to have been produced at the Suzuka factory, instead of at Yachiyo Industry.

 

Financial Services Business

 

The following table sets out Honda’s revenue from Financial Services during the fiscal years ended March 31, 2003, 2004, 2005, 2006 and 2007:

 

     Fiscal years ended March 31,  
     2003     2004     2005     2006     2007  

Revenue in billions of Japanese yen

   ¥ 237     ¥ 242     ¥ 255     ¥ 306     ¥ 409  

Revenue as a percentage of total sales revenue

     3 %     3 %     3 %     3 %     4 %

 

In our financial services business, Honda offers a variety of financial services to our customers and dealers through finance subsidiaries in Japan and abroad, with the aim of providing sales support for our products.

 

Power Product and Other Businesses

 

The following table sets out Honda’s revenue from Power Product and Other Businesses during the fiscal years ended March 31, 2003, 2004, 2005, 2006 and 2007:

 

     Fiscal years ended March 31,  
     2003     2004     2005     2006     2007  

Units (in thousands)

     4,584       5,047       5,300       5,876       6,421  

Revenue in billions of Japanese yen

   ¥ 315     ¥ 331     ¥ 332     ¥ 370     ¥ 417  

Revenue as a percentage of total sales revenue

     4 %     4 %     4 %     4 %     4 %

 

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Honda manufactures a variety of power products including power tillers, portable generators, general-purpose engines, grass cutters, outboard engines, water pumps, snow throwers, power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers).

 

Marketing and Distribution

 

Most of Honda’s products are distributed under trademarks of Honda in Japan and/or in overseas markets. Major trademarks include HONDA, ACURA, LEGEND, INSPIRE, ACCORD, CIVIC, CITY, FIT SALOON, FIT ARIA, ACURA RL, ACURA TL, ACURA TSX, ELYSION, ODYSSEY, STEP WGN, EDIX, FR-V, STREAM, MOBILIO, FIT, JAZZ, AIRWAVE, PILOT, RIDGELINE, ELEMENT, CR-V, CROSSROAD, MDX, ACURA MDX, S2000, INSIGHT, ACURA RDX, LIFE, THAT’S, VAMOS, ZEST, ACTY, GOLD WING, WAVE, and CUB.

 

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 1,000 PROS authorized dealerships. PROS dealerships sell substantially all of Honda’s Japanese motorcycle models.

 

Honda integrated its three sales channels in Japan—Primo, Clio and Verno—into one Honda channel in March 2006. At present, 912 retail dealers operate 2,352 shops and sell Legend, Inspire, Accord, Civic, Fit Aria, Elysion, Odyssey, Step Wagon, Edix, Stream, Spike, Mobilio, Fit, Airwave, CR-V, Crossroad, S2000, Partner, Zest, Life, That’s, Vamos, Zest and Acty.

 

Power products are distributed in Japan to approximately 1,420 retail dealers throughout Japan, including affiliates of Honda. A number of small engines are also sold to other manufacturers for use in their products.

 

The independent retail dealers who sell Honda’s products in Japan receive payment from customers by one of four payment methods: cash, bank loans, installment payments or financing by credit companies.

 

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 96% 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, which is the largest market for Honda automobiles, Honda markets its products through a sales network of approximately 1,288 independent local dealers for automobiles, approximately 1,250 for motorcycles and approximately 5,700 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 268 dealerships at the end of fiscal 2007. The Acura network offers RL, TL, TSX, MDX, RSX, RDX and CSX (Canada only) models.

 

With regard to exports from North America, Honda is currently exporting such North American-built models as Accord, Civic, TL, Odyssey, Pilot, Ridgeline, Element and MDX to other markets. In fiscal 2007, Honda exported approximately 35,074 units from North America to 37 countries throughout the world.

 

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In Europe, Honda’s products are distributed in the United Kingdom, Germany, France, Belgium, the Netherlands, Spain, Switzerland, Austria, Italy and other European countries through approximately 1,800 independent local dealers for automobiles, approximately 1,950 for motorcycles and approximately 7,400 for power products.

 

Honda Motor Co., Ltd. exports motorcycle components to 14 countries, including Indonesia, Thailand, India, Brazil and the People’s Republic of China, 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.

 

Honda Motor Co., Ltd. exports automobile components to 14 countries, including the United States, Canada, the People’s Republic of China, Thailand and Brazil, where automobiles are manufactured by Honda, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

Honda Motor Co., Ltd. also exports power product components to eight countries, including the United States, Thailand, Italy, the People’s Republic of China, France, India, Australia, where power products are manufactured by Honda, 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.

 

Net Sales by Product Group and Region

 

Breakdown of Net Sales and Other Operating Revenue by Category of Activity

 

    

Fiscal years ended March 31,

Yen (millions)

     2005    2006    2007

Motorcycle Business

   ¥ 1,097,754    ¥ 1,225,812    ¥ 1,370,617

Automobile Business

     6,963,635      8,004,694      8,889,080

Financial Services

     255,741      306,869      409,701

Power Product and Other Businesses

     332,975      370,621      417,742
                    

Total

   ¥ 8,650,105    ¥ 9,907,996    ¥ 11,087,140
                    

 

Breakdown of Net Sales and Other Operating Revenue by Geographical Markets

 

    

Fiscal years ended March 31,

Yen (millions)

     2005    2006    2007

Japan

   ¥ 1,699,205    ¥ 1,694,044    ¥ 1,681,190

North America

     4,575,076      5,463,359      5,980,876

Europe

     870,795      1,009,421      1,236,757

Asia

     977,011      1,085,451      1,283,154

Others

     528,018      655,721      905,163
                    

Total

   ¥ 8,650,105    ¥ 9,907,996    ¥ 11,087,140
                    

 

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Components and Parts, Raw Materials and Sources of Supply

 

Honda manufactures the major components and parts used in its products, including engines, frames and transmissions. Other components and parts, such as shock absorbers, electrical equipment and tires, are purchased from numerous suppliers. The principal raw materials used by Honda are steel plate, aluminum, special steels, steel tubes, paints, plastics and zinc, which are purchased from several suppliers. The most important raw material purchased is steel plate, accounting for approximately 41% 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, 2007.

 

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 will become effective starting from 2008. The long term targets for gasoline vehicles remain unchanged except for direct injection gasoline vehicles which will be required to meet the PM standard. Long-term emissions targets for diesel vehicles have been lowered by more than 50% 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, 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, CARB approved modifications to the “Zero-Emission Vehicles” (“ZEV”) requirement under LEV II, permitting gasoline SULEVs (Super Ultra Low Emission

 

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Vehicles), 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, 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’s with warranties coverage up to the earlier of 15 years or 150,000 driven miles, 2% must be advanced technology PZEV’s and 2% must be ZEV’s. Required percentages will be gradually increased under the “Zero-Emission Vehicle” standards from the 2008 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 a new emission standard (Euro5 and Euro6) and comprehensive requirements for gasoline vehicles and diesel vehicles. Euro5 will become effective starting around 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 become effective starting around 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 vehicles. A PM mass limit will also apply to gasoline vehicles which use lean burn direct injection engines.

 

Other Regions

 

China adopted Step3 and Step4 emission regulations for light-duty vehicles in 2005.

 

These regulations are similar to Euro3 and Euro4. Step3 will be implemented in 2007 and Step4 will be implemented in 2010.

 

In the city of Beijing, Euro3 was implemented in December 2005.

 

South Korea adopted the enforcement regulation of the Special Act on Capital Region Air Quality Improvement.

 

Accordingly, some manufacturers shall be required to sell low emission vehicles which meet a more stringent emission standard than those meeting the national standard.

 

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 will be implemented in July 2008.

 

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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 5%) 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 a 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 will be implemented in the 2008 model year. Passenger cars are divided into the following two categories: “Domestic” and “Import”, and credits earned in one category may not be applied to another.

 

In addition, the U.S. Senate and the House of Representatives are undergoing heated discussions on the topic of raising the CAFE standards for passenger cars.

 

In August 2005, CARB finalized its Green House Gas (GHG) regulation. Under the GHG regulation, which will become effective for the 2009 model year, automobile manufactures 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 President has 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.

 

Europe

 

In early 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

 

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(“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 will begin among the European Commission, Member States and the automobile industry.

 

In early 2007, European Commission published “Results of the review of the Community Strategy to reduce CO2 emissions from passenger cars and light-commercial vehicles”. According to this communication, the European Commission will be setting a more stringent target of 130 grams of carbon dioxide per kilometer for new cars offered for sale in the EU in 2012.

 

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 will be 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 in 2010.

 

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

 

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 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 becomes effective on June 1, 2007. From June 1, 2008, any manufacturer or importer of a substance is required to submit a registration to the Agency, depending on annual production or import quantity. Also, any manufacturer or importer of an article is

 

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required to submit a registration for the substances contained in such article this is intended to be released. Submitting a pre-registration between June 1, and December 1, 2008 will allow the manufacturer or importer to extend the deadline for submitting the registration for existing substances.

 

Other Regions

 

Taiwan and Korea will implement 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 March 2005, the Ministry of Land, Infrastructure and Transport issued the world’s first Seat Belt Reminders standard. Pursuant to the standard, the driver’s seat in passenger vehicles must be equipped with a seat belt reminder from September 1, 2005 for new models and from September 1, 2008 for all other models.

 

JASIC, which is organized by 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, NHTSA issued various motor vehicle safety standards, including a final rule specifying enhanced fuel system integrity requirements. For example, the rule changes the test method for rear crash impacts from a full-lap 48km/h test to an offset 80km/h test, and sets forth a phase-in compliance schedule mandating that 40% of all vehicles produced by a manufacturer meet the new safety standard by 2006, 70% by 2007, and 100% by 2008.

 

In December 2003, vehicle manufacturers, including us, 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 May 2004, NHTSA issued a proposed rule to upgrade side impact protection standards. The rule imposes a requirement to provide head protection and adopt a small adult female dummy in side crashes for the first time. Manufacturers must meet an additional performance test involving a 32-km/h vehicle side impact into a rigid pole at an approach angle of 75 degrees for 20% of all vehicles produced by a manufacturer by 2009, 50% by 2010, and 100% by 2011. New dummies will be used from September 1, 2009 for the existing moving deformable barrier and new pole tests.

 

In December 2004, NHTSA issued a standard to require Lap/Shoulder Safety Belts for rear center seats in passenger vehicles. Manufacturers must comply with it for 50% of all vehicles produced by 2005, 80% by 2006, and 100% by 2007.

 

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NHTSA reissued a final rule regarding a tire pressure monitoring system standard in April 2005 based on the Transportation Recall Enhancement, Accountability and Documentation Act (“TREAD Act”), which was finalized in June 2002 but vacated in November 2003 by a court decision. Manufacturers must comply with the standard for 20% of all vehicles produced by 2005, 70% by 2006, and 100% by 2007.

 

In August 2006, 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 August 2006, NHTSA issued a regulation to standardize requirements for the accuracy, collection, storage, survivability, and retrievability of onboard motor vehicle crash event data in passenger cars and other light vehicles equipped with event data recorders on or after September 2010.

 

In April 2007, 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, 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.

 

Europe

 

The European Commission issued a regulation and technical prescription for pedestrian protection. The regulation required M1 (Passenger vehicles up to nine passengers) and N1 (Light commercial vehicles with gross vehicle weight up to 3.5t) vehicles to meet standards for the protection of pedestrians in the event of a collision with the front of a motor vehicle.

 

The regulation consists of Phase 1, to be effective October 1, 2005 for new types of vehicles and December 31, 2012 for all vehicles, and Phase 2, to be effective September 1, 2010 for new types of vehicles and September 1, 2015 for all vehicles.

 

In early 2004, The European Commission issued a revised regulation relating to indirect vision to reduce “blind spots” on motor vehicles of which side and rear areas were not visible to the driver via side or rear-view mirrors. The regulation has been effective from January 29, 2006 for new types of vehicles and will be effective on January 29, 2010 for all vehicles.

 

Additionally, the European Commission has established a project called “eSafety” aiming at cutting road fatalities in half by 2010. The project focuses on road accident prevention. To achieve this target, such issues as the introduction of new features on automobiles are being discussed.

 

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 the United States, in September 2006, NHTSA issued a final rule to require displaying specified NCAP information on a safety rating label that is part of their Monroney label. New passenger vehicles manufactured on or after September 2007 must comply with the rule.

 

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In January 2007, NHTSA also issued a report titled, “The New Car Assessment Program Suggested Approaches for Future Program Enhancements” to encourage additional safety improvements, and to provide consumers with relevant information that will aid them in their new vehicle purchasing decisions. The future program includes detail proposals regarding not only crash worthiness assessment but also crash avoidance assessment.

 

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. 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, will be 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.

 

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In Brazil, Euro2-equivalent regulations have been in effect from the beginning of last year. Euro3-equivalent regulations will be 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.

 

2. Safety

 

The United States

 

Three-wheeled all terrain vehicles, or ATVs (formerly referred to as “ATC”s) became a problem for the youth-involved accidents in 80s’, and ATV regulations were about to created at that time. However, it turned out that a voluntary standard, which was agreed between the industry and regulators, was established. There was no further increase of accidents in 90s’, but the rapid development of ATVs in the U.S. market from 2000 and the problem of increased youth-involved accidents became a focus again. The Consumer Product Safety Commission has been concerned about this, and is now conducting a review to make the voluntary standard for ATVs compulsory regulation.

 

Europe

 

ATVs designed to travel on four low pressure tires on non-paved surfaces has recently increased in the EU market. Most ATVs obtained authorization by the WVTA (Whole Vehicle Type Approval) and are permitted to run on highways. As a result, there has been a problem of increasing accidents. As a result, the ATVEA (All Terrain Vehicle European industry Association) was established, and it is now are focusing on ATV standards rulemaking. It is expected that a standard will be completed in about five years at the earliest.

 

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 1998 model year products and were gradually strengthened every year until the 2006 model year. Currently, the EPA has proposed enhanced emission regulations for non-road engines and marine engines.

 

In 1995, the State of California enacted new engine emissions regulations for small non-road engines. California is now gradually shifting its focus on emissions regulations for engines in use manufactured in the 2000 model year and beyond. California has introduced tighter tail-pipe emissions standards and added requirements for evaporative emissions from small non-road engines from the 2006 model year. With respect to marine engines, California enacted emissions regulations for model year 2001 outboard engines and personal watercraft that are equivalent to the U.S. federal government’s 2006 model year regulations, and strengthened these regulations in the model year 2004. California plans to further strengthen the regulations for these products in the 2008 model year.

 

Canada

 

The Canadian federal government has introduced emissions regulations generally equivalent to the U.S. EPA regulations for small non-road engines from the 2005 model year, with some exceptions.

 

Currently, the Canadian federal government has proposed to introduce emission regulations for marine engines generally equivalent to the U.S. EPA regulations.

 

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Europe

 

Emissions regulations regarding diesel non-road mobile machinery have been in place in the European Union. The EU has introduced regulations covering gasoline engines from 2004 based on the contents of the current EPA regulations in the United States and introduced emissions regulations targeting outboard engines and personal watercraft from 2005. In addition, with respect to marine engines, emissions regulations have been implemented since 1993 in Bodensee, which is located between Switzerland, Germany and Austria.

 

2. Safety

 

Japan

 

The Consumer Product Safety Law, as amended, which mandates manufacturers and/or importers liable for product accidents to give a report to the Minister of the Ministry of Economy, Trade and Industry (METI), became effective on May 14, 2007.

 

Main points of this Law are as follows:

 

  1. Manufacturers and importers are mandated to notify a serious product accident.

 

  2. Distributors, retailers and repair shops are encouraged to inform manufacturers and importers.

 

  3. Products covered by this Law include all products utilized in daily life except for products regulated by other laws (such as motor vehicles, medicines, etc.).

 

  4. Mandatory reports are limited to serious accidents (involving fatal and serious injury accident, CO poisoning, and fire).

 

  5. Product name, etc. are published to the public as necessary to prevent danger and hazard from occurring or expanding.

 

The United States

 

The CPSC issued a final rule to require that portable generators bear a carbon monoxide poisoning warning label. This regulation requires that the label include pictograms and statements warning consumers that “a generator’s exhaust contains poisonous carbon monoxide” and that “a generator should never be used inside the home or partially enclosed areas such as garages”. This regulation became effective on May 14, 2007 and applies to any portable generator manufactured or imported on or after that date.

 

Strengthening our Commitment to Reduce Our Environmental Footprint

 

Under the direction of “commitment for the future,” Honda will continue pursuing more proactive efforts to reduce its environmental footprint, with its main focus on CO2 reduction.

 

Reduction of CO2 Emissions—Setting Voluntary Goals

 

Honda has voluntarily set global CO2 reduction goals for its products and production activities and is accelerating its efforts to achieve those goals.

 

In 2000, the global average of CO2 exhaust emissions among Honda automobiles was 179.5g/km. Despite increased sales of larger-size vehicles such as SUV and minivans, average CO2 emissions were reduced by 5% during the five-year period up to 2005.

 

Honda now strives to achieve a further reduction of 5% or more, aiming to accomplish a total of 10% reduction by 2010 compared to the level of 2000. Honda will also work toward a 10% reduction both for motorcycles and power products.

 

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At Honda, the global average of CO2 emissions to produce one automobile also declined by approximately 5% during the five-year period up to 2005. Honda is working toward a further reduction by 5% or more by 2010 to achieve a total reduction of 10% compared to the level of 2000. For motorcycle and power product production, Honda set goals to reduce CO2 emissions by 20% in each area.

 

Honda is the first automaker in the world to announce global CO2 reduction goals for its products and production activities.

 

New Clean Diesel

 

Based on the current highly successful diesel engine currently sold in Europe, Honda is now developing a cleaner next-generation four-cylinder diesel engine. This engine will meet the U.S. EPA’s stringent Tier2 BIN5 emission standard requiring NOx emission levels equivalent to a gasoline-powered vehicle. Honda plans to introduce this super-clean diesel engine to market within the next three years.

 

Honda will also work toward development of a clean V6 diesel engine.

 

While improving the fuel efficiency of gasoline engines with Advanced VTEC, Advanced VCM, and other technologies, Honda will expand application of hybrid technology to smaller size vehicles and diesel technology to medium-to-large size vehicles. Thorough these comprehensive efforts leveraging the unique characteristics of each environmental technology, Honda will accelerate its efforts to reduce CO2 emissions.

