Form 6-K
Table of Contents

No.1-7628


 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE MONTH OF AUGUST 2004

 

COMMISSION FILE NUMBER: 1-07628

 

HONDA GIKEN KOGYO KABUSHIKI KAISHA

(Name of registrant)

 

HONDA MOTOR CO., LTD.

(Translation of registrant’s name into English)

 

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

(Address of principal executive officers)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-F  x     Form 40-F  ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes  ¨    No  ¨

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-            

 



Table of Contents

Contents

 

Exhibit 1:

 

On July 28, 2004, Honda Motor Co., Ltd. announced its intention to implement a tender offer for acquisition of its outstanding company stock, the resolution for which was resolved at the meeting of the Board of Directors held on July 28, 2004 in accordance with Article 211-3, Paragraph 1, Item 2 of the Japanese Commercial Code.

 

Exhibit 2:

 

On July 28, 2004, Honda Motor Co., Ltd. announced its intention to retire the treasury stock, the resolution for which was resolved at the meeting of the Board of Directors held on July 28, 2004 in accordance with Article 212 of the Japanese Commercial Code.

 

Exhibit 3:

 

On August 24, 2004, Honda developed an environmentally friendly electric moped prototype designed for convenient city driving and commuting. (Ref. #M04-028)

 

Exhibit 4:

 

On August 24, 2004, Honda Motor Co., Ltd., developed a 50cc hybrid scooter prototype that offers reduced emissions, exceptional fuel economy, and ample storage space. (Ref. #M04-029)

 

Exhibit 5:

 

On August 24, 2004, Honda Motor Co., Ltd., developed a scooter powered by its light, compact fuel cell system, the Honda FC Stack. (Ref. #M04-030)

 

Exhibit 6:

 

On August 24, 2004, Honda Motor Co., Ltd., announced that it developed the world’s first Intelligent Night Vision System, which uses “far infrared” cameras to detect pedestrians in or approaching the vehicle’s path and provides the driver visual and audio cautions to help prevent accidents involving pedestrians. (Ref. #A04-031)

 

Exhibit 7:

 

On August 24, 2004, Honda Motor Co., Ltd. announced development of a pop-up hood system for pedestrian safety, which raises the engine hood in the event of a collision with a pedestrian to reduce the possibility of a serious impact to the pedestrian’s head region by providing added engine compartment clearance. (Ref. #A04-032)

 

Exhibit 8:

 

On August 26, 2004, Honda Motor Co., Ltd. announced production, domestic sales and export results for the month of July. (Ref #C04-058)

 

Exhibit 9:

 

Annual report for the fiscal year ended March 31, 2004 (which was mailed to ADR stockholders for the Company in August 2004).

 

Exhibit 10:

 

English summary of Honda Report to Stockholders No. 122, which was prepared full in Japanese and mailed to stockholders of Honda Common Stock in Japan in August 2004.

 


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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

HONDA GIKEN KOGYO

KABUSHIKI KAISHA

( HONDA MOTOR CO., LTD )

/s/ Satoshi Aoki

Satoshi Aoki

Senior Managing and

Representative Director

