Honda 2009 Annual Report Download - page 58

Liquidity and Capital Resources
Overview of Capital Requirements, Sources and Uses
The policy of Honda is to support its business activities by
maintaining suffi cient capital resources, a suffi cient 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 fi nancing and automobile
leasing services for customers, as well as wholesale fi nancing
services for dealers.
Honda requires operating capital mainly to purchase parts
and raw materials required for production, as well as to
maintain inventory of fi nished products and cover receivables
from dealers. Honda also requires funds for capital
expenditures, mainly to introduce new models, upgrade,
rationalize and renew production facilities, as well as to expand
and reinforce sales and R&D facilities.
Honda meets its operating capital requirements primarily
through cash generated by operations, bank loans and the
issuance of commercial paper. Year-end balance of liabilities
associated with the Company and its subsidiaries’ funding for
non-fi nancial services businesses was ¥766.6 billion as of
March 31, 2009. In addition, the Company’s fi nance
subsidiaries fund those fi nancial programs for customers and
dealers primarily from corporate bonds, medium-term notes,
commercial paper, securitization of fi nance receivables and
intercompany loans. Year-end balance of liabilities associated
with these fi nance subsidiaries’ funding for fi nancial services
business was ¥4,515.8 billion as of March 31, 2009.
Cash Flows
Consolidated cash and cash equivalents for the year ended
March 31, 2009 decreased by ¥360.5 billion from March 31,
2008, to ¥690.3 billion. The reasons for the increases or
decreases for each cash fl ow activity are as follows.
Net cash provided by operating activities amounted to
¥383.6 billion of cash infl ows. Cash infl ows from operating
activities decreased by ¥743.2 billion compared with the
previous fi scal year, due mainly to a decrease in cash received
from customers, primarily due to lower unit sales in the
automobile business in North America and an increase in
inventories, which was offset by decreased payments for parts
and raw materials primarily due to a decrease in automobile
production and decreased payments for operating expenses.
Net cash used in investing activities amounted to ¥1,133.3
billion of cash outfl ows, due mainly to capital expenditures and
the purchase of operating lease assets (which exceeds
proceeds from sales of operating lease assets), which was
offset by collections of and proceeds from sales of fi nance
subsidiaries-receivables (which exceeded acquisitions of
fi nance subsidiaries-receivables). Cash outfl ows from investing
activities decreased by ¥553.0 billion compared with the
previous fi scal year, due mainly to a decrease in acquisitions of
fi nance subsidiaries-receivables and the purchases of operating
lease assets and an increase in proceeds from sales of fi nance
subsidiaries-receivables and operating lease assets.
Net cash provided by fi nancing activities amounted to ¥530.8
billion of cash infl ows, due mainly to proceeds from long-term
debt and increase in short-term debt (which exceeded
repayment of long-term debt), which was offset by cash
dividends paid. Cash infl ows from fi nancing activities decreased
by ¥157.1 billion compared with the previous fi scal year.
Liquidity
The ¥690.3 billion in cash and cash equivalents at the end of
year corresponds to approximately 0.8 month of net sales, and
Honda believes it has suffi cient 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 fi nancial and foreign exchange market volatility, may
adversely affect liquidity. For this reason, fi nance subsidiaries
that carry total short-term borrowings of ¥1,697.4 billion have
committed lines of credit equivalent to ¥864.5 billion that serve
as alternative liquidity for the commercial paper issued regularly
to replace debt. Honda believes it currently has suffi cient credit
limits, extended by prominent international banks as of the date
of the fi ling of Honda’s form 20-F.
Honda’s short- and long-term debt securities are rated by
credit rating agencies, such as Moody’s Investors Service, Inc.,
Standard & Poor’s Rating Services, and Rating and Investment
Information, Inc. The following table shows the ratings of
Honda’s unsecured debt securities by Moody’s, Standard &
Poor’s and Rating and Investment Information as of March 31,
2009.
Credit Ratings for
Short-term
unsecured
debt securities
Long-term
unsecured
debt securities
Moody’s Investors Service P-1 A1
Standard & Poor’s Rating Services A-1 A+
Rating and Investment Information a-1+ AA
The above ratings are based on information provided by
Honda and other information deemed credible by the rating
agencies. They are also based on the agencies’ assessment of
credit risk associated with designated securities issued by
Honda. Each rating agency may use different standards for
calculating Honda’s credit rating, and also makes its own
assessment. Ratings can be revised or nullifi ed by agencies at
any time. These ratings are not meant to serve as a
recommendation for trading in or holding Honda’s unsecured
debt securities.
Off-Balance Sheet Arrangements
Special Purpose Entity
For the purpose of accelerating the receipt of cash related to
our fi nance receivables, we periodically securitize and sell pools
of these receivables. In these securitizations, we sell a portfolio
of fi nance receivables to a special purpose entity, which is
established for the limited purpose of buying and reselling
fi nance receivables. We remain as a servicer of the fi nance
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 certifi cates, servicing assets and
residual interests in certain cash reserves provided as credit
enhancements for investors. We apply signifi cant assumptions
regarding prepayments, credit losses and average interest
Annual Report 2009
56