 

Motorcycles

 

Moreover, Honda will introduce new engine technologies such as super-low friction engines, which will improve fuel economy by up to 13% compared to the current level, and VCM systems for motorcycles, which will improve fuel economy by up to 30% compared to the current level.

 

Preparing for the Future

 

Looking globally, the U.S. economy is showing signs of a moderate downturn, while European economies are expected to continue recovering and Asian economies are expected to continue expanding. Japan’s economy is forecast to sustain its gradual recovery. However, the global environment in which Honda’s management operates still remains uncertain because of global political and economic uncertainties, fluctuations in oil and raw material prices and currency movements. As a result, we expect the operating environment to remain difficult.

 

It is under these circumstances that Honda seeks to strengthen its corporate structure quickly and flexibly to meet the requirements of our customers and society and the changes in its business environment. Also, in order to improve the competitiveness of its products, Honda will endeavor to enhance its R&D, production and sales ability. Furthermore, Honda will continue striving to earn even more trust and understanding from society through Companywide activities. Honda recognizes that further enhancing the following specific areas is essential to its success:

 

Research and Development

 

Along with efforts to develop even more effective safety and environmental technologies, Honda will enhance creativity in its advanced technology and products, and will create and swiftly introduce new value-added products that meet specific needs in various markets around the world. Honda will also continue its efforts to research future technologies.

 

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Production Efficiency

 

Honda will establish efficient and flexible production systems and expand production capacity at its global production bases, with the aim of increasing its capability of supplying high quality products.

 

Sales Efficiency

 

Honda will remain proactive in its efforts to expand product lines through the innovative use of IT and to upgrade sales and service structure, in order to further satisfy its customers.

 

Product Quality

 

Responding to increasing consumer demand, Honda will upgrade its quality control through enhancing the functions of and coordination among the development, purchasing, production, sales and service departments.

 

Safety Technologies

 

Honda will develop safety technologies for accident prediction and prevention, technologies to reduce injuries to passengers and pedestrians from car accidents, and technologies for reducing aggressivity, as well as expand its line-up of products incorporating such technologies. Honda will reinforce and continue to advance its contributions to traffic safety in motorized societies in Japan and overseas. Honda also intends to remain active in a variety of traffic safety programs, including advanced driving and motorcycling training schemes 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. The Company also plans to make further progress with fuel cells and solar cells and to promote commercialization of solar cells. In addition, Honda will further its efforts to minimize its environmental impact. To this end, we set global targets to reduce the environmental burden as measured by the Life Cycle Assessment, in all areas of business, spanning production, logistics and sales.

 

Continuing to Increase Society’s Trust in and Understanding toward Honda

 

In addition to continuing to provide products incorporating Honda’s advanced safety and environmental technologies, Honda will continue striving to earn even more trust and understanding from society by, among other things, undertaking activities for corporate governance, compliance, and risk management and contributing to society.

 

Through these Company-wide activities, we will strive to materialize Honda’s visions of “value creation (Creating New Value for our Customers),” “globalization (Expanding Regional Operations),” and “commitment to the future (Developing Safety and Environmental Solutions),” with the aim of sharing the joy with Honda’s customers, thus becoming a company valued by society.

 


* Life Cycle Assessment

 

  A comprehensive system for quantifying the impact Honda’s products have on the environment at different stages in their life cycles, from material procurement and energy consumption to waste disposal.

 

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C. Organizational Structure

 

As of March 31, 2007, the Company had 151 Japanese subsidiaries and 254 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 Lock Mfg. Co., Ltd.

   Japan    Manufacturing    100.0

Yutaka Giken Co., Ltd.

   Japan    Manufacturing    69.7

Asama Giken Co., Ltd.

   Japan    Manufacturing    81.7

Honda Foundry Co., Ltd.

   Japan    Manufacturing    82.1

Honda Motorcycle Japan Co., Ltd.

   Japan    Sales    100.0

Honda Finance Co., Ltd.

   Japan    Finance    100.0

Mobilityland Corporation

   Japan    Others (Leisure)    100.0

Honda Trading Corporation

   Japan    Others(Trading)    100.0

Honda Logistics Inc.

   Japan    Others (Physical Distribution)    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 of South Carolina Mfg., Inc.

   U.S.A.    Manufacturing    100.0

Honda Transmission Mfg. of America, Inc.

   U.S.A.    Manufacturing    100.0

Honda Precision Parts of Georgia, LLC

   U.S.A.    Manufacturing    100.0

Honda Power Equipment Mfg., Inc.

   U.S.A.    Manufacturing    100.0

Honda R&D Americas, Inc.

   U.S.A.    Research & Development    100.0

Cardington Yutaka Technologies Inc.

   U.S.A.    Manufacturing    100.0

Celina Aluminum Precision Technology Inc.

   U.S.A.    Manufacturing    100.0

Honda Trading America Corporation

   U.S.A.    Other (Trading)    100.0

Honda Engineering North America, Inc.

   U.S.A.

 

 

   Manufacturing and Sales of machine tools, equipment and production techniques    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 Europe NV

   Belgium    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 Europe Power Equipment, S.A.

   France    Manufacturing and Sales    100.0

Honda Motor Europe (North) GmbH

   Germany    Sales    100.0

 

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Table of Contents

Company

   Country of
Incorporation
  

Function

   Percentage
Ownership
and
Voting Interest

Honda Bank GmbH

   Germany    Finance    100.0

Honda R&D Europe (Deutschland) GmbH

   Germany    Research & Development    100.0

Honda Italia Industriale S.p.A.

   Italy    Manufacturing and Sales    100.0

Montesa Honda S.A.

   Spain    Manufacturing and Sales    100.0

Honda Motor (China) Investment Corporation, Limited

   China    Holding Company and Sales    100.0

Jialing-Honda Motors Co., Ltd.

   China    Manufacturing and Sales    70.0

Honda Automobile (China) Co., Ltd.

   China    Manufacturing    65.0

Honda Motorcycle and Scooter India Private Limited

   India    Manufacturing and Sales    100.0

Honda Siel Cars India Limited

   India    Manufacturing and Sales    97.4

P.T. Honda Precision Parts Manufacturing

   Indonesia    Manufacturing    100.0

P.T. Honda Prospect Motor

   Indonesia    Manufacturing and Sales    51.0

Honda Malaysia SDN. BHD.

   Malaysia    Manufacturing and Sales    51.0

Honda Atlas Cars (Pakistan) Limited

   Pakistan    Manufacturing and Sales    51.0

Honda Philippines, Inc.

   Philippines    Manufacturing and Sales    99.6

Honda Cars Philippines, Inc.

   Philippines    Manufacturing and Sales    74.2

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 South America Ltda.

   Brazil    Holding Company 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 Componentes da Amazonia Ltda.

   Brazil    Manufacturing    100.0

Honda Turkiye A.S.

   Turkey    Manufacturing and Sales    100.0

Honda Australia Pty. Ltd.

   Australia    Sales    100.0

Honda New Zealand Limited

   New Zealand    Sales    100.0

 

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D. Property, Plants and Equipment

 

Honda’s manufacturing operations are principally conducted in 32 separate factories, four of which are located in Japan. The following table sets out information, as of March 31, 2007, 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

   5,286    Automobiles

Hamamatsu, Shizuoka, Japan

   3,376    Motorcycles, power products and transmissions

Suzuka, Mie, Japan

   7,102    Automobiles

Ohzu-machi, Kikuchi-gun Kumamoto, Japan

   2,923    Motorcycles, all-terrain vehicles, power products and engines

Marysville, Ohio, U.S.A.

   6,895    Motorcycles and automobiles

Anna, Ohio, U.S.A.

   2,850    Engines

East Liberty, Ohio, U.S.A.

   2,596    Automobiles

Lincoln, Alabama, U.S.A.

   4,563    Automobiles

Swepsonville, North Carolina, U.S.A.

   566    Power products

Timmonsville, South Carolina, U.S.A.

   1,603    All-terrain vehicles

Alliston, Ontario, Canada

   4,585    Automobiles

El Salto, Mexico

   1,487    Motorcycles and automobiles

Swindon, Wiltshire, U.K.

   4,046    Automobiles and engines

Ormes, France

   171    Power products

Atessa, Italy

   760    Motorcycles, power products and engines

Barcelona, Spain

   293    Motorcycles

Guangzhou, China

   1,096    Automobiles

Chongqing, China

   881    Power products

Greater Noida, India

   1,331    Automobiles

Gurgaon, India

   2,598    Motorcycles

Karawang, Indonesia

   1,218    Automobiles

Alor Gajah, Malaysia

   1,204    Automobiles

Lahore, Pakistan

   587    Automobiles

Manila, Philippines

   646    Motorcycles and power products

Laguna, Philippines

   687    Automobiles

Pingtung, Taiwan

   661    Automobiles

Ayutthaya, Thailand

   2,546    Automobiles

Bangkok, Thailand

   2,697    Motorcycles and power products

Vinhphuc, Vietnam

   1,108    Motorcycles and automobiles

Sumare, Brazil

   1,947    Automobiles

Manaus, Brazil

   6,462    Motorcycles and power products

Gebze, Turkey

   539    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, 2007, the Company’s property, with a net book value of approximately ¥23.6 billion, was subject to specific mortgages securing indebtedness.

 

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Table of Contents

Capital Expenditures

 

Capital expenditures in fiscal 2007 were applied to the expansion of manufacturing facilities, streamlining efforts, and the replacement of older equipment. Other expenditures included funds used to augment sales and R&D facilities.

 

Total capital expenditures for the year amounted to ¥993.8 billion, up ¥536.0 billion from the previous year. Also, total capital expenditures excluding property on operating leases for the year amounted to ¥627.0 billion, up ¥169.2 billion from the previous year. Spending by business segment is shown below.

 

     Fiscal years ended March 31,  
             2006                    2007            Increase (Decrease)  
     Yen (millions)  

Motorcycle Business

   ¥ 52,246    ¥ 68,880    ¥ 16,634  

Automobile Business

     392,934      540,859      147,925  

Financial Services

     1,316      367,728      366,412  

Financial Services (Excluding Property on Operating Leases)

     1,316      933      (383 )

Power Product and Other Businesses

     11,345      16,394      5,049  

Total

   ¥ 457,841    ¥ 993,861    ¥ 536,020  

Total (Excluding Property on Operating Leases)

   ¥ 457,841    ¥ 627,066    ¥ 169,225  

 

In the motorcycle business, we made capital expenditures of ¥68.8 billion in the fiscal year ended March 31, 2007. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of Sales and R&D facilities.

 

In the automobile business, we made capital expenditures of ¥540.8 billion in the fiscal year ended March 31, 2007. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of Sales and R&D facilities.

 

In the financial services segment, capital expenditures excluding property on operating leases amounted to ¥0.9 billion in the fiscal year ended March 31, 2007, while capital expenditures for property on operating leases were ¥366.7 billion. Capital expenditures in power products and other businesses in the fiscal year ended March 31, 2007, totaling ¥16.3 billion, were deployed to upgrade, streamline, and modernize manufacturing facilities for power products, and to improve R&D facilities for power products.

 

Plans after fiscal 2007

 

Honda plans to build a new engine plant in Ogawa-machi Hiki-gun, Saitama with an investment of approximately ¥25,000 million. The annual production capacity of this new plant will be approximately 200,000 units. This new plant should begin operation in 2009. The amount of this capital expenditure is included in the plan of new auto plant in Yorii-machi Oosato-gun, Saitama with an investment of approximately ¥70,000 million, which was announced last fiscal year.

 

The estimated amount of capital expenditures in fiscal 2008 is shown below.

 

    

Fiscal year ended

March 31, 2008

     Yen (millions)

Motorcycle Business

   ¥ 92,800

Automobile Business

     588,000

Financial Services

     1,300

Power Product and Other Businesses

     27,900

Total

   ¥ 710,000

 

The estimated amount of capital expenditures in fiscal 2008 for Financial Services does not include property on operating leases.

 

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Table of Contents

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 Results

 

Overview

 

During fiscal 2007, Honda set in place a number of measures aimed at global growth and advancement. To propel ourselves forward over the medium to long term, we outlined specific measures of our three initiatives that are; developing advanced systems at our production facilities in Japan, solidifying the foundation for growth in our overseas business and working to reduce our CO2 emissions on a global level by promoting innovative products and production facilities. We also accelerated efforts to strengthen the core characteristics that make Honda unique in order to continue creating new value for our customers, such as by commercializing the HondaJet and solar cell businesses, bringing these projects a step closer to reality.

 

As to the economic conditions surrounding Honda during fiscal 2007, although crude oil prices became relatively more stable other raw materials prices continued to significantly increase. In the United States, despite slowing growth in personal consumption and capital investment, strong economic growth continued, albeit at a slightly slower rate, and the economies of Europe sustained a gradual recovery. Rapid economic growth also persisted in Asian countries, particularly China and India. In Japan, increases in capital investments and other factors supported a gradual economic recovery, although personal consumption was lackluster.

 

Tumultuous change characterized the business environment in key world markets. Amid increasingly stringent competition, we remained proactive in our efforts to launch products that create new value. These undertakings paid off in the form of higher unit sales in each of our businesses—motorcycles, automobiles and power products—and revenues grew for the seventh consecutive year as each of our businesses expanded.

 

Despite a demanding competitive environment, increased overseas unit sales and the currency effects caused by the depreciation of the Japanese yen rose profits, but income fell for a variety of reasons. The Company benefited from positive translation effects resulting from the depreciation in the value at yen. We experienced the negative impact of changes in our model mix, as significantly increasing gasoline prices prompted a shift in demand toward compact cars. The cost of steel, aluminium and precious metals substantially increased, and selling, general and administrative expenses accompanied the rise in unit sales. R&D expenses also rose, as we spent more on safety and environmental technologies and worked to improve the attractiveness of our products. Furthermore, the gain that we posted in fiscal 2006 on the return of the substitutional portion of the Employees Pension Funds to the Japanese government was absent in fiscal 2007.

 

In the motorcycle business, in key Asian markets, demand for motorcycles as an essential mode of transportation continued to grow. Sales in Latin America remained strong, mainly in Brazil, where economic performance was stable.

 

Since mid-2005, Indonesia, which is a major market for our products in Asia, has been affected by substantially increasing gasoline prices, coupled with substantially high inflation and interest rates, which depressed overall demand. However, a turnaround in this situation from mid-2006 allowed our equity method affiliate there to stage a recovery in sales.

 

In the automobile business, on a global basis, a sharp rise in gasoline prices spurred demand for automobiles featuring good fuel economy, leading to steady increases in sales of Honda vehicles in North America and Europe. Sales remained strong in China, India, Brazil and other emerging economies. In particular, strong worldwide sales of the new Civic, introduced in September 2005, continued in fiscal 2007. Sales of the new CR-V, which we launched in September 2006, also recorded strong worldwide sales results and contributed to the steady expansion of unit sales.

 

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Table of Contents

In power products and other businesses, unit sales in the power products business increased in all regions in fiscal 2007, mainly in North America and Europe. This rise was supported by products that play a role in customer lifestyles, such as lawn mowers and generators, as well as engines for OEM*1 use in construction equipment and generators.

 

In December 2006, we established a subsidiary in Japan to manufacture and sell next-generation thin-film solar cells that we developed using proprietary technologies. Sales began in Japan on a limited regional basis in June 2007, and by autumn of 2007 we expect to commence mass production on an annual capacity of 27.5 megawatts and full-fledged sales.

 

Fulfilling an objective that Honda has set through research and development since the time of its establishment, in October 2004, we formed a joint venture with the General Electric Company, and in 2006, that venture secured orders to supply compact turbofan engines to two aircraft manufacturers. Furthering these efforts, in August 2006 we established a subsidiary in the United States to conduct R&D, manufacturing and sales of compact jets. In October 2006, we began accepting orders for HondaJet, a compact business jet. Deliveries and associated revenue are scheduled to begin in 2010.

 


*1:

OEM (Original equipment manufacturing)

 

OEM refers to a manufacturing of products and components supplied for sale under a third-party brand.

 

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Table of Contents

Fiscal Year 2007 Compared with Fiscal Year 2006

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter, “net sales”) for fiscal year 2007, ended March 31, 2007, grew 11.9%, compared with fiscal year 2006, to ¥11,087.1 billion. Behind this increase were higher unit sales in the motorcycle business in Other regions, higher overseas unit sales in the automobile business and higher unit sales in all regions in power product and other businesses, as well as the positive impact of currency effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales and operating revenue for the period would have increased by approximately 7.4%.

 

Domestic net sales decreased by 0.8% to ¥1,681.1 billion, but overseas net sales were up 14.5% from fiscal year 2006, to ¥9,405.9 billion.

 

Cost of Sales

 

Despite the effects of cost reduction efforts, the cost of sales rose 12.2%, to ¥7,865.1 billion. The cost of sales was affected by increased unit sales, substantially increased raw materials prices, such as steel, aluminum and precious grade metals, as well as the negative impact of currency effects caused by the depreciation of the Japanese yen.

 

Selling, General and Administrative Expenses / Research and Development Expenses

 

Selling expenses increased in line with higher unit sales, higher freight costs as the result of substantially increased crude oil prices, higher expenses related to product quality and the impact of currency effects. G&A expenses increased due mainly to the impact of currency effects and the effects from newly consolidated subsidiaries. Total of SG&A expenses rose 9.8% from fiscal year 2006, to ¥1,818.2 billion. R&D expenses also grew 8.1%, to ¥551.8 billion, as we spent more on safety and environmental technologies and worked to enhance the attractiveness of our products.

 

Operating Income

 

Operating income declined 2.0%, compared with the preceding year, to ¥851.8 billion. In addition to the above mentioned factors, changes in model mix due mainly to shift of customers’ demands towards more fuel efficient (compact) models especially in U.S. market negatively affected operating income.

 

Other Income and Expenses

 

Other income and expenses, net, fell ¥20.0 billion, due to an increase in losses on the valuation of interest rate swaps and other derivatives.

 

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

 

Income before Income Taxes, Minority Interest and Equity in Income of Affiliates fell 4.5%, to ¥792.8 billion.

 

Income Tax Expense

 

Income tax expense decreased by 10.5%, to ¥283.8 billion. The effective tax rate was 35.8%, a decrease by 2.4 percentage points from the previous fiscal year. Additional detailed information is described in Note (10) 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 31.6% from the previous year, to ¥20.1 billion, due mainly to the impact of a newly consolidated subsidiary.

