Honda 2011 Annual Report Download - page 50

Liquidity and Capital Resources
Overview of Capital Requirements, Sources and Uses
The policy of Honda is to support its business activities by maintaining
sufficient capital resources, a sufficient level of liquidity and a sound
balance sheet.
Honda’s main business is the manufacturing and sale of
motorcycles, automobiles and power products. To support this
business, it also provides retail financing and automobile leasing
services for customers, as well as wholesale financing services for
dealers.
Honda requires operating capital mainly to purchase parts and
raw materials required for production, as well as to maintain inventory
of finished products and cover receivables from dealers and for
providing financial services. 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
corporate bonds. The year-end balance of liabilities associated with
the Company and its subsidiaries’ funding for non-financial services
businesses was ¥399.8 billion as of March 31, 2011. In addition, the
Company’s finance subsidiaries fund financial programs for
customers and dealers primarily from medium-term notes,
commercial paper, corporate bonds, bank loans, securitization of
finance receivables and intercompany loans. The year-end balance
of liabilities associated with these finance subsidiaries’ funding for
the Financial Services business was ¥4,207.9 billion as of March 31,
2011.
Cash Flows
Consolidated cash and cash equivalents for the year ended March
31, 2011 increased by ¥159.1 billion from March 31, 2010, to
¥1,279.0 billion. The reasons for the increases or decreases for each
cash flow activity are as follows:
Net cash provided by operating activities amounted to ¥1,070.8
billion of cash inflows. Cash inflows from operating activities
decreased by ¥473.3 billion compared with the previous fiscal year,
due mainly to increased payments for parts and raw materials
primarily due to an increase in automobile production, which was
partially offset by an increase in cash received from customers,
primarily due to increased unit sales in the automobile business.
Net cash used in investing activities amounted to ¥731.3 billion of
cash outflows. Cash outflows from investing activities increased by
¥135.6 billion compared with the previous fiscal year, due mainly to
an increase in acquisitions of finance subsidiaries–receivables and
an increase in purchase of operating lease assets, which was
partially offset by an increase in collections of finance subsidiaries–
receivables and an increase in proceeds from sales of operating
lease assets.
Net cash used in financing activities amounted to ¥100.4 billion of
cash outflows. Cash outflows from financing activities decreased by
¥458.8 billion, compared with the previous fiscal year, due mainly to
an increase in debts which decreased in the previous fiscal year,
which was partially offset by purchases of treasury stock and an
increase in dividends paid.
Liquidity
The ¥1,279.0 billion in cash and cash equivalents at the end of the
fiscal year 2011 corresponds to approximately 1.7 months of net
sales, and Honda believes it has sufficient liquidity for its business
operations.
At the same time, Honda is aware of the possibility that various
factors, such as recession-induced market contraction and financial
and foreign exchange market volatility, may adversely affect liquidity.
For this reason, finance subsidiaries that carry total short-term
borrowings of ¥1,369.4 billion have committed lines of credit
equivalent to ¥788.3 billion that serve as alternative liquidity for the
commercial paper issued regularly to replace debt. Honda believes it
currently has sufficient credit limits, extended by prominent
international banks, as of the date of the filing of Honda’s Form 20-F
(as of June 23, 2011).
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, 2011.
Credit Ratings for
Short-term Long-term
unsecured unsecured
debt securities debt securities
Moody’s Investors Service P-1 A1
Standard & Poor’s Rating Services A-1 A+
Rating and Investment Information a-1+ AA
The above ratings are based on information provided by Honda
and other information deemed credible by the rating agencies. They
are also based on the agencies’ assessment of credit risk associated
with designated securities issued by Honda. Each rating agency
may use different standards for calculating Honda’s credit rating,
and also makes its own assessment. Ratings can be revised or
nullified by agencies at any time. These ratings are not meant to
serve as a recommendation for trading in or holding Honda’s
unsecured debt securities.
Off-Balance Sheet Arrangements
Securitization
For the purpose of liquidity and funding, our finance subsidiaries
periodically securitize finance receivables. In these securitizations,
our finance subsidiaries transfer a portfolio of finance receivables to
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