Honda 2011 Annual Report Download - page 35

and materials purchased. Accordingly, currency fluctuations have an effect on Honda’s results
of operations and financial condition, as well as Honda’s competitiveness, which will over time
affect its results.
Since Honda exports many products and components, particularly from Japan, and gener-
ates 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.
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 inter-
est 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. Hon-
da 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.
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 au-
tomobile, motorcycle and power product industries. These regulations are subject to change,
and are often made more restrictive, particularly in recent years, due to an increasing concern
with respect to possible global climate changes. The costs to comply with these regulations can
be significant to Honda’s operations.
Honda 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 infringement of some or a large group of Honda’s intellectual
property rights, would have an adverse effect on Honda’s operations.
Honda is and could be subject to suits, investigations and proceedings under relevant laws
and regulations of various jurisdictions. A negative outcome in any of the legal proceedings
pending against Honda could adversely affect Honda’s business, financial condition or results
of operations.
Honda is reliant on
the protection and
preservation of its
intellectual property
2.
Honda is
subject to legal
proceedings
3.
Honda’s hedging
of currency and
interest rate risk
exposes Honda to
other risks
2.
The automobile,
motorcycle and power
product industries are
subject to extensive
environmental and other
governmental regulations,
including with respect to
global climate changes
1.
— Legal and Regulatory Risks —
33