 

Equity in Income of Affiliates

 

Equity in income of affiliates grew 3.8%, to ¥103.4 billion.

 

Net Income

 

Net income was down 0.8% from the previous year, to ¥592.3 billion.

 

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Table of Contents

In fiscal year 2006, operating income and income before income taxes, minority interest and equity in income of affiliates were impacted by the posting of a ¥138.0 billion gain on the return of the substitutional portion of the Employees Pension Funds (hereafter, “gain on return”) to the Japanese government, which also affected income after tax.

 

Motorcycle Business

 

Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) in fiscal 2007 amounted to 10,369,000units, an increase of 1.0%, from the previous fiscal year. Unit sales in Japan were 337,000 units, a decrease of 8.4%. Overseas unit sales in the motorcycle totaled 10,032,000 units, an increase of 1.3%, due mainly to an increase in unit sales in Other regions, especially in Latin America. Revenue from unaffiliated customers increased 11.8%, to ¥1,370.6 billion, from the previous fiscal year, due mainly to increased unit sales and the positive impact of currency translation effects. Operating income decreased 11.7 %, to ¥100.6 billion, from the previous fiscal year, due mainly to increased SG&A expenses, higher R&D expenses and the gain on return which was recorded in the fiscal year ended March 31, 2006, offsetting the positive impact of increased profit attributable to higher revenue and positive currency effects. The Operating margin was 7.3%.

 

Japan

 

In Japan, total demand for motorcycles in fiscal year 2007, was approximately 730,000 units, down from the previous year. Demand increased for second-class motor-driven cycles (51cc–125cc) and small-size two-wheeled motor vehicles (over 251cc), but fell for first-class motor-driven cycles (up to 50cc) and mini-size two-wheeled motor vehicles (126cc–250cc).

 

To meet increasingly diverse customer needs, we strengthened the Honda Dream Shop and other parts of our sales network, and strove to develop even more appealing motorcycles. Nevertheless, unit sales of motorcycles fell 8.4% in fiscal year 2007, to 337,000 units.

 

We adopted advanced technologies from specialized racing motorcycles in small-size two-wheeled motor vehicles, and sales of the fun-to-ride and maneuverable CBR1000RR super sports model were favorable, but sales of the CB1300 Super Bol d’Or decreased. In mini-size two-wheeled motor vehicles, sales of the Hornet, a naked sports model with refined and exciting styling, were strong. On the other hand, Forza sales declined. Sales of first- and second-class motor-driven cycles, such as the Today and the Duo, decreased.

 

North America

 

Looking at calendar year 2006, demand in the United States for motorcycles, ATVs and personal watercraft came roughly equal to the previous year’s demand. Demand for road bikes grew, but demand for ATVs—particularly utility ATVs—declined.

 

Of this number, Honda motorcycle sales fell 18.2%, to 503,000 units, in fiscal year 2007. Sales of the CBR1000RR, a super sports model, and our new off-road model, the CRF150R, were strong, but higher interest rates and economic uncertainty impacted demand for leisure products. Particularly affected by this impact were sales of off road-models, mainly Enduro*1 models such as CRF50F and CRF70F, which dropped 15.1%, to 282,000 units.

 

As one of our safety initiatives, we launched the world’s first mass-market motorcycle with an airbag system, the GoldWing touring bike, in the United States and Canada.

 

Although sales of the FourTrax Rancher series of utility ATVs, which underwent a full model change in December 2006, were strong, total unit sales of ATVs and personal watercraft came to 221,000 units in fiscal year 2007, down 21.9%.

 

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Table of Contents

Europe

 

In calendar year 2006, total European motorcycle demand*2 increased from the previous year, to approximately 1,290,000 units, particularly in Spain due to changes in licensing systems as well as economic expansion, followed by increases in Italy, France and the United Kingdom.

 

In fiscal year 2007, unit sales decreased 6.8%, to 329,000 units. Sales were strong for the SH300i, which launched in December 2006. Sales of PS125i, PS150i and Silver Wing 400 scooters were also stable, as were sales of the Deauville touring bike model. However, sales of large super sports models and models mainly in the 125cc class declined.

 

Asia

 

In Asia, demand for motorcycles as an essential mode of transportation has continued to grow. In fiscal year 2007, unit sales in Asia of completed products of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, declined 0.2%, to 7,895,000 units.

 

The Honda Group is working hard to expand local businesses in the region through its active promotion of 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 affiliates accounted for under the equity method in India and China, but do not include any parts supplied by Honda or its consolidated subsidiaries, therefore not included in the consolidated unit sales.

 

Total demand in India in calendar 2006 expanded to approximately 8,390,000 units, buoyed by growing market of motorcycles which is the largest category. Hero Honda Motors Limited, an affiliate accounted for under the equity method, enjoyed strong sales of its mainstay Splendor, Splendor Plus and Super Splendor models. In December 2006, the Company launched the new CD Dawn and CD Deluxe models, which feature class-leading fuel efficiency. Honda Motorcycle and Scooter India Private Limited, a consolidated subsidiary, reported strong sales of the Shine equipped with a newly developed engine and the Activa scooter. In India in fiscal year 2007, total unit sales of completed motorcycles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, grew 10.3%, to 2,134,000 units.

 

In calendar year 2006, the Indonesian market experienced increasing inflation and interest rates, caused by a sharp rise in gasoline prices, which substantially dampened consumer purchasing power in the first half of the year. Fortunately, a mid-year monetary policy relaxation helped ease the inflation rate. Companies in Indonesia responded by strengthening measures to expand sales, but total demand fell to approximately 4,630,000 units nevertheless. P.T. Astra Honda Motors, an affiliate accounted for under the equity method, experienced strong sales of Vario, a automatic transmission (AT) equipped scooter launched in September 2006. Sales of Karizma by P.T. Astra Honda Motors, however, declined. As a result, in fiscal year 2007 total unit sales of completed motorcycles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, fell 7.7%, to 2,467,000 units from the previous fiscal year.

 

In Thailand, total demand in calendar year 2006 came to approximately 2,060,000 units, down from the previous year. A maturing motorcycle market, the sharp rise in gasoline prices, political upheaval and irregular weather all had some impact on these results. Unit sales in fiscal year 2007 fell 7.5%, to 1,401,000 units from the previous year, although two AT-equipped scooters—the Click, which launched in fiscal year 2006, and the Air Blade, which went on sale in June 2006—were favorable.

 

Total demand for motorcycles in Vietnam in calendar year 2006 benefited greatly from the country’s thorough abolition of a regulation limiting riders to one per motorcycle. This move caused the market to expand and pushed up demand to approximately 2,370,000 units. Similarly, in fiscal year 2007, unit sales significantly increased 25.3%, to 787,000 units.

 

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China’s 2005 implementation of Euro2 emission standards caused motorcycle demand to plunge, but in calendar year 2006, this demand returned to 2004 level, expanding to approximately 14,830,000 units. Sundiro Honda Motorcycle Co., Ltd., an affiliate accounted for under the equity method, experienced strong sales of the M-Power, which launched in June 2006. Sales of the Fight Hawk, featuring a large half cowl, were also strong. Similarly, another affiliate accounted for under the equity method, Wuyang-Honda Motors (Guangzhou) Co., Ltd., introduced the SCR110—the first model in China to be equipped with programmed fuel injection (PGM-FI)—in September 2006. In February 2007, the company also launched the SCR125 sports bike. Both models enjoyed favorable sales. As parts for manufacturing these new models are not supplied by Honda or its consolidated subsidiaries, their numbers are not included in Honda’s consolidated unit sales. For this reason, together with the decrease in unit sales of other models, total unit sales of completed motorcycles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, fell 39.3%, to 204,000 units.

 

To meet increasing demand in the region, two new plants began operations—one in the Philippines in May 2006, and the other in July in Pakistan.

 

Other Regions

 

Other regions—including Latin America, the Middle & Near East, Africa and Oceania—unit sales grew 26.9%, to 1,305,000 units from the previous fiscal year. In Brazil, where economic performance was stable, Honda posted solid sales of such models as the Biz 125 and the CG125 Fan.

 

In June 2006, we began local production in Argentina to meet rising demand.


*1

Enduro

 

A motor sport involving long races on relatively flat off-road courses and lasting between two and 12 hours

 

*2

Motorcycle registrations in Europe (10 countries)

 

Automobile Business

 

Honda’s unit sales of automobiles amounted to 3,652,000 units, up 7.7% from the previous fiscal year. In Japan, unit sales decreased 3.4%, to 672,000 units. Overseas unit sales increased 10.6%, to 2,980,000 units, due mainly to increased unit sales in North America, Europe, Asia and other regions. Revenue from unaffiliated customers increased 11.0%, to ¥8,889.0 billion, from the previous fiscal year, due to increased unit sales and the positive impact of the 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 and operating revenue for the period would have increased by approximately 7.0%. Operating income decreased 4.6%, to ¥599.5 billion, from the previous fiscal year, due mainly to the negative impact of changes in the model mix, substantially increased raw material costs, increased SG&A expenses, higher R&D expenses and the gain on return recorded in the fiscal year ended March 31, 2006, which offset the positive impacts of higher revenue attributable to the increased unit sales, continuing cost reduction effects and the currency effects caused by the depreciation of the Japanese yen. The operating margin was 6.7%.

 

Japan

 

Total automobile demand in Japan in calendar year 2006 remained largely unchanged, at around 5,740,000 units. With the number of mini cars increased and the number of registered vehicles declined.

 

In fiscal year 2007, unit sales declined 3.4%, to 672,000 units. Although Honda’s sales of the Zest and new Stream, CR-V and Crossroad models increased, sales of the Step Wagon, Life and Airwave decreased. In July 2006, Honda introduced the new Stream, a stylish model that offers powerful driving performance. In October, the new CR-V also went on sale. This model features advancements in design, user-friendliness and driving performance, as well as an increased number of advanced safety features. In February 2007, Honda launched the Crossroad. This new model combines the handling ease of a compact car with the rugged exterior and versatility of an SUV.

 

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Since integrating our sales channels in March 2006, sales have increased for mini cars and other vehicles used to be sold exclusively by each channel.

 

In the mini car segment, Honda strengthened its capital relationship with Yachiyo Industry Co., Ltd., strengthening its alliance with the Company. The objective of this move was to strengthen Honda’s ability to develop highly competitive products and strengthen its business in this segment.

 

North America

 

In calendar year 2006, total demand in the United States was down to approximately 16,550,000 units. Impacted by the sharp rise in gasoline prices, demand for fuel-efficient vehicles expanded, while sales of large SUVs and pickup trucks was stagnant.

 

Total North American unit sales in fiscal year 2007 came to 1,788,000 units, up 6.3% from the previous year. Unit sales in the passenger car segment benefited from the April 2006 introduction of the Fit, but sales of Acura-brand cars declined, causing overall unit sales in this segment to be approximately the same level as the previous fiscal year. In the light truck segment, on the other hand, the new Acura RDX—an entry-premium SUV—launched in August. The CR-V, a compact SUV which underwent a full model change, went on sale in September, and the new Acura MDX, a premium SUV, launched in October. A favorable market response to these new models strengthened overall sales performance in this region.

 

To increase the local production of powertrain components, in May 2006 we started operating a new automatic transmission plant in Georgia. The Pilot, which was being manufactured on the second line of our plant in Canada, was transferred to Honda’s plant in Alabama in February 2007 and the second line of our plant in Canada began manufacturing the Civic in April 2007, raising annual capacity by 60,000 units, so as to respond to heightened demand for fuel-efficient vehicles.

 

Honda vehicles were selected as Top Picks in three of the 10 automobile categories rated by U.S. Consumer Reports magazine for 2007 models, earning particularly high marks for their fuel efficiency and safety performance. Earning top place were the Civic in the small sedan category, the Accord in the family sedan category and the Fit in the budget car category.

 

Europe

 

Total demand in Europe* in calendar year 2006 amounted to approximately 14,620,000 units, roughly the same level as in 2005.

 

Unit sales for fiscal year 2007 climbed 11.3%, to 324,000 units from the previous year. Recording strong sales results were the five-door Civic and the Accord, as well as the CR-V, a compact SUV that was launched in January 2007 which underwent a full model change, and the three-door Civic.

 

In production, consolidated subsidiary Honda of the U.K. Manufacturing Ltd. responded to rising demand for the Civic and the CR-V, ramping up to full production in calendar year 2007 by starting two-shift production in February at its second plant. The company is strengthening its production system through the gradual transfer of diesel engine production from Japan.

 

Asia

 

In Asia in fiscal year 2007, total unit sales of completed automobiles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, grew 19.0%, to 620,000 units from the previous fiscal year.

 

Total demand amounted to approximately 5,200,000 units in China in calendar year 2006, rising substantially from the previous year. Particularly strong were sales of the City by Guangzhou Honda Automobile

 

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Co., Ltd., an affiliate accounted for under the equity method, and Civic sales by Dongfeng Honda Automobile Co., Ltd., also an equity-method affiliate. In September 2006, the Acura brand was introduced in China, in the brand’s first launch outside North America, through sales of the Acura RL and the Acura TL. In fiscal year 2007, total unit sales of completed automobiles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, significantly increased 37.6%, to 361,000 units from the previous fiscal year. In production, in September 2006 operations began at the second plant of Guangzhou Honda Automobile Co., Ltd., which has an annual production capacity of 120,000 units. In March 2007, production also began at a new plant in China that manufactures automobile transmissions and other powertrain components. These advances are in line with Honda’s move to strengthen its structure to meet burgeoning Chinese demand.

 

In India, where the market continues to expand, an Indian-made Civic model went on sale in July 2006, contributing to higher unit sales.

 

In Vietnam, consolidated subsidiary Honda Vietnam Co., Ltd., began local production of the Civic in July 2006.

 

Other Regions

 

Due to expansion in Latin America, the Pacific, and the Middle & Near East, unit sales in Other regions rose 23.4% in fiscal year 2007, to 248,000 units.

 

In Brazil, Honda began local production of the Civic in April 2006, and sales of this model were strong. In November 2006, we introduced the Civic FFV, a flexible-fuel vehicle that runs on 100% ethanol or any gasoline– ethanol mixture, followed by the launch of the Fit FFV in December. Australian sales of the Civic, Jazz and the new CR-V were strong.

 


* Source: European Automobile Manufacturers’ Association (ACEA), passenger car category (15 countries in the European Union, three countries in the European Free Trade Association)

 

Power Products and Other Businesses

 

Honda’s unit sales of power products totaled 6,421,000 units, up 9.3% from the previous fiscal year. In Japan, unit sales totaled 527,000 units, an increase of 8.2%. Overseas unit sales came to 5,894,000 units, an increase of 9.4%, due mainly to increased unit sales in North America and Europe. Revenue in power products and other businesses, including intersegment sales within Honda, increased 14.7%, to ¥438.9 billion, from the previous fiscal year, due mainly to increased unit sales of power products and the positive impact of currency translation effects. Operating income was ¥36.1 billion, an increase of 0.6% from the previous fiscal year, due mainly to the positive impact of increased profit attributable to higher revenue and the currency effects caused by the depreciation of the Japanese yen, which offset the negative impact of the increased SG&A expenses and the gain on return which was recorded in the fiscal year ended March 31, 2006. The operating margin was 8.2%.

 

Japan

 

In Japan, unit sales rose 8.2%, to 527,000 units from the previous fiscal year. Sales of snowblowers, compact home-use cogeneration systems*1, the GX-series engines supplied to pump and generator manufacturers on an OEM*2 basis applications increased.

 

North America

 

In North America, sales were strong for GCV series engines—mainly for OEM use in lawn mowers, as well as GX- and GC-series engines for such OEM applications as generators and high-pressure washers. Sales of completed equipment expanded, due to Honda’s introduction of the new HRR lawn mower, but sales of generators declined as a result of overall market shrinkage. As a result of these factors, unit sales from power product grew 9.8% in fiscal year 2007, to 3,103,000 units.

 

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During the year, J.D. Power and Associates of the United States accorded Honda the highest ranking for the third consecutive year in the electronic fuel-injected (EFI) four-stroke outboard segment.

 

Europe

 

In Europe, OEM sales of GCV-series engines for lawn mowers were favorable, as were sales of GX-series engines for OEM use in generators and construction equipment. As a result, unit sales grew 10.0%, to 1,625,000 units.

 

Asia

 

Unit sales in Asia expanded 6.0%, to 760,000 units, due to increased sales of pumps and other equipment in China and India.

 

Other Regions

 

In other regions, increased unit sales of GX-series engines for OEM production, mainly in Latin Africa, pushed up sales 10.3%, to 406,000 units from the previous fiscal year.

 

In fiscal year 2007, Honda introduced two four-stroke outboard engines, the BF90 and BF75 that underwent a full model change, responding to needs throughout the world by simultaneously addressing demands for high levels of both environmental performance, power performance and fuel efficiency. Honda also began sales in Japan of the EU55is generator, which employs electromagnetic inverter technology to supply a high level of power, but emit a low level of noise, and of the EU6500is generator in North America. In Japan, we introduced a compact home-use cogeneration system with improved generation efficiency which underwent a full model change. We also launched this model in the United States. In addition, Honda launched the Punch X compact tiller in Japan, and the F501 and FE500 compact tillers in Europe which underwent a full model change. In China, we launched the new EM10000 high-output 10kVA generator, which is compact and equipped with a newly developed alternator.

 


*1:

Compact, home-use cogeneration system

 

Honda has combined its original electromagnetic inverter technologies with the world’s smallest(i) natural gas engine (GE160V) in an efficient layout to create a small, lightweight cogeneration unit. Due to its compactness, the unit can be installed in the home and boasts an overall energy efficiency of 85%. It also emits approximately 30% less carbon dioxide than conventional natural gas-powered generators or hot-water heating units using natural gas.(ii)

 

 

(i):

A Honda development, the reciprocal gas enjine

 

 

(ii):

Data from Honda test results. Data compares electricity from the grid with hot-water heating units that use natural gas.

 

*2:

OEM (Original equipment manufacturing)

 

OEM refers to a manufacturing of products and components supplied for sale under a third-party brand.

 

Financial Services Business

 

Honda offers a variety of financial services to its customers and dealers, with the aim of supporting sales of Honda products. These services are provided through finance subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand.

 

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In fiscal year 2007, net sales of our financial services business, including intersegment sales within Honda, rose 32.9%, to ¥413.3 billion from the previous fiscal year, due mainly to a higher loan balance accompanying the expansion of automobile business in North America, increased net sales in operating leases, as well as positive currency translation effects. Operating income also expanded 27.6%, to ¥115.5 billion from the previous fiscal year, due mainly to the increased profit attributable to higher revenue benefiting from a higher loan balance and positive currency translation effects, which offset the negative impact of the increased interest rates. The operating margin came to 28.0%.

 

Our finance subsidiaries in North America have historically accounted for all leases as direct finance 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 finance 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 Prospectus A. Operating Results. Information about finance subsidiaries-receivables and securitizations is described in Note (3) to the accompanying consolidated financial statements.

 

Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales was ¥4,774.1 billion, up 7.6% 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 unit sales in domestic automobile business. Operating income was ¥228.1 billion, down 38.5%, compared to the previous fiscal year, due primarily to the negative impact of the changes in the model mix, substantially increased raw material costs, increased SG&A expenses, increased R&D expenses and the absence of a gain on the return of the substitutional portion of the Employee Pension Funds of the Japanese government which was present in fiscal year 2006, which offset the positive impact of the increased profit attributable to higher revenue, continuing cost reduction effects and the currency effects caused by the depreciation of the Japanese yen. Operating margin was 4.8%.

 

North America

 

In North America, which mainly consists of the United States, revenue increased 9.9%, to ¥6,172.6 billion, due mainly to increased unit sales in the automobile business and the positive impact of currency translation effects. Operating income increased 29.1%, to ¥456.8 billion, from the previous fiscal year, due primarily to the positive impacts of increased profit attributable to higher revenue, continuing cost reduction effects, decreased SG&A expenses and the currency effects caused by the depreciation of the Japanese yen, which offset the negative impacts of the change in model mix and substantially increased raw material costs. The operating margin was 7.4%.

 

Europe

 

In Europe, revenue increased 13.3%, to ¥1,347.7 billion, compared to the previous fiscal year, due primarily to increased unit sales in the automobile and power product businesses and the positive impact of currency translation effects. Operating income increased 21.6%, to ¥31.9 billion, from the previous fiscal year, due mainly to the positive impacts of increased profit attributable to higher revenue, continuing cost reduction and the currency effects caused by the depreciation of the Japanese yen, which offset the negative impacts of the change in model mix and increased SG&A expenses. The operating margin was 2.4%.

 

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Asia

 

In Asia, revenue increased 27.5%, to ¥1,271.4 billion from the previous fiscal year, due primarily to increased unit sales in the automobile business and the positive impact of currency translation effects. Operating income increased 18.7%, to ¥77.1 billion, from the previous fiscal year, due mainly to the positive impacts of increased profit attributable to higher revenue, which offset the negative impact of increased SG&A expenses. The operating margin was 6.1%.

 

Other Regions

 

In other regions, revenue increased 39.5%, to ¥797.6 billion, compared to the previous fiscal year, due mainly to increased unit sales in all of the business segments and the positive impact of currency translation effects. Operating income rose 26.4%, to ¥72.2 billion, from the previous fiscal year, due mainly to the positive impact of the increased profit attributable to higher revenue, and the currency effects caused by the depreciation of the Japanese yen, offsetting the negative impact of increased SG&A expenses. The operating margin was 9.1%.

 

As described in Note (1) (v) and Note (2) to our consolidated financial statements, certain revisions for misclassifications and reclassifications have been made to the prior years’ consolidated financial statements to conform to the presentation used for the fiscal year ended March 31, 2007.

 

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Fiscal 2006 Compared with Fiscal 2005

 

Overview

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter “net sales”) for fiscal 2006, ended March 31, 2006, amounted to ¥9,907.9 billion, up 14.5% from the previous fiscal year.

 

Of this amount, domestic net sales decreased by ¥5.1 billion, or 0.3%, to ¥1,694.0 billion, while overseas net sales increased by ¥1,263.0 billion, or 18.2% to ¥8,213.9 billion.

 

Selling, General and Administrative Expenses / Research and Development Expenses

 

SG&A expenses for fiscal 2006 increased by ¥143.1 billion or 9.5%, to ¥1,656.3 billion, reflecting increased expenses from higher revenue and increased advertisement expenses and freight costs due to rising prices of crude oil which offset the positive impact of decreased in provision for credit and lease residual losses on finance subsidiaries-receivables.

 

R&D expenses increased by ¥42.6 billion or 9.1%, to ¥510.3 billion.

 

Operating Income

 

Operating income amounted to ¥868.9 billion, which was an increase by 37.7% from the previous fiscal year.

 

This was primarily due to positive currency effects caused by the depreciation of the Japanese yen, increased profit attributable to higher revenue, continuing cost reduction effects and gain on return, which offset the negative impact of increased SG&A and R&D expenses.

 

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

 

Income before income taxes, minority interest and equity in income of affiliates was up 24.2%, to ¥829.9 billion. Other income & expenses, net decreased by ¥76.4 billion from the previous fiscal year, due mainly to decline in gains on derivative instruments.

 

Income Tax Expense

 

Income tax expense increased by 18.9%, to ¥317.1 billion. The effective tax rate was 38.2%, a decrease by 1.7 percentage points from the previous fiscal year. Additional detailed information is described in Note (10) to the accompanying consolidated financial statements. The prior year income taxes in 2005 are due to assessment by the Japanese tax authorities as a result of their transfer pricing audit relating to the Company’s motorcycle business in Brazil.

 

Equity in Income of Affiliates

 

Equity in income of affiliates increased by 3.7%, to ¥99.6 billion.

 

Net Income

 

Net income amounted to ¥597.0 billion, an increase of 22.8%.

 

Basic net income per common share amounted to ¥324.33, compared with ¥260.34 in fiscal 2005.

 

The gain on “return” of ¥138.0 billion which was recorded in the fiscal year ended March 31, 2006, was included in the result of consolidated operating income and consolidated income before income taxes. Accordingly, the result of amount of the relevant income after tax that was recorded by the “return” was included in the consolidated net income for the fiscal year ended March 31, 2006.

 

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Business segments

 

Motorcycle Business

 

In fiscal 2006, domestic unit sales of motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) fell 2.6%, to 368,000 units. Overseas unit sales fell 2.0%, to 9,903,000 units, mainly due to a decrease in unit sales of parts for local production at affiliates accounted for under the equity method in Asia*.

 

As a result, total unit sales of motorcycles amounted to 10,271,000 units, down 2.0% compared to the previous fiscal year. Net sales from sales to unaffiliated customers in the motorcycle segment increased 11.7%, to ¥1,225.8 billion, due mainly to the positive impact of the currency translation effects and the change in model mix, offsetting negative impact of decreased unit sales. Operating income increased by 64.4% to ¥113.9 billion, due mainly to the positive impact of currency effects caused by the depreciation of the Japanese yen, increased profit attributable to higher revenue, continuing cost reduction effects and gain on “return”, offsetting the negative impact of the increase in SG&A and R&D expenses. The operating margin was 9.3%.

 


* Of the net sales of Honda-brand motorcycle products that are manufactured and sold by overseas affiliates accounted for under the equity method, those with respect to which parts for manufacturing were not supplied from Honda or such subsidiaries are not included in net sales and other operating revenue, in conformity with U.S. generally accepted accounting principles. Accordingly, these unit sales are not included in the financial results. Such products amounted 2,600 thousand units for the fiscal year.

 

Japan

 

In Japan, unit sales declined 2.6%, to 368,000 units. Sales of small-sized motorcycles (over 250cc) increased, supported by strong demand for sports bikes, as did sales of mini-sized motorcycles (126cc–250cc), which benefited from strong sales of scooters. However, sales of first-class motor-driven cycles (up to 51cc) and second-class motor-driven cycles (51cc–125cc) fell, in market demand, and affected overall unit sales.

 

In the small-sized motorcycle category, the CB1300 Super Bol D’Or and the CB400 Super Bol D’Or—featuring a newly designed half-cowl for improved riding stability—generated strong sales. With respect to mini-sized motorcycles, we enjoyed strong sales of the Forza series due to strong demand centered on customers in their 30’s. The motor-driven cycle category, types 1 and 2, recorded declines in sales of Today and Crea Scoopy models, although sales of Zoomer bikes were favorable.

 

North America

 

In North America, unit sales declined 4.4%, to 615,000 units. We recorded strong sales of the VTX1300 series of cruisers and two models released at the end of the previous fiscal year: the CRF450X off-road bike and the CBR600RR sports model. Overall sales of off-road vehicles were down, however, due to substantially increased fuel prices. As a result, unit sales of models in the motorcycle segment fell 4.0%, to 332,000 units.

 

The ATV category benefited from strong sales of the FourTrax Rincon, which underwent a full model change in October 2005, and the TRX90, which is now equipped with an easy-starting electric starter motor. However, as was the case for motorcycles, high gasoline prices affected sales of small and medium-sized ATV sales, leading to a 4.7% overall decline in combined ATV and PWC sales in North America, to 283,000 units.

 

Europe

 

In Europe, unit sales rose 4.4%, to 353,000 units.

 

In that region, we enjoyed strong sales of SH150i and SH125i scooters and the CB600F Hornet, a “naked” sports bike that underwent minor changes. Also popular was the Deauville touring bike, which underwent a full

 

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model change in February 2006. We have already released the Forza series of large scooters, which have been well received in Japan, and in February 2006 we released the CBF1000 touring sports bike, equipped with an engine based on that found in the CBR1000RR. Both models have proven popular among European customers. In these ways, we delivered products that met the needs of customers in the intensely competitive market for commuter vehicles and in the growing market for large scooters.

 

Asia

 

In Asia, demand for motorcycles as an essential mode of transportation has continued to grow. Total unit sales of motorcycles made by Honda and its subsidiaries, as well as of motorcycle parts sold to regional affiliates accounted for under the equity method, declined 3.5%, to 7,907,000 units.

 

Honda is working hard to expand local businesses in the region through its active promotion of local procurement of parts used in overseas production. This strategy has resulted in a sharp increase in 100% locally procured models made by our affiliates in India and China that are not included in Honda’s unit sales.

 

In India, we enjoyed healthy sales of core models made by our affiliate, Hero Honda Motors Limited (HHML). These included two 125cc models—Super Splendor, which went on sale at the end of the previous fiscal year, and Glamour, which launched in June 2005—as well as the 100cc CD Deluxe. In January 2006, HHML launched the Pleasure. Honda Motorcycle & Scooter India (Private) Limited (HMSI), a consolidated subsidiary, recorded strong sales of the Unicorn, its first motorcycle, and the Activa scooter. Combined sales in India of completed vehicles by Honda and consolidated subsidiaries, as well as sales of unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, totaled 1,934,000 units, down 865,000 from the previous fiscal year.

 

In Indonesia, P.T. Astra Honda Motors (AHJ), an equity-method affiliate, posted healthy sales of its Supra series, centering on the Supra X 125, which went on sale in June 2005, and the Supra Fit, which underwent a full model change in August 2005. Also popular was the Supra X 125 PGM-FI, which was added to the lineup in December 2005 and features PGM-FI for superior fuel economy and drivability. In September 2005, we commenced production at a third new plant, strengthening our annual capacity by 1 million units, to 3 million. In Indonesia, combined sales of finished vehicles by Honda and consolidated subsidiaries, as well as sales of unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, grew 18.0%, to 2,672,000 units.

 

In Thailand, we enjoyed strong sales of the Wave125, which underwent a minor model change in April 2005, and the Wave100, following a full model change in April 2005. In February 2006, we launched the Click scooter with the first automatic transmission developed for the Asian market. Unit sales in Thailand of completed vehicles by Honda and consolidated subsidiaries grew 1.7%, to 1,514,000 units.

 

In China, Sundiro Honda Motorcycle Co., Ltd., an affiliate accounted for under the equity method, posted strong sales of the Storm, released in April 2005, and the Wiz, released in June 2005. Another equity-method affiliate, Wuyang-Honda Motors (Guangzhou) Co., Ltd., recorded strong sales of the SCR100, GL125 and other core scooter models. Due to market confusion stemming from the adoption of Euro2* emission standards, as well as suppression of purchases following the announcement of an upcoming reduction in consumption tax, combined unit sales in China of completed vehicles by Honda and consolidated subsidiaries fell 97,000 units from the previous term, to 336,000 units. However, this figure does not include sales of 100% locally procured Honda-brand vehicles manufactured and sold by affiliates accounted for under the equity method.

 

Other Regions

 

In other regions—covering Latin America, the Middle & Near East, Africa and Oceania—unit sales grew 10.4%, to 1,028,000 units.

 

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In Brazil, where economic performance was stable, we posted strong sales of the core CG150 Titan and CG125 Fan models. Following a full model change in September 2005, the Biz 125, aimed at young people and women, was also popular.

 

In the Middle & Near East and Africa, we enjoyed strong sales of the Chinese-made CGL125 and the Japanese-made XL125.

 


*

Euro2 (motorcycles)

 

     Extremely stringent exhaust emission regulations for motorcycles implemented in Europe from 2003. Euro2 regulations are relatively recent and stringent standards. China began employing Euro2 regulations from the 2005 model year, and Indonesia and Brazil are also employing these regulations. (Even more stringent Euro3 emission regulations are being implemented in Europe in 2006.)

 

Automobile Business

 

Domestic unit sales of automobiles in fiscal 2006 fell 2.2%, to 696,000 units and overseas unit sales increased by 6.5%, to 2,695,000 units. Consequently, total unit sales of automobiles grew 4.6%, to 3,391,000 units, compared to the previous fiscal year. Net sales from sales to unaffiliated customers in the automobile segment increased 14.9%, to ¥8,004.6 billion, due to the positive currency translation effects and increased unit sales mainly in North America and Europe. Operating income increased by 38.9% to ¥628.3 billion, due mainly to the positive impact of currency effects caused by the depreciation of the Japanese yen, an increase in profit attributable to higher revenue, continuing cost reduction effects and gain on “return”, which offset the negative impact of increase in SG&A and R&D expenses. The operating margin was 7.9%.

 

Japan

 

Total domestic automobile demand in Japan in calendar year 2005 remained largely unchanged, at around 5,860,000 units. For Honda, however, unit sales in fiscal 2006 edged down 2.2%, to 696,000 units, due to lower sales of Fit, Elysion and Odyssey models. This was despite the launch of the new Air Wave wagon and the Zest, as well as higher sales of the Step Wagon, which underwent a full model change.

 

In April 2005, we introduced the all-new Air Wave station wagon, featuring high utility in a compact body. In May, we released the new Step Wagon, after lowering the vehicle’s floor level and center of gravity and providing a more user-friendly body size, more internal space and sedan-like driving performance and comfort. In September 2005, we launched the new Civic, featuring an innovative, monoform design and more ample interior space. In March 2006, we commenced sales of the new Zest mini car, incorporating low-floor design technology for greater cabin room, occupant access and storage space.

 

In addition to these and other products with new levels of value, we enhanced marketing efficiency by deploying advanced information technologies while reinforcing our sales and service capabilities. In these ways, Honda strove to maximize the lifetime satisfaction of its existing customers in Japan, whose numbers are around 9.0 million.

 

North America

 

In calendar 2005, automobile demand in the United States remained high, at around 16,990,000 units.

 

In the passenger car segment, we reported an increase in unit sales of the new Civic model, which offers excellent safety features and superb fuel economy. Sales of the Acura RL and the Acura TSX, a sport sedan, were also stable. In the light truck segment, the all-new Ridgeline, a next-generation truck launched in March 2005, attracted strong demand, as did the Pilot, a mid-class SUV, and the Odyssey mini-van. As a result, overall sales in North America grew 6.8%, to 1,682,000 units.

 

In October, we launched a new Brazilian-made Fit model in Mexico. Further north, in November we released the Acura CSX, an Acura-brand entry model aimed designed specifically for the Canadian market.

 

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In fiscal 2006, we received “North American Car and Truck of the Year” awards for the Civic and the Ridgeline, marking the first time in history that the same manufacturer has won both categories at the same time. In addition, Honda vehicles were selected as Top Picks in five of the 10 automobile categories rated by U.S. Consumer Reports magazine for 2006 models. These rankings reflect excellent feedback on our introduction of models in the passenger car and light truck categories that offer excellent fuel performance and safety features.

 

Europe

 

In Europe, overall automobile demand remained almost unchanged in calendar year 2005, at around 17,660,000 units. Nevertheless, Honda’s unit sales in fiscal 2006 climbed 9.0%, to 291,000 units. This was due mainly to increased sales of the five-door Civic, released in January 2006 after a full model change that resulted in a well-received sporty and sophisticated design, and the FR-V series, which benefited from the addition in August 2005 of a version with the Honda-developed i-CTDi*1 diesel engine, and continued strong sales of the Jazz. To meet growing demand for diesel-powered vehicles in the region and to fortify out our manufacturing system, Honda of the U.K. Manufacturing Limited began assembling diesel engines. We included a diesel model in the new five-door Civic line, and the Accord and CR-V are also available with Honda-developed diesel engines. In these ways, we enhanced our competitiveness in the extremely challenging European market.

 

Asia

 

In Asia, total unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate edged up 1.8%, 521,000 units.

 

In China, the passenger car market expanded considerably, with demand reaching around 3.20 million in calendar year 2005. Guangzhou Honda, an affiliate accounted for under the equity method, recorded healthy sales of the popular Accord and Odyssey models. Another equity-method affiliate, Dongfeng Honda, enjoyed strong sales of the CR-V. Total unit sales in China of completed vehicles by Honda and its subsidiaries, as well as sales of component parts sets for production to equity method affiliates amounted to 263,000 units, on a par with the preceding year.

 

In February 2006, Dongfeng Honda expanded its capacity to 120,000 vehicles per year, in an effort to meet rapidly expanding Chinese demand. Further, in June 2005 Guangzhou Honda became the first passenger car maker in China to export vehicles to Europe from a plant that specializes in the production of export models. In these ways, Honda will continue using its accumulated China-related expertise to deliver top-level products in terms of quality and cost.

 

Demand continued to expand on other Asian markets, with major increases in sales of the City in Pakistan, India and elsewhere. Sales were also up in Taiwan, contributing to sales in the Asian region. In terms of manufacturing and R&D, we expanded manufacturing capacity at our plant in India and established an R&D location in Thailand. These are a few examples of Honda’s efforts to build up its systems to respond swiftly to diversifying local needs

 

Other Regions

 

Unit sales in other regions grew 14.2%, to 201,000 units, thanks mainly to increased sales in Latin America, Oceania and the Middle & Near East.

 

In Brazil, sales of the locally produced Fit increased. In Australia and the Gulf states, we posted healthy sales of the Accord, Civic and other models.

 


*1:

i-CTDi

 

This is a proprietary diesel engine developed by Honda that optimizes combustion through the adoption of a high-pressure fuel injection system, combined with a newly developed emission treatment system. The i-CTDi is also compliant with Euro4 emission standards for 2005.

 

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Power Product and Other Businesses

 

Domestic unit sales of power products in fiscal 2006 increased 12.7%, to 487,000 units. Overseas unit sales increased 10.7%, to 5,389,000 units. Accordingly, total unit sales of power products rose 10.9%, to 5,876,000 units, compared to the previous fiscal year.

 

Net sales from power products and other businesses, including sales between segments, climbed 11.6%, to ¥382.5 billion, due mainly to increased unit sales. Operating income increased 86.3% to ¥35.9 billion, due mainly to positive currency effects caused by the depreciation of the Japanese yen, the increased profit attributable to higher revenue and gain on “return”, which offset the negative impact of the increase in SG&A expenses. The operating margin was 9.4%.

 

Japan

 

In Japan, unit sales of power products rose 12.7%, to 487,000 units, due largely to increases in sales of the GX series of general-purpose engines supplied to pump manufacturers on an OEM basis, as well as higher sales of imported engines made by Honda in Thailand and China.

 

North America

 

In North America, unit sales grew 12.5%, to 2,827,000 units. Stable demand for power generation equipment provided a strong increase in sales of both completed products and engines supplied on an OEM*1 basis. Within the engine category, strong sales of large-scale models in the GX series have enabled Honda to create a new market for completed equipment. Our North American business also benefited from healthy sales of inverter-equipped mobile generators for camping and leisure use, as well as large-scale power generation equipment.

 

Europe

 

Unit sales in Europe grew 12.8%, to 1,477,000 units, bolstered by stable demand for GCV135/160 engines for lawn mower use, as well as construction equipment and GX general-purpose engines for use in tillers. Among completed products, the new HRX push lawn mower generated a considerable sales increase, encouraged by favorable weather.

 

Asia

 

In Asia, unit sales remained mostly unchanged, at 717,000 units. In April 2005, we restructured the operations of Jialing-Honda Motors Co., Ltd., a company in China that previously manufactured and sold both power products and motorcycles. That company subsequently restarted its operations, concentrating solely on power products. This measure enabled us to better utilize our cost-competitiveness and resulted in favorable unit sales, together with Thailand-made products.

 

Other Regions

 

In other regions, unit sales climbed 10.5%, to 368,000 units. In Brazil, sales were strong for locally made GX series engines, which became more price-competitive as a result of further cuts in component procurement costs.

 

In Australia, we posted higher sales of green products, including the environmentally friendly HRU series of push lawn mowers and UMK series lawn mowers.

 

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During the year, Honda released the iGX440 general-purpose engine in Japan, United States, Europe and elsewhere. Highly friendly to the environment, the iGX440 features a new, world first electronic governor*2 technology that regulates engine speed and thus improves responsiveness to varying engine loads. In Japan, we incorporated the iGX440 into the newly launched HSM1590i, a mid-sized hybrid snow plow featuring a gasoline engine for removing snow and an electric motor for travel motion. The combination of the two power units facilitates switching between work modes and enhances user-friendliness. The new product has received favorable response from customers.

 

In March 2006, we released the Monpal ML200, a stylish four-wheel scooter with a comfortable ride and high maneuvering stability. It is the first commercially available vehicle to feature visibility enhancement design, adapted from the Honda ASV-3*3 advanced safety research vehicle.

 

Meanwhile, diffusion of our compact, home-use cogeneration system*4 increased in Japan. In fiscal 2006, sales increased firmly in line with growing worldwide environmental awareness. Since January 2006, Tokyo Gas Co., Ltd., became a new distributor of this system.

 


*1: Original equipment manufacturing (OEM)

 

OEM refers to a manufacturing of products and components supplied for sale under a third-party brand.

 

*2: STR governor (electronic governor)

 

This system uses an electronic control unit (ECU) to constantly monitor throttle aperture and speed, so that even if the engine load changes the electronic control adjusts the throttle to maintain a pre-established speed.

 

STR: Self-tuning regulator

 

Governor: A device that regulates engine speed, maintaining a constant engine speed, regardless of load fluctuations

 

*3: ASV (Advanced Safety Vehicle)

 

Japan’s Ministry of Land, Infrastructure and Transport promotes this project for the development of advanced safety vehicles, which all manufacturers of automobiles and motorcycles join voluntarily. The first phase of this project, ASV-1 (Apr.1991–Mar.1996), studied technical possibilities. ASV-2 (Apr.1996–Mar.2001) involved research and development on practical applications, while ASV-3 (Apr.2001–Mar.2006) used technology to inter-vehicle communication technologies.

 

In September 2005, Honda succeeded in the creation of its ASV-3. Using inter-vehicle communication technologies to avoid collision by determining distances between vehicles, this vehicle provides features to warn of and attempt to avoid collisions, bypass collisions and minimize damage, and provide post-collision assistance.

 

*4: Compact, home-use cogeneration system

 

By using natural gas to produce both heat and electricity, cogeneration units use energy sparingly and significantly reduce the burden that these tasks place on the environment.

 

Financial Services

 

Honda offers a variety of financial services to its customers and dealers, with the aim of supporting sales of Honda motorcycles and automobiles. These services are provided through finance subsidiaries in the United States, Japan, Canada, the United Kingdom, Germany, Brazil and Thailand. In fiscal 2006, net sales of our financial services business, including inter-segment sales within Honda, rose 20.0%, to ¥310.9 billion, due mainly to stable demand for automobiles in North America, as well as the effect of increased foreign exchange

 

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translations. Operating income edged up 0.8%, to ¥90.5 billion, benefiting from a higher loan balance accompanying expansion of our business, as well as a reduction in selling, general and administrative expenses, which outweighed the negative effects of increased interest rates for fund-raising purposes.

 

Information about allowance for credit losses is provided at Item 5. Operating and Financial Review and Prospects A. operating Results. Information about finance subsidiaries-receivables and securitizations is described in Note (3) to the accompanying consolidated financial statements.

 

Geographical Information

 

Geographical information are based on the location of the Company and its subsidiaries.

 

Japan

 

Net sales in Japan were ¥4,437.8 billion, up by 7.2% from the previous fiscal year, due mainly to increased export sales in the automobile business and increased revenue in the motorcycle, power product and other businesses, which offset the negative impact of decreased unit sales in domestic automobile business. Operating income in Japan was ¥370.9 billion, up by 100.6%, due primarily to the positive impact of the currency effects caused by the depreciation of the Japanese yen, increased profit attributable to higher revenue and continuing cost reduction effects and gain on “return” of ¥138.0 billion, which offset the negative impact of the increase in SG&A and R&D expenses.

 

North America

 

Net sales in North America, which mainly consists of the United States, increased by 19.4% from the previous fiscal year to ¥5,616.3 billion, due mainly to positive currency translation impact and the increased revenue in all of Honda’s business segments. Operating income in North America increased by 10.2% to ¥353.9 billion, due primarily to the positive impact of currency effects caused by the depreciation of the Japanese yen and the increased profit attributable to higher revenue, which offset the negative impact of the increase in SG&A expenses.

 

Europe

 

Net sales in Europe increased by 14.0% to ¥1,189.5 billion compared to the previous fiscal year, due mainly to the positive currency translation impact and the increased revenue in all of Honda’s business segments. Operating income in Europe decreased by 36.2% to ¥26.3 billion, due mainly to the negative impact of the changes in model mix and increased SG&A expenses, offsetting the positive impact of the currency effects caused by the depreciation of the Japanese yen and the increased profit attributable to higher revenue.

 

Asia

 

Net sales in Asia increased by 15.9% to ¥997.3 billion from the previous fiscal year, due mainly to positive currency translation impact and the increased revenue in all of Honda’s business segments. Operating income increased by 7.1% to ¥64.9 billion from the same period of the previous year, due mainly to the positive impact of the currency effects caused by the depreciation of the Japanese yen, increased profit attributable to higher revenue and continuing cost reduction, which offset the negative impact of the increase in SG&A expenses. In Asia, in addition to subsidiaries, many affiliates accounted for under the equity method manufacture and sell Honda-brand products. Operating income does not include income from these affiliates. Income from these affiliates is recorded as equity in income of affiliates and reflected in net income.

 

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Other Regions

 

Net sales in Other Regions increased by 22.7% to ¥571.6 billion compared to the previous fiscal year, due mainly to positive impact of the currency translation effects and the increased revenue in all of Honda’s business segments mainly in Latin America. Operating income increased by 72.2% from the same period of the previous year to ¥57.1 billion, due mainly to the positive currency effects caused by the depreciation of the Japanese yen, the increased profit attributable to higher revenue and continuing cost reduction effects, offsetting the negative impact of the increase in SG&A expenses.

 

As described in Note (1) (v) and Note (2) to our consolidated financial statements, certain revisions for misclassifications have been made. Also, certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the presentation used for the fiscal year ended March 31, 2007.

 

 

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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.

 

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 their adequacy of the accrual. Therefore, warranty expense accruals are maintained at an amount we deem adequate to cover estimated warranty expenses.

 

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

 

Additional detailed information about the changes in provisions for the product warranties for each of the years in the two-year period ended March 31,2007 is described in Note (17) to the accompanying consolidated financial statements.

 

Credit Losses

 

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

 

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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.

 

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 2007 in our North America portfolio, the provision for fiscal 2007 and the allowance balance at the end of fiscal 2007 would have increased by approximately ¥5.5 billion and ¥2.8 billion, respectively. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2007.

 

Additional Narrative of the Change in Credit Loss as Below

 

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

 

     Yen (billions)  
     2005     2006     2007  

Charge-offs (net of recoveries)

   23.1     22.8     26.2  

Provision for credit losses

   31.7     27.4     25.5  

Allowance for credit losses

   29.2     30.1     28.7  

Ending receivable balance

   3,613.6     4,166.5     4,351.8  

Average receivable balance, net

   3,333.5     3,938.2     4,330.8  

Charge-offs as a % of average receivable balance

   0.70 %   0.58 %   0.61 %

Allowance as a % of ending receivable balance

   0.81 %   0.72 %   0.66 %

 

Fiscal Year 2007 Compared with Fiscal Year 2006

 

Net charge-offs in our North American portfolio increased by ¥3.4 billion, or 15%. Higher originations of finance receivables due to business expansion in fiscal year 2006 compared to fiscal year 2005 resulted in higher charge-offs in fiscal year 2007.

 

The provision for credit losses decreased by ¥1.9 billion, or 7% and the allowance for credit losses decreased by ¥1.4 billion, or 5%. The decreases were due to lower estimates of losses incurred as of March 31, 2007 even though finance receivables increased.

 

Fiscal Year 2006 Compared with Fiscal Year 2005

 

Net charge-offs in our North America portfolio decreased by ¥0.3 billion, or 1%. The lower loan originations during fiscal year 2005 resulted in a lower volume of defaults during fiscal year 2006, offsetting the currency translation effects. Also the difficulties experienced with the implementation of the new customer account servicing system in fiscal year 2005 has passed, which improved collection efforts.

 

The provision for credit losses decreased by ¥4.3 billion, or 14%. The allowance for credit losses increased by ¥0.9 billion, or 3%, due to the currency translation effects. Excluding this effect, the allowance for credit losses decreased.

 

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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 finance 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, 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 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, 2007, were to decrease by approximately ¥10,000 per unit from our present estimates, the total impact would be an increase in losses on lease residual values by about ¥0.8 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 about ¥0.1billion. For operating lease portfolio as of March 31 with the same prerequisite shown above, the impacts would be immaterial. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2007.

 

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 and expected long-term rate of return on plan assets are determined based on our evaluation of current market conditions, including changes in interest rates. The salary increase assumptions reflect our actual experience as well as near-term outlook. Our assumed discount rate and rate of salary increase as of March 31, 2007 were 2.0% and 2.3%, respectively, and our assumed expected long-term rate of return for the year ended March 31, 2007 was 4.0% for Japanese plans. Our assumed discount rate and rate of salary increase as of March 31, 2007 were 5.2-6.0% and 2.9-6.4%, respectively, and our assumed expected long-term rate of return for fiscal 2007 was 6.8-8.0% for foreign plans.

 

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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 will be generally reflected as our recognized expenses and recorded obligations in future period. 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)
     Percentage
Point
Change (%)
   Funded
status
   Equity     

Assumptions

            Pension expense

Discount rate

   +0.5/-0.5    -88.1/+99.3    +47.9/-59.8    -5.2/+6.3

Expected long-term rate of return

   +0.5/-0.5    —      —      -3.3/+3.3
Foreign Plans                    
     Yen (billions)
     Percentage
Point
Change (%)
   Funded
status
   Equity     

Assumptions

            Pension expense

Discount rate

   +0.5/-0.5    -43.4/+49.8    +30.7/-35.8    -6.3/+7.3

Expected long-term rate of return

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

 


(*1)

Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions at March 31, 2007.

 

(*2)

Funded status for fiscal 2007 is affected by March 31, 2007 assumptions.

 

  Pension expense for fiscal 2007 is affected by March 31, 2006 assumptions.

 

New Accounting Pronouncements

 

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 156, “Accounting for Servicing of Financial Assets”. This statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 gives revised guidance as to when servicing assets and servicing liabilities should be recognized. It also revises guidance regarding the initial and subsequent measurement of servicing assets and liabilities. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. Management is currently in process of quantifying the financial impact of adoption. It is not anticipated that adoption will have a material impact on the Company’s financial position or results of operations.

 

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes”. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. This Interpretation prescribes a two step process for the recognition and measurement in the financial statement of a tax position taken or expected to be taken in a tax return. This statement is effective as of an entity’s first fiscal year that begins after December 15, 2006. Management is currently in the process of quantifying the financial impact of adoption.

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.157, “Fair Value Measurements”. This statement defines fair value, establishes

 

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a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. This statement is effective as of an entity’s first fiscal year that begins after November 15, 2007, with early adoption encouraged. Management is currently in the process of determining whether to early adopt this statement and quantifying the financial impact of adoption. It is not anticipated that adoption will have a material impact on the Company’s financial position or results of operation.

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This statement amends SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension and for Termination Benefits”, SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, and SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. This statement requires an employer to recognize the overfunded or underfunded status as an asset or liability in its statement of financial position and to recognize changes in that funded status in comprehensive income in the year in which the changes occur. This statement replaces SFAS No. 87’s requirement to report at least minimum pension liability measured as excess at the accumulated benefit obligation over the fair value at the plan assets. The Company and its consolidated subsidiaries adopted SFAS No.158 on March 31, 2007. Detailed information about the impact of the adoption of SFAS No. 158 is provided in note 12 to the accompanying consolidated financial statements. This statement also changes the date at which benefit obligations are to be measured to the date of the year-end statement of financial position. The measurement provisions of this statement are effective for fiscal years ending after December 15, 2008.

 

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of SFAS No.115”. This statement permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in earnings in the current period. The statement also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, with early adoption being permitted. Management is currently in process of determining whether to early adopt this statement and quantifying the financial impact of adoption.

 

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.

 

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

 

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Honda meets its operating capital requirements mainly through cash generated by operations. Honda funds its financial programs for customers and dealers primarily from corporate bonds, medium-term notes, commercial paper, and securitization of finance receivables. The year-end balance of liabilities associated with fund-raising by finance subsidiaries was ¥4,470.4 billion as of March 31, 2007.

 

Cash Flows

 

Consolidated cash and cash equivalents amounted to ¥945.5 billion as of March 31, 2007, up ¥228.7 billion, or 31.9%, from a year earlier, mainly owing to the increases in net cash provided by operating and financing activities, offset in part by the increase in net cash used in investing activities as described below.

 

Net cash provided by operating activities amounted to ¥904.5 billion. Factors increasing operating cash flows included continued significant growth in sales and stable operating margins (excluding the effect of the non-cash gain on return in the prior year), accompanied by lower increases in net operating assets and liabilities in the current year.

 

Net cash used in investing activities totaled ¥1,130.7 billion. Factors increasing net cash used in investing cash flows were mainly due to ¥597.9 billion in capital expenditures associated with introducing new models, upgrading, streamlining and renewing production facilities, and the improvement of Sales and R&D facilities. Other factors were ¥240.2 billion increase in acquisition of finance subsidiaries-receivables and ¥365.5 billion increase of property on operating leases associated with higher sales of automobiles in North America and elsewhere.

 

Net cash provided by financing activities was ¥423.4 billion. During the year, Honda raised ¥306.0 billion in short-term debt through the issue of commercial paper, and also raised ¥969.4 billion in long-term debt through the issue of bonds and medium-term notes to meet capital requirements associated mainly with an increase in liabilities of finance subsidiaries, as well as to repay ¥677.5 billion in long-term debt. By contrast, Honda also made ¥26.6 billion in payments for purchase of treasury stock and ¥140.4 billion in cash dividends paid.

 

Liquidity

 

The ¥945.5 billion in cash and cash equivalents at end of year corresponds to approximately 1.0 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 carry total short-term borrowings of ¥1,842.1 billion in the form of commercial paper issued regularly to replace debt. This serves as alternative liquidity for a back-up credit line equivalent to ¥826.1 billion. Honda believes it currently has sufficient credit limits, extended by prominent international banks.

 

Honda believes it has adequate liquidity to meet its cash obligations for the near future at least for the year ending March 31, 2008.

 

Honda’s short- and long-term debt securities are rated by credit rating agencies, such as Moody’s Investor Service, Inc., and Standard & Poor’s Rating Services. Based on major current ratings, which are shown below, Honda will be able to raise funds even if it requires more capital than its present level of liquidity would allow.

 

The following table shows the ratings of Honda’s unsecured debt securities by Moody’s and Standard & Poor’s as of the date of the filing of this Form 20-F.

 

     Credit ratings for
     Short-term
unsecured debt securities
  

Long-term

unsecured debt securities

Moody’s Investors Service

   P-1    Aa3

Standard & Poor’s Rating Services

   A-1    A+

 

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

 

C. Research and Development

 

Using the most advanced technologies, Honda Motor Company and its consolidated subsidiaries conduct R&D activities aimed at creating distinctive products that are internationally competitive. The Group’s main R&D divisions operate independently as subsidiaries, allowing technicians to pursue their tasks with significant freedom.

 

Product-related research and development is spearheaded by the Honda R&D Co., Ltd., Honda R&D Americas, Inc., in the United States and Honda R&D Europe (Deutschland) GmbH in Germany. Research and development on production technologies centers on Honda Engineering Co., Ltd., in Japan and Honda Engineering North America, Inc. All of these entities work in close association with our other entities and business in their respective regions. Total consolidated R&D expenditures for the year ended March 31, 2007 amounted to ¥551.8 billion. Main R&D activities conducted by each business segment are outlined below.

 

Motorcycle Business

 

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

 

Breakthroughs during fiscal 2007 include the development in the United States and Canada of the Gold Wing touring bike equipped with the world’s first motorcycle airbag system. In North America and Europe, the CBR600RR underwent a full model change, achieving lower weight than the previous model through a more compact engine installed in a newly designed Fine Die-Cast aluminum frame. It also employs a newly designed compact, electrically controlled steering damper that facilitates further enhanced riding performance. In Asia, we began production and sales at an equity-method affiliate in India of the Glamour-FI 125cc motorcycle, equipped with a PGM-FI electronic fuel-injection system, which meets new demands for low fuel consumption and clean performance through exhaust emissions. In China, we commenced production and sales at an equity-method affiliate of two new models: CBF150 motorcycle, mounted with a newly developed Core 2 150cc engine with low fuel consumption and robust power achieved through substantially reduced friction loss and improved cooling performance; and SCR110 scooter, which employs PGM-FI low-friction technologies to become the first model in the country to clear Euro3 motorcycle emission gas standards.

 

Other technological R&D highlights include the announced development of Honda’s Variable Cylinder Management (VCM) system, which is based on high-performance Variable Valve Timing and Lift, Electronic Control (VTEC) technologies for three-phase control over the number of active cylinders, facilitating low fuel consumption and high power capacity. We also developed an engine that offers one of the world’s lowest levels of friction, achieved by improving fuel efficiency through a two-plug system and reducing mechanical resistance in the engine.

 

Research and development expenses (which do not include research and development at equity-method affiliates described above) in the Motorcycle Business segment in fiscal 2007 totaled ¥90.1 billion.

 

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Automobile Business

 

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

 

Major achievements during the year include a full model change for the CR-V in markets around the world. For four-wheel drive models, we introduced a new real-time 4WD system that improves rear-wheel torque transmissibility by bolstering the existing dual-pump system with a one-way cam unit. In Japan, we melded steering maneuver and voice guidance in the Honda Smart Parking Assist System, which is used on the Life. Further, we released the Crossroad, an automobile that transcends existing categories by combining the design and functionality of an SUV, the convenient size of a compact car, and the three-row, seven-seat configuration of a minivan. In North America, we commenced sales of the Acura RDX entry-premium SUV, which features a newly developed 2.3-liter i-VTEC (intelligent VTEC) turbo engine and Super-Handling All Wheel Drive (SH-AWD) to provide good fuel economy, high output and excellent driving performance. Breakthroughs in other regions included sales of flexible fuel vehicle (FFV) versions of the Civic and Fit in Brazil that can be powered by ethanol or an ethanol-gasoline mixture.

 

Another technology development milestone was the development of a clean diesel engine on par with a gasoline engine for environmental performance. This is achieved through a newly developed NOx catalyst that efficiently purifies NOx gases to nitrogen through a reduction reaction using ammonia produced within the catalytic converter. In addition, we have developed an evolutionary VTEC engine with high power and low fuel consumption and emissions, attained by combining VTEC and Valve Timing Control (VTC)—which dynamically controls the intake valve lift amount and aperture angle—for continuously variable control.

 

In the field of automotive fuel cell technologies, Honda announced the operation of its next-generation fuel-cell-powered FCX Concept, with the compact, high efficiency Honda FC STACK run through the central tunnel, to deliver radically improved performance in terms of driving, as well as environmental performance.

 

Research and development expenses in the Automobile Business segment in fiscal 2007 totaled ¥447.0 billion.

 

Power Product and Other Businesses

 

In the Power Products Businesses, we seek to develop products that match customers’ lifestyles and needs while strengthening our lineup of offerings that address environmental issues.

 

In fiscal 2007, BF90 four-stroke marine outboard motor underwent a full model change. This motor features such intelligent technologies as a VTEC structure based on a 1.5-liter passenger car engine, PGM-FI, a Lean Burn Control system and the world’s first air-fuel timing ignition control for a marine outboard. The BF90 is lightweight and compact, while achieving excellent drive performance and economizing on fuel consumption. We also carried out a model change for our compact, home-use cogeneration system, scoring improvements in power generation efficiency and reducing the CO2 emissions ratio. An electronic control variable jet to automatically optimize fuel flow is also employed to enhance cold-start performance.

 

Other technical development spawned a high-expansion-ratio engine with an original intake/compression stroke and expansion/exhaust stroke structure that was prototyped during fiscal 2007.

 

In other businesses, ongoing research into jet engines and HondaJet, our advanced, compact business jet, has reached fruition with development moving toward commercial production.

 

Research and development expenses in this segment in fiscal 2007 amounted to ¥14.6 billion.

 

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Fundamental Research

 

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

 

During the year, we announced a new brain-machine interface creating basic technology for manipulating robots using human brain activity as a result of joint research with Advanced Telecommunications Research Institute International. Honda has also developed a biofabric with excellent levels of durability, aesthetics and smoothness for use as an automobile interior finish. As this fabric is derived from plant materials, the material manufacturing process results in an energy savings of 10% to 15%, compared with such conventional oil-based fabrics as polyester. Further, through joint research with the Research Institute of Innovative Technology for the Earth we have established a technological base for ethanol production from soft-biomass, cellulose from plant stalk and leaf matter, such as cultivated rice byproducts, that are not suitable for human consumption. This step from cellulose to bioethanol production surmounts a problem that had been thwarting progress in this field.

 

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

 

Patents and Licenses

 

At March 31, 2007, Honda owned more than 10,900 patents and 80 utility model registrations in Japan and more than 18,500 patents abroad. Honda also had applications pending for more than 18,400 patents in Japan and for more than 18,800 patents abroad. Under Japanese law, a utility model registration is a right granted with respect to inventions of less originality than those which qualify for patents. While the Company considers that, in the aggregate, Honda’s patents are important, it does not consider any one of such patents, or any related group of them, to be of such importance that the expiration or termination thereof would materially affect Honda’s business.

 

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.

 

(Guarantee)

 

At March 31, 2007, we guaranteed ¥41.1 billion of employee bank loans for their housing costs. If an employee defaults on his/her loan payments, we are required to perform under the guarantee. The undiscounted maximum amount of our obligation to make future payments in the event of defaults is ¥41.1 billion. As of March 31, 2007, no amount was accrued for any estimated losses under the obligations, as it was probable that the employees would be able to make all scheduled payments.

 

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F. Tabular Disclosure of Contractual Obligations

 

The following table shows our contractual obligations at March 31, 2007:

 

Contractual Obligations

 

    

At March 31, 2007

Yen (millions)

     Payments due by period
     Total   

Less than

1 year

  

1-3

years

  

3-5

years

  

After

5 years

Long-term debt

   2,681,152    775,409    1,374,355    504,705    26,683

Operating leases

   128,978    25,354    34,703    23,543    45,378

Purchase commitments (*)

   78,027    78,027    —      —      —  

(*) Honda had commitments for purchases of property, plant and equipment at March 31, 2007.

 

Honda expects to contribute ¥33,953 million to its domestic pension plans and ¥37,187 million to its foreign pension plans in the year ending March 31, 2008.

 

At March 31, 2007, 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. Director, 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 members 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 Japanese Company Law, a representative director individually has authority to represent the Company generally in the conduct of its affairs. The Board of Directors has the ultimate responsibility for the administration of the affairs of the Company.

 

Under the Japanese 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

 

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

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

 

General Manager of Accounting Division for Business

Management Operations,

appointed in June 1996

 

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    15,100

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned

Takeo Fukui

(November 28, 1944)

  

Director of the Company from June 1988

 

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

 

General Manager of Hamamatsu Factory in Motorcycle Operations,

appointed in June 1992

 

General Manager of Development Management Division in Motorcycle Operations,

appointed in March 1991

 

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    22,800

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 (presently held)

 

Chief Operating Officer for Regional Sales Operations (Japan),

appointed in April 2007 (presently held)

 

Senior Managing Director of the Company,

appointed in June 2005

 

   *3    8,936

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned
  

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

 

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

     

Minoru Harada

(January 9, 1947)

  

Director of the Company from June 1994

 

Purchasing Operations Support,

appointed in April 2006 (presently held)

 

Chief Operating Officer for Motorcycle Operations,

appointed in April 2004 (presently held)

 

Senior Managing Director of the Company,

appointed in June 1999

 

President and Director of Honda Motor Europe Limited,

appointed in June 1998

 

Chief Operating Officer for Regional Operations

(Europe, the Middle & Near East and Africa),

appointed in June 1998

 

Chief Operating Officer for Power Product Operations,

appointed in June 1997

 

Managing Director of the Company,

appointed in June 1997

   *3    14,400

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned
  

Chief Operating Officer for Regional Operations

(Asia & Oceania) and General Manager of Asia &

Oceania Division (Automobiles),

appointed in June 1995

 

General Manager of Asia & Oceania Division

(Automobiles) in Regional Operations (Asia & Oceania),

appointed in April 1995

 

General Manager of Asia & Oceania Division in Regional Operations (Asia & Oceania),

appointed in June 1994

 

Director of the Company,

appointed in June 1994

 

General Manager of Asia & Oceania Division

(Automobiles) for Overseas Regional Automobile

Operations (Asia & Oceania, the Middle & Near East,

Africa and Latin America),

appointed in October 1993

 

Joined Honda in April 1969

     

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    17,100

Satoshi Toshida

(January 13, 1947)

  

Director of the Company from June 1995

 

Chief Operating Officer for Power Product Operations,

appointed in April 2006 (presently held)

 

Senior Managing Director of the Company,

appointed in June 2005

 

   *3    6,000

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned
  

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

appointed in April 2003

 

President and Director of Honda Leasing (Thailand) Company Limited,

appointed in June 2002

 

President and Director of Honda Automobile (Thailand) Co., Ltd.,

appointed in December 2000

 

Managing Director of the Company,

appointed in June 2000

 

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

appointed in June 1999

 

President and Director of Honda Cars (Thailand) Co., Ltd.,

appointed in June 1998

 

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

appointed in May 1996

 

Director of the Company,

appointed in June 1995

 

General Manager of Motorcycle Sales Division in Regional Operations (Asia & Oceania),

appointed in April 1995

 

Joined Honda in May 1973

     

Koki Hirashima

(November 28, 1946)

  

Director of the Company from June 1997

 

Senior Managing Director of the Company,

appointed in June 2005

 

General Supervisor, Information Systems,

appointed in April 2005 (presently held)

 

Risk Management Officer,

appointed in April 2005 (presently held)

 

Chief Operating Officer for Production Operations,

appointed in April 2005 (presently held)

 

Managing Director of the Company,

appointed in June 2000

 

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

appointed in June 1998

 

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

appointed in June 1997

   *3    6,000

 

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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

 

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

appointed in June 1993

 

Joined Honda in April 1969

     

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 (presently held)

 

Compliance Officer,

appointed in April 2005 (presently held)

 

Managing Director of the Company,

appointed in June 2004

 

Chief Operating Officer for Business Support Operations,

appointed in April 2004 (presently held)

 

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

   *3    7,100

Takanobu Ito

(August 29, 1953)

  

Director of the Company from June 2000

 

Senior Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Automobile Operations,

appointed in April 2007 (presently held)

 

Managing Officer of the Company,

appointed in June 2005

   *3    6,000

 

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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

     

Masaaki Kato

(September 16, 1949)

  

Director of the Company from June 1998

 

Senior Managing Director of the Company,

appointed in June 2007

 

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

appointed in April 2007 (presently held)

 

General Supervisor, Quality

appointed in April 2007 (presently held)

 

Managing Officer of the Company,

appointed in June 2005

 

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

Appointed in April 2005

 

Executive Vice President and Director of Honda Motor Europe Ltd.,

appointed in April 2005

 

President and Director of Honda Manufacturing of Alabama, LLC,

appointed in April 2002

 

Director of the Company,

appointed in June 1998

 

General Manager of Human Resources Division and

HR Development Office for Business Support Operations

appointed in January 1998

 

Joined Honda in April 1974

   *3    16,100

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned

Toru Onda

(March 18, 1949)

  

Director of the Company from June 1999

 

Managing Director of the Company,

appointed in June 2002

 

Chief Operating Officer for Purchasing Operations,

appointed in April 2000 (presently held)

 

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

   *3    8,000

Akira Takano

(August 18, 1949)

  

Director of the Company from June 1996

 

Chief Operating Officer for Customer Service Operations,

appointed in April 2004 (presently held)

 

Managing Director of the Company,

appointed in June 2003

 

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

appointed in June 1998

 

Executive Vice President and Director of Honda

Motor Europe Ltd.,

appointed in June 1998

 

Director of the Company,

appointed in June 1996

 

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

appointed in June 1995

 

Joined Honda in April 1972

   *3    9,200

Shigeru Takagi

(February 4, 1952)

  

Director of the Company from June 1998

 

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    7,800

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned

Tetsuo Iwamura

(May 30, 1951)

  

Director of the Company from June 2000

 

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    6,200

Tatsuhiro Oyama

(July 9, 1950)

  

Director of the Company from June 2001

 

Managing Director of the Company,

appointed in June 2006

 

President and Director of Asian Honda Motor Co.,

Ltd.,

appointed in April 2006 (presently held)

 

Chief Operating Officer for Regional Operations

(Asia & Oceania),

appointed in April 2006 (presently held)

 

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

   *3    9,000

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned
  

General Manager of Motorcycle Sales Division for

Regional Sales Operations (Japan),

appointed in April 2001

 

Joined Honda in April 1969

     

Fumihiko Ike

(May 26, 1952)

  

Director of the Company from June 2003

 

Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Business Management Operations,

appointed in April 2006 (presently held)

 

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    7,400

Satoru Kishi

(March 29, 1930)

  

Director of the Company from June 2001

 

Advisor of the Board of The Bank of Tokyo-Mitsubishi, Ltd. (presently The Bank of Tokyo-Mitsubishi UFJ, Ltd.),

appointed in June 2002 (presently held)

 

Director of the Company,

appointed in June 2001

 

Chairman of the Board of The Bank of Tokyo-Mitsubishi, Ltd. (presently The Bank of Tokyo-Mitsubishi UFJ, Ltd.),

appointed in June 2000

   *3    None

Kensaku Hogen

(August 2, 1941)

  

Director of the Company from June 2005

 

Director of the Company,

appointed in June 2005

 

Ambassador in Canada,

appointed in April 2001

   *3    None

Hiroyuki Yoshino

(November 2, 1939)

  

Director of the Company from May 1983

 

Director and Advisor of the Company,

appointed in June 2003

 

Chief Operating Officer for Regional Operations (Japan),

appointed in June 1999

 

President and Director of the Company,

appointed in June 1998

 

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

appointed in June 1994

 

Chief Operating Officer for Automobile Operations (Japan),

appointed in June 1992

   *3    40,400

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned
  

Executive Vice President and Director of the Company,

appointed in June 1992

 

Senior Managing Director of the Company,

appointed in June 1990

 

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

appointed in June 1988

 

Managing Director of the Company,

appointed in June 1988

 

General Manager of Suzuka Factory,

appointed in March 1987

 

Director of the Company,

appointed in May 1983

 

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

appointed in May 1983

 

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

appointed in March 1977

 

Joined Honda R&D Co., Ltd. in April 1963

     

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.,

appointed in April 2004

 

Joined Honda in April 1978

   *3    7,100

 

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Table of Contents

Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned

Corporate Auditors

        

Hiroshi Okubo

(October 30, 1945)

  

Corporate Auditor (full-time),

appointed in June 2004

 

Senior Managing Director of the Company,

appointed in June 2003

 

Compliance Officer,

appointed in April 2003

 

Managing Director of the Company,

appointed in June 1999

 

Chief Operating Officer for Business Support Operations and Chief Officer of Driving Safety Promotion Center in Business Support Operations,

appointed in June 1999

 

Director of the Company,

appointed in June 1996

 

General Manager of Executive Office in Business Support Operations,

appointed in June 1994

 

Joined Honda in April 1970

   *4    13,600

Koji Miyajima

(June 10, 1948)

  

Corporate Auditor of the Company (full-time),

appointed in June 2003

 

Corporate Auditor of the Company,

appointed in June 2001

 

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

appointed in April 2000

 

Joined Honda in April 1971

   *4    7,000

Shinichi Sakamoto

(August 3, 1950)

  

Corporate Auditor of the Company (full-time),

appointed in June 2005

 

Regional Operating Officer of the Company,

appointed in April 2004

 

Joined in April 1969

   *5    6,000

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

   *6    None

 

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Name

(Date of birth)

  

Current Positions and Biographies

with Registrant

   Term    Number of
Shares Owned
  

Joined The Tokio Marine and Fire Insurance Co.,

Ltd. (presently Tokio Marine & Nichido Fire Insurance

Co., Ltd.) in April 1960

     

Fumihiko Saito

(June 9, 1945)

  

Corporate Auditor of the Company,
appointed in June 2004

 

Representative of Saito Law Office in February 2006

(presently held)

 

Partner of Haarmann Hemmelrath Saito Law Office in June 2003

 

Joined The Law Firm of Hamada & Yanagida (presently The Law Firm of Mori Hamada & Matsumoto) in April 1973

   *4    None

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

   *6    1,000

*1. Mr. Satoru Kishi and Mr. Kensaku Hogen 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 22, 2007.
*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 23, 2004.
*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 23, 2005.
*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 22, 2007.
*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   
Akio Hamada   

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

Takashi Yamamoto   

General Manager of Saitama Factory of Production Operations

Suguru Kanazawa   

Executive Vice President and Director of Honda Motor Europe Ltd.

 

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

 

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Operating Officers   
Manabu Nishimae   

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)

Masaya Yamashita   

General Manager of Kumamoto Factory of Production Operations

Hiroshi Kobayashi   

President and Director of Honda Canada Inc.

Hiroshi Oshima    Corporate Communications, Motor Sports General Manager of Corporate Communications Division
Tsutomu Saka    General Manager of Hamamatsu Factory of Production Operations
Hidenobu Iwata    General Manager of Suzuka Factory of Production Operations
Gen Tsujii   

Production for Production Opertions

 

General Manager of Automobile Production

 

Planning Office in Production Operations

 

President and Director of Honda Engineering Co., Ltd.

Koichi Fukuo    Quality, Certification & Regulation Compliance
Hiroshi Soda   

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

 

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

Takuji Yamada    President and Director of Honda Motor Europe (North) GmbH
Hideki Okada   

General Manager of Regional Operation Planning Office in Regional Operations (North America)

 

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

Masahiro Takedagawa   

President and Director of Honda Siel Cars India Ltd.

 

President and Director of Honda Motor India Private Ltd.

Yoichi Hojo    General Manager of Automobile Purchasing Division 2 in Purchasing Operations
Tsuneo Tanai    Executive Vice President and Director of Honda of America Mfg., Inc.
Yoshiyuki Matsumoto    Automobile Products for Automobile Operations
Eiji Okawara   

Production in China in Production Operations

 

President of Guangzhou Honda Automobile Co., Ltd.

Ko Katayama    Manufacturing of Honda Canada Inc.
Masahiro Yoshida   

Human Resources and Associate Relations for Business Support Operations

 

General Manager of Human Resources Division for Business Support Operations

Seiji Kuraishi    Vice President of Honda Motor (China) Investment Corporation, Ltd.
Takashi Nagai    Executive Vice President and Director of Asian Honda Motor Co., Ltd.

 

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 the 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.

 

In accordance with customary Japanese business practice, when a Director or Corporate Auditor retires, a proposal to pay a lump sum retirement allowance is submitted at the general meeting of shareholders for approval. The amount of retirement allowance for a Director or Corporate Auditor generally reflects his or her position at the time of retirement, the length of his service as a Director or Corporate Auditor and other factors, as appropriate under Honda’s internal regulations.

 

The total amount of remuneration paid to the Company’s directors and corporate auditors during the fiscal year ended March 31, 2007 was ¥879 million, including ¥772 million paid to 21 directors (who include a director who retired during that fiscal year) and ¥106 million paid to six corporate auditors. The amount of remuneration paid to the directors includes amount of wages paid to those directors who were also employees of the Company or directors of subsidiaries of the Company.

 

The total amount of bonuses that were paid during the year ended March 31, 2007 was ¥590 million, including ¥513 million to our 21 directors as of the end of the year ended March 31, 2006 and ¥77 million to our six corporate auditors as of the end of the year ended March 31, 2006.

 

The amount of retirement allowances paid to three retired directors (including two managing officers who were directors in the past) was ¥330 million, in accordance with a resolution of the Ordinary General Meeting of Shareholders held in June 2006.

 

C. Board Practices

 

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

 

Corporate Governance

 

Companies listed on the New York Stock Exchange (the “NYSE”) must comply with certain standards regarding corporate governance under Section 303A of the NYSE Listed Company Manual.

 

However, listed companies that are foreign private issuers, such as Honda, are permitted to follow home country practice in lieu of certain provisions of Section 303A.

 

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The following table shows the significant differences between the corporate governance practices followed by U.S. listed companies under Section 303A of the NYSE listed Company Manual and those followed by Honda.

 

Corporate Governance Practices Followed by

NYSE-listed U.S. Companies

  

Corporate Governance Practices Followed by Honda

A NYSE-listed U.S. company must have a majority of directors meeting the independence requirements under Section 303A of the NYSE Listed Company Manual.   

For Japanese companies, which employ a corporate governance system based on a board of corporate auditors (the “board of corporate auditors system”), including Honda, Japan’s company law has no independence requirement with respect to directors. The task of overseeing management and, together with the accounting audit firm, accounting is assigned to the corporate auditors, who are separate from the company’s management and meet certain independence requirements under Japan’s company law.

 

In the case of Japanese companies which employ the board of corporate auditors system, including Honda, at least half of the corporate auditors must be “outside” corporate auditors who must meet additional independence requirements under Japan’s company law. An outside corporate auditor is defined as a corporate auditor who has not served as a director, accounting councilor, executive officer, manager or any other employee of the company or any of its subsidiaries.

 

Currently, Honda has three outside corporate auditors which constitute 50% of Honda’s corporate auditors.

A NYSE-listed U.S. company must have an audit committee composed entirely of independent directors, and the audit committee must have at least three members.   

Like a majority of Japanese listing companies, Honda employs the board of corporate auditors system as described above. Under this system, the board of corporate auditors is a legally separate and independent body from the board of directors. The main function of the board of corporate auditors is similar to that of independent directors, including those who are members of the audit committee, of a U.S. company: to monitor the performance of the directors, and review and express opinion on the method of auditing by the company’s accounting audit firm and on such accounting audit firm’s audit reports, for the protection of the company’s shareholders.

 

Japanese companies which employ the board of corporate auditors system, including Honda, are required to have at least three corporate auditors. Currently, Honda has six corporate auditors. Each corporate auditor has a four-year term. In contrast, the term of each director of Honda is one year.

 

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Corporate Governance Practices Followed by

NYSE-listed U.S. Companies

  

Corporate Governance Practices Followed by Honda

  

With respect to the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees, Honda relies on an exemption under that rule which is available to foreign private issuers with boards of corporate auditors meeting certain criteria.

A NYSE-listed U.S. company must have a nominating/corporate governance committee entirely of independent directors.   

Honda’s directors are elected at a meeting of shareholders. Its Board of Directors does not have the power to fill vacancies thereon.

 

Honda’s corporate auditors are also elected at a meeting of shareholders. A proposal by Honda’s Board of Directors to elect a corporate auditor must be approved by a resolution of its Board of Corporate Auditors. The Board of Corporate Auditors is empowered to request that Honda’s directors submit a proposal for election of a corporate auditor to a meeting of shareholders. The corporate auditors have the right to state their opinion concerning election of a corporate auditor at the meeting of shareholders.

 

A NYSE-listed U.S. company must have a compensation committee composed entirely of independent directors.    Maximum total amounts of compensation for Honda directors and corporate auditors are proposed to, and voted on, by a meeting of shareholders. Once the proposals for such maximum total amounts of compensation are approved at the meeting of shareholders, each of the Board of Directors and Board of Corporate Auditors determines the compensation amount for each member within the respective maximum total amounts.
A NYSE-listed U.S. company must generally obtain shareholder approval with respect to any equity compensation plan.    Currently, Honda does not adopt stock option compensation plans. When Honda adopts it, Honda must obtain shareholder approval for stock options only if the stock options are issued with specifically favorable conditions or price concerning the issuance and exercise of the stock options.

 

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D. Employees

 

The following tables list the number of Honda full-time employees as of March 31, 2007, 2006 and 2005.

 

As of March 31, 2007

 

Total

   Motorcycle Business    Automobile Business    Financial Services    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.

 

As of March 31, 2006

 

Total

   Motorcycle Business    Automobile Business    Financial Services    Power Product And
Other Businesses

144,785

   28,783    105,623    1,921    8,458
                     

At March 31, 2006, Honda had 144,785 full-time employees, including 83,088 local nationals employed in its overseas operations.

As of March 31, 2005         

Total

   Motorcycle Business    Automobile Business    Financial Services    Power Product And
Other Businesses

137,827

   27,991    99,525    1,787    8,524
                     

 

At March 31, 2005, Honda had 137,827 full-time employees, including 76,763 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 Metal Workers Federation. Approximately 85% of the employees of the Company and its Japanese subsidiaries were members of AHWU at March 31, 2007.

 

In Japan, basic wages are negotiated annually and the average increases in wages of the Company’s employees in fiscal 2005, 2006 and 2007 were 2.0%, 2.0% and 2.0%, 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.

 

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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 22, 2007 is as follows.

 

Title of Class   Amount Owned   % of Class  
Common Stock   242,236 shares   0.013 %

 

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, 2007, the Association owned 4,595,083 shares of the Company’s common stock.

 

Item 7. Major shareholders and Related Party Transactions

 

A. Major Shareholders

 

As of March 31, 2007, 1,834,828,430 shares of Honda’s Common Stock were issued and 1,821,992,908 shares were outstanding.

 

According to a report filed under the Securities and Exchange Law of Japan by Mitsubishi UFJ Financial Group, Inc., as of April 9, 2007, Mitsubishi UFJ Financial Group, Inc. directly and indirectly held 133,010,880 shares of Honda’s common stock, or 7.30% of the total number of shares of Honda’s outstanding stock. Mitsubishi UFJ Financial Group, Inc. does not have any voting rights that are different from those of our other shareholders.

 

ADS 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, 2007 were 1,834,828,430 shares of Common Stock, of which 120,199,186 shares represented by ADS and 195,330,697 shares not represented by ADS 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 229 at March 31, 2007.

 

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, 2007, Honda had sales of ¥329.3 billion and purchases of ¥1,083.6 billion with equity affiliates accounted under the equity method. As of March 31, 2007, Honda had receivables of ¥77.3 billion from affiliated companies, and had payables of ¥155.6 billion to affiliated companies.

 

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

 

C. Interest of Experts and Counsel

 

Not applicable.

 

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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”. Except for Honda’s consolidated financial statements included under Item 18, no other information in this Annual Report has been audited by independent auditors.

 

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 reserves. Punitive damages are claimed in certain of these lawsuits. We are also subject to potential liability by other various lawsuits and claims.

 

75 purported class actions on behalf of all purchasers of new motor vehicles in the United States since January 1, 2001, have been filed in various state and federal courts against American Honda Motor Co., Inc., Honda Canada, Inc., General Motors, Ford, Daimler Chrysler, Toyota, Nissan, and Volkswagen and their Canadian affiliates, the National Automobile Dealers Association and the Canadian Automobile Dealers Association. Several of the state court actions also name Honda Motor Co., Ltd. as a defendant, as well as other Japanese and German parent companies of United States based subsidiaries. The federal court actions have been consolidated for coordinated pretrial proceedings in federal court in Maine and 37 California cases have been consolidated in the state court in San Francisco. Additionally, there are pending cases in seven other states.

 

The nearly identical complaints allege that the manufacturer defendants, aided by the association defendants, conspired among themselves and with their dealers to prevent United States citizens from purchasing vehicles produced for the Canadian market and sold by dealers in Canada. The complaints allege that new vehicle prices in Canada are 10 to 30% lower than those in the United States and that preventing the sale of these vehicles to United States citizens resulted in the payment of supracompetitive prices by United States consumers. The complaints seek treble damages under the antitrust laws, but do not specify damages. The federal court has certified a class for injunctive relief and damages. We believe our actions have been lawful and are vigorously defending these cases.

 

In accordance with Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies”, Honda has recorded a contingent liability when it is probable that an obligation has been incurred and the amount of loss can be reasonably estimated. After consultation with legal counsel, and taking into account all known factors pertaining to existing lawsuits and claims, we believe that the overall results of all lawsuits and pending claims should not result in liability to us that would be likely to have an adverse material effect on our consolidated financial position and results of operations.

 

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 our shareholders, which we consider to be one of the most

 

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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 may determine dividends from surplus by a resolution of the Board of Directors based on Article 459 of the Company Law as provided by the article of Incorporation. 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 ¥20 per share for the year ended March 31, 2007. As a result, total cash dividends for the year ended March 31, 2007, together with the interim cash dividends of ¥30 and the third quarter cash dividends of ¥17, were ¥67 per share.

 

The Company executed a two-for-one stock split for the Company’s common stock effective July 1, 2006. Had the stock split not been carried out, annual dividends would have corresponded to ¥134, an increase of ¥34 per share from the annual dividends paid for the year ended March 31, 2006.

 

The Company plans to distribute quarterly cash dividends of ¥20 per share for each quarter for the year ending March 31, 2008. As a result, total cash dividends for the year ending March 31, 2008 are planned to be ¥80 per share, an increase of ¥13 from the annual dividends paid for the year ended March 31, 2007.

 

Details of Distribution of Surplus ( Record dates of the fiscal year ended March 31, 2007 )

 

     Resolution of
the Board
of Directors
   Resolution of
the Board
of Directors
  

Resolution at

General Meeting

of Shareholders

     October 25, 2006    January 31, 2007    June 22, 2007

Dividend per Share of Common Stock (yen)

   30.00    17.00    20.00

Total Amount of Dividends Yen (millions)

   54,710    30,987    36,456

 

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.

 

Item 9. The Offer and Listing

 

A. The Offer and Listing

 

Honda’s shares have been listed on the Tokyo Stock Exchange (TSE) since 1957 and as of March 31, 2007, Honda’s shares were traded over five 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

 

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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, in June 2007, applied for delisting from Euronext Paris and SWX Swiss Exchange and for terminating European Depositary Receipts.

 

The monthly average turnover of Honda’s shares of Common Stock and American Depositary Shares for the fiscal year ended March 31, 2007 was approximately 138,976,000 shares of Common Stock on the TSE and approximately 8,057,500 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

2003

     2,995      1,920      23.85      16.40

2004

     2,755      1,785      23.59      15.47

2005

     2,850      2,185      27.30      19.25

2006

           

1st quarter

   ¥ 2,835    ¥ 2,510    $ 26.00    $ 23.75

2nd quarter

     3,310      2,690      29.08      24.06

3rd quarter

     3,570      3,070      29.70      26.50

4th quarter

     3,750      3,050      31.74      27.10

2007

           

1st quarter

   ¥ 4,285    ¥ 3,270    $ 37.95    $ 29.13

2nd quarter

     4,030      3,410      35.00      29.43

3rd quarter

     4,740      3,910      39.87      33.49

4th quarter

     4,940      4,050      40.82      34.64

Jan — 2007

   ¥ 4,920    ¥ 4,490    $ 40.70    $ 37.62

Feb

     4,940      4,330      40.82      36.37

Mar

     4,420      4,050      37.36      34.64

Apr

     4,270      3,950      36.19      33.62

May

     4,280      4,010      35.39      33.30

June

     4,520      4,150      36.59      34.15

* The reported high and low sales prices of Honda’s shares on the TSE in yen from 2003 to 2006 have been adjusted based on the shares after stock split.

 

B. Plan of distribution

 

Not applicable.

 

C. Markets

 

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

 

D. Selling Shareholders

 

Not applicable.

 

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E. Dilution

 

Not applicable.

 

F. Expenses of The Issue

 

Not applicable.

 

Item 10. Additional Information

 

A. Share Capital

 

Not applicable

 

B. Memorandums and Article 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, which has become effective as of May 1, 2006, 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. Under the Company Law, shares must be registered and are transferable by delivery of share certificates. In order to assert shareholders’ rights against Honda, a shareholder must have its name and address registered on Honda’s register of shareholders, in accordance with Honda’s share handling regulations. 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.

 

A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with the Japan Securities Depository Center, Inc. (the “Securities Center”). If a holder of shares is not a participating institution in the Securities Center, it must participate through a participating institution, such as a securities company or a bank having a clearing account with the Securities Center. All shares deposited with the Securities Center will be registered in the name of the Securities Center on Honda’s register of shareholders. Each participating shareholder will in turn be registered on Honda’s register of beneficial shareholders and be treated in the same way as shareholders registered on Honda’s register of shareholders. For the purpose of transferring deposited shares, delivery of share certificates is not required. Entry of the share transfer in the books maintained by the Securities Center for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial owners may exercise the rights attached to the deposited shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from Honda. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial owner are aggregated for these purposes. Beneficial owners may at any time withdraw and receive their share certificates from the Securities Center.

 

A law to establish a new central book entry clearing system for shares of listed companies and to eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the part of such law that is relevant to the shares of Honda will come into effect on a date within five years of the date of the promulgation which will be determined by a Cabinet Order. On the effective date, a new book entry central clearing system will be established and will become responsible for handling the shares of all Japanese companies listed on any Japanese stock exchange, including the shares of Honda. On the same day, all existing share certificates will become null and void. The transfer of shares will be effected by book-entry in the accounts maintained under the new central clearing system.

 

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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.

 

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

 

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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.

 

Upon stock splits, shareholders will not be required to exchange share certificates held by them for new share certificates. In respect of deposited shares, new shares resulting from the stock split will be deposited with the Securities Center, and shareholders who directly possess share certificates will receive additional certificates representing the additional shares resulting from the stock split.

 

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.

 

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 a board resolution. An increase in the number of shares that constitute one voting unit requires a resolution of a general shareholders’ meeting. In any case, the number of shares constituting one voting unit may not exceed 1,000 shares.

 

The articles of incorporation of Honda provide that Honda may not issue share certificates for a number of shares not constituting an integral number of voting units. Because the transfer of shares normally requires delivery of the share certificates for the shares being transferred, shares constituting a fraction of a voting unit and for which no share certificates are issued may not be transferable, however, 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

 

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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 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.

 

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

 

A holder of shares representing less than one voting unit has the following rights 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 an 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, including the right to examine Honda’s accounting books and records.

 

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

 

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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 holding regulations, at least two weeks prior to the date of the meeting.

 

A shareholder 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 of Honda provide that such resolution may be adopted at a meeting of shareholders by two thirds of the voting rights of the shareholders 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 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.

 

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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.

 

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 transfers of record ownership upon presentation of share certificates.

 

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.

 

The shares generally trade ex-dividend or ex-rights on the Japanese stock exchanges on the third business day before 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.

 

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 is effective for one year 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.

 

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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.

 

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 Securities and Exchange Law of Japan and regulations under the 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 stock 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 stock 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 Stock Exchange Rules

 

Share prices on Japanese stock 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.

 

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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.

 

E. Taxation

 

Japanese Taxes

 

The following is a summary of the principal Japanese tax consequences to owners of our shares or ADSs who are non-resident individuals or non-Japanese corporations without a permanent establishment in Japan to which income from our 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 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 or a non-Japanese corporation is 20%. With respect to dividends paid on listed shares issued by Japanese corporations (such as our shares) to any corporate or individual shareholder (including non-resident shareholders), the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends to be paid between January 1, 2004 and March 31, 2009, 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 us. 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, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and, prior to July 1, 2004, the United States. In the case of the Japan—U.S. tax treaty, as a result of its recent amendment, the maximum withholding tax rate was reduced to 10% for portfolio investors with effect from July 1, 2004. 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.

 

With effect from July 1, 2004, a new “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 “New Treaty”) entered into force and replaced an old treaty. Under the New Treaty, a portfolio investor that is a U.S. holder is generally subject to Japanese withholding tax on dividends on our shares or ADSs at a rate of 10%.

 

To obtain the benefits of the reduced withholding rate on dividends under the New Treaty, a U.S. holder must file an application for reduced withholding with the Japanese tax authorities at least one day before the date of the dividend distribution. A U.S. holder of our ADSs must file, through the depositary, one application for exemption from withholding tax for eight months for the purpose of investigating tax status of the holder one day before the dividend payment and a second one for reduced withholding in accordance with the New Treaty within eight months after the end of our fiscal year in which the annual dividend is paid or, in the case of interim dividend, within eight months after the record date for such interim dividend. For this purpose, a U.S. holder must file proof of its taxpayer status, its residence and its beneficial ownership of the shares or ADSs. The

 

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depositary may require the U.S. holder also to provide other information in accordance with the Japanese tax laws and regulations. A U.S. holder that does not submit an application for reduced withholding before a dividend is paid can file a claim for refund of the Japanese tax withheld in excess of the reduced tax under the New Treaty with the Japanese tax authorities.

 

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.

 

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 Old Treaty and the New 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 New 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 United States 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 New Treaty, as (i) the shares and ADSs 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 New 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

 

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earnings and profits (as determined for U.S. federal income tax purposes) is subject to United States 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. 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 Old Treaty or the New Treaty, as applicable, 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 Old Treaty or the New Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder 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, but dividends paid in taxable years beginning before January 1, 2007 generally will be “passive income” or “financial services income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive” or “general” income which in either case, is treated separately from other types of 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 it was not a PFIC for United States federal income tax purposes in 2006, and that it will not be a PFIC in 2007. Honda’s shares and ADRs 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.

 

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

 

   

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 ADRs; and

 

   

any excess distribution that Honda makes to it (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 ADRs during the three preceding taxable years or, if shorter, its holding period for the shares or ADRs).

 

Under these rules:

 

   

the gain or excess distribution will be allocated ratably over its 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 ADRs in a PFIC that are treated as marketable stock, it may make a mark-to-market election. If it makes this election, it will not be subject to the PFIC rules described above. Instead, in general, it 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. It 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). Its 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

 

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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 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.

 

Foreign Currency Exchange Rate Risk

 

Foreign currency forward exchange contracts and purchased option contracts are normally used to hedge 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, 2006 and 2007. For forward exchange contracts and currency options, the table presents the contract amounts and fair value. All forward exchange contracts and currency options to which we are a party have original maturities of less than one year.

 

Foreign Exchange Risk

 

    2006   2007
    Yen (millions)    

Average
contractual
rate

  Yen (millions)    

Average
contractual
rate

Forward Exchange Contract

  Contract
amounts
  Fair value       Contract
amounts
  Fair value    

To sell US$

  ¥ 270,070   (1,771 )   115.88   ¥ 336,005   1,299     117.84

To sell EUR

    132,694   (3,333 )   138.57     60,305   (963 )   154.35

To sell CA$

    19,225   (1 )   100.59     16,548   (67 )   100.88

To sell GBP

    82,546   (984 )   201.67     173,894   (1,352 )   228.48

To sell other foreign currencies

    82,985   310     various     36,344   (670 )   various

To buy US$

    5,535   45     115.78     9,864   (122 )   114.93

To buy other foreign currencies

    992   22     various     11,358   (85 )   various

Cross-currencies

    304,078   2,228     various     334,676   (1,533 )   various
                           

Total

  ¥ 898,125   (3,484 )     ¥ 978,994   (3,493 )  
                           
    Yen (millions)    

Average

contractual

rate

  Yen (millions)    

Average

contractual

rate

Currency Option

 

Contract

amounts

  Fair value      

Contract

amounts

  Fair value    

Option purchased to sell US$

  ¥ 58,446   520     various   ¥ —     —       —  

Option written to sell US$

    104,576   (323 )   various     —     —       —  

Option purchased to sell other currencies

    4,982   19     various     2,317   24     various

Option written to sell other currencies

    8,544   (85 )   various     3,476   (42 )   various
                           

Total

  ¥ 176,548   131       ¥ 5,793   (18 )  
                           

 

Interest Rate Risks

 

Honda is exposed to market risk for changes in interest rates related primarily to its debt obligations and finance receivables. In addition to short-term financing such as commercial paper, Honda has long-term debt with both fixed and floating rates. Our finance receivables are primarily fixed rate. Interest rate swap agreements are mainly used 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.

 

The following tables provide information about Honda’s financial instruments that were sensitive to changes in interest rates at March 31, 2006 and 2007. For finance receivables and long-term debt, these tables present principal cash flows, fair value and related weighted average interest rates. For interest rate swaps and currency & interest rate swaps, the table presents notional amounts, fair value and weighted average interest rates. Variable interest rates are determined using formulas such as LIBOR+ a and an index.

 

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Interest Rate Risk

 

Finance Subsidiaries-Receivables

 

    2006   2007  
    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

  Thereafter   Fair value  

Direct Finance Leases :

                     

JP¥

  ¥ 24,450   *   ¥ 26,894   15,811   5,571   3,247   1,465   800   —     *   4.82 %

US $

    1,846,959   *     1,426,173   558,263   531,211   309,651   27,039   9   —     *   4.75 %

Other

    348,691   *     439,499   127,160   97,709   108,119   102,209   4,285   17   *   4.52 %
                                             

Total—Direct Finance Leases

  ¥ 2,220,100   *   ¥ 1,892,566   701,234   634,491   421,017   130,713   5,094   17   *  
                                     

Other Finance Receivables :

                     

JP¥

  ¥ 412,415   377,036   ¥ 402,970   135,176   103,753   75,794   48,250   25,086   14,911   398,869   4.82 %

US $

    1,982,413   1,935,956     2,485,210   876,988   525,019   466,471   350,458   210,906   55,368   2,545,210   7.03 %

Other

    428,934   405,397     487,922   265,085   94,556   67,451   40,621   17,573   2,636   411,955   7.48 %
                                             

Total—Other Finance Receivables

  ¥ 2,823,762   2,718,389   ¥ 3,376,102   1,277,249   723,328   609,716   439,329   253,565   72,915   3,356,034  
                                     

Retained interest in the sold pools of finance receivables **

    94,634   94,634     88,110               88,110  
                                 

Total ***

  ¥ 5,138,496     ¥ 5,356,778                
                             

* : Under U.S. generally accepted accounting principles, disclosure of fair values of direct finance leases is not required.
** : The retained interest in the sold pools of finance receivables 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 (3) to the accompanying consolidated financial statements.

 

Long-Term Debt (including current maturities)

 

    2006   2007  
    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

  Thereafter   Fair value  

Japanese yen bonds

  ¥ 231,200   228,555   ¥ 230,129   50,050   30,048   60,049   59,992   29,990   —     229,379   0.89 %

Japanese yen medium-term notes (Fixed rate)

    374,624   374,887     367,900   114,000   103,400   70,500   62,000   18,000   —     368,425   0.80 %

Japanese yen medium-term notes (Floating rate)

    100,696   101,328     85,200   24,500   38,000   19,700   —     3,000   —     85,525   0.77 %

U.S. dollar medium-term notes (Fixed rate)

    336,512   334,377     354,500   35,409   107,539   88,147   58,764   41,135   23,506   357,121   4.52 %

U.S. dollar medium-term notes (Floating rate)

    986,010   995,905     1,171,527   444,023   480,341   153,140   35,259   58,764   —     1,183,041   5.38 %

U.S. dollar commercial paper

    204,893   204,893     —     —     —     —     —     —     —     —     —    

Loans and others—primarily fixed rate

    302,710   303,969     471,896   107,427   129,322   94,169   101,964   35,837   3,177   471,384   4.14 %
                                             

Total

  ¥ 2,536,645   2,543,914   ¥ 2,681,152   775,409   888,650   485,705   317,979   186,726   26,683   2,694,875  
                                             

 

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Interest Rate Swaps

 

        2006     2007  
        Yen (millions)     Yen (millions)              

Notional
principal
currency

                    Expected maturity date   Fair
value
    Average
receive
rate
    Average
pay rate
 
 

Receive/Pay

  Contract
amounts
  Fair
value
    Contract
amounts
 

Within

1 year

 

1-2

year

 

2-3

year

 

3-4

year

 

4-5

year

  Thereafter      

JP¥

  Float/Fix   ¥ 1,455   (3 )   ¥ 5,858   150   4,582   326   800   —     —     —       1.01 %   1.45 %

US$

  Float/Fix     2,712,564   39,965       2,933,563   1,195,922   964,636   633,560   120,409   19,036   —     8,661     5.35 %   4.65 %
 

Fix/Float

    337,726   (6,426 )     355,921   35,414   108,016   88,538   59,025   41,318   23,610   (1,878 )   4.52 %   5.50 %
 

Float/Float

    52,274   (311 )     90,899   32,464   49,581   8,854   —     —     —     (205 )   5.20 %   5.36 %

CA$

  Float/Fix     433,089   4,445       490,691   126,528   134,859   116,808   89,792   22,704   —     2,186     4.09 %   3.94 %
 

Fix/Float

    71,663   (1,067 )     75,961   6,817   18,832   18,677   6,373   25,196   66   (346 )   3.95 %   4.44 %
 

Float/Float

    185,057   (303 )     195,325   74,134   64,383   37,207   14,701   4,834   66   (302 )   4.04 %   4.13 %

GBP

  Float/Fix     54,927   32       48,314   16,408   10,321   11,377   10,208   —     —     333     4.81 %   4.90 %
 

Fix/Float

    8,993   —         1,931   1,563   368   —     —     —     —     —       5.11 %   5.62 %
                                                     

Total

  ¥ 3,857,748   36,332     ¥ 4,198,463   1,489,400   1,355,578   915,347   301,308   113,088   23,742   8,449      
                                                     

 

Currency & Interest Rate Swap

 

    2006     2007  
            Yen (millions)     Yen (millions)              

Receiving
side
currency

 

Paying
side
currency

                    Expected maturity date         Average
receive
rate
    Average
pay rate
 
   

Receive/
Pay

  Contract
amounts
  Fair
value
    Contract
amounts
 

Within

1 year

 

1-2

year

 

2-3

year

 

3-4

year

 

4-5

year

  Thereafter   Fair
value
     

JP¥

  US$   Fix/Float   ¥ 393,389   (22,996 )   ¥ 386,064   117,555   109,379   76,071   64,740   18,319   —     (21,728 )   0.80 %   5.61 %
   

Float/Float

    103,823   (5,520 )     87,414   25,374   40,496   18,516   3,028   —     —     (4,940 )   0.77 %   5.58 %

JP¥

  CA$   Fix/Float     2,772   (610 )     2,790   —     —     2,790   —     —     —     (628 )   0.95 %   4.75 %

Other

  Other   Fix/Float     70,041   736       70,387   —     —     —     70,387   —     —     6,425     3.75 %   5.50 %
   

Float/Float

    14,333   241       61,879   —     22,471   39,408   —     —     —     3,334     3.99 %   5.42 %
                                                       

Total

  ¥ 584,358   (28,149 )   ¥ 608,534   142,929   172,346   136,785   138,155   18,319   —     (17,537 )    
                                                       

 

Equity Price Risk

 

Honda is exposed to equity price risk as a result of its holdings of marketable equity securities. Marketable equity securities included in Honda’s investment portfolio are held for purposes other than trading, and are reported at fair value, with unrealized gains or losses, net of deferred taxes included in accumulated other comprehensive income (loss) in the stockholders’ equity section of the consolidated balance sheets. At March 31, 2006 and 2007, the estimated fair value of marketable equity securities was ¥141.8 billion and ¥169.2 billion, respectively.

 

Item 12. Description of Securities Other than Equity Securities

 

Not applicable.

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

 

None.

 

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

 

Effective July 1, 2006, we effected (1) a one to two split of our shares of common stock and (2) a change in the ratio of our American Depositary Receipt to Honda’s underlying shares of common stock from 1:0.5 to 1:1. See Item 3.A. for further information.

 

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Item 15. Controls and Procedures

 

Disclosure Controls and Procedures

 

Under the supervision and participation of our management, including our Chief Executive Officer and Chief Operating Officer for Business Management Operations (who is our principal financial officer), we performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934) as of March 31, 2007. Based on that evaluation, our Chief Executive Officer and Chief Operating Officer for Business Management Operations concluded that our disclosure controls and procedures were effective as of that date.

 

Management’s Report on Internal Control over Financial Reporting

 

The management of Honda is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.

 

Our management, including our Chief Executive Officer and Chief Operating Officer for Business Management Operations(who is our principal financial officer), assessed the effectiveness of internal control over financial reporting as of March 31, 2007 based on the criteria established in “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, our management concluded that our internal control over financial reporting was effective as of March 31, 2007.

 

Management’s assessment of the effectiveness of internal control over financial reporting has been audited by KPMG AZSA & Co., an independent registered public accounting firm, as stated in their report which is included herein.

 

Changes in Internal Control over Financial Reporting

 

No significant changes were made in our internal control over financial reporting during the fiscal year ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 16A. Audit Committee Financial Expert

 

Honda’s Board of Auditors has determined that Mr. Shinichi Sakamoto is qualified as an “audit committee financial expert” as defined by the rules of the SEC. He was elected as one of Honda’s corporate auditors at the general meeting of shareholders held on June 23 2005. See Item 6.A. for additional information regarding

 

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Mr. Sakamoto. Mr. Sakamoto meets the independence requirements imposed on corporate auditors under the Company law of Japan. See Item 6.C. for an explanation of such independence requirements

 

Item 16B. Code of Ethics

 

Honda has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of Honda’s code of ethics is attached as an exhibit to this annual report on Form 20-F.

 

Item 16C. Principal Accountant Fees and Services

 

Principal Accountant, who conducted audits of our consolidated financial statements under U.S. generally accepted accounting principles or its affiliates, is independent auditor under applicable SEC rules and billed the following fees to us for professional services:

 

     Yen (millions)
         2006            2007    

Audit Fees

   1,119    2,708

Audit-Related Fees

   45    38

Tax Fees

   350    176

All Other Fees

   —      —  

Total

   1,514    2,922

 

“Audit fees” means fees for audit services, which are professional services provided by independent auditors for the audit of our annual financial statements or for services that are normally provided by independent auditors with respect to any submissions required under applicable laws and regulations.

 

“Audit-related fees” means fees for audit-related services, which are assurance services provided by independent auditors that are reasonably related to the carrying out of auditing or reviewing of our financial reports and other related services. This category includes fees for agreed-upon or expanded audit procedures related to accounting and/or other records.

 

“Tax fees” means fees for tax services, which are services provided by independent auditors related to tax compliance, tax advice and tax planning.

 

“All other fees” means fees for all other services, which are any services provided by independent auditors other than the audit services, audit-related services and tax services set forth above. This category includes fees for training and other miscellaneous support services.

 

Pre-approval policies and procedures of the Board of Auditors

 

Under applicable SEC rules, our Board of Corporate Auditors must pre-approve audit services, audit-related services, tax services and other services to be provided by principal accountant to ensure that the independence of principal accountant under such rules is not impaired as a result of the provision of any of these services.

 

While, as a general rule, specific pre-approval must be obtained for these services to be provided, our Board of Corporate Auditors has adopted pre-approval policies and procedures which list particular audit and non-audit services that may be provided without specific pre-approval. Our Board of Corporate Auditors reviews this list of services on an annual basis, and is informed of each such service that is actually provided.

 

All services to be provided to us by principal accountant and its affiliates those are not specifically set forth in this list must be specifically pre-approved by our Board of Corporate Auditors.

 

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None of the services described above in this Item 16C were waived from the pre-approval requirements pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X.

 

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

 

With respect to the requirements of Rule 10A-3 under the Securities Exchange Act of 1934 relating to listed company audit committees, which apply to us through Section 303A.06 of the New York Stock Exchange’s Listed Company Manual, we rely on an exemption provided by paragraph (c)(3) of that Rule available to foreign private issuers with boards of corporate auditors meeting certain requirements. For a New York Stock Exchange-listed Japanese company with a board of corporate auditors, the requirements for relying on paragraph (c)(3) of Rule 10A-3 are as follows:

 

   

The Board of Corporate Auditors must be established, and its members must be selected, pursuant to Japanese law expressly requiring such a board for Japanese companies that elect to have a corporate governance system with corporate auditors.

 

   

Japanese law must and does require the board of corporate auditors to be separate from the Board of Directors.

 

   

None of the members of the board of corporate auditors may be elected by management, and none of the listed company’s executive officers may be a member of the board of corporate auditors.

 

   

Japanese law must and does set forth standards for the independence of the members of the board of corporate auditors from the listed company or its management.

 

   

The board of corporate auditors, in accordance with Japanese law or the listed company’s governing documents, must be responsible, to the extent permitted by Japanese law, for the appointment, retention and oversight of the work of any registered public accounting firm engaged (including, to the extent permitted by Japanese law, the resolution of disagreements between our management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the listed company, including its principal accountant which audits its consolidated financial statements included in its annual reports on Form 20-F.

 

   

To the extent permitted by Japanese law:

 

  the board of corporate auditors must established procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;

 

  the board of corporate auditors must have the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties; and

 

  the listed company must provide for appropriate funding, as determined by its board of corporate auditors, for payment of (i) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for us, (ii) compensation to any advisers employed by the board of corporate auditors, and (iii) ordinary administrative expenses of the board of corporate auditors that are necessary or appropriate in carrying out its duties.

 

In our assessment, our Board of Corporate Auditors, which meets the requirements for reliance on the exemption in paragraph (c)(3) of Rule 10A-3 as described above, is not materially less effective than an audit committee meeting all the requirements of paragraph (b) of Rule 10A-3 (without relying on any exemption provided by at acting independently of management and performing the functions of an audit committee as contemplated therein.

 

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Table of Contents

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

 

The following table sets forth certain information with respect to purchases by Honda of its own shares during the year ended March 31, 2007. There were no purchases of Honda’s shares by its affiliated purchasers during that year.

 

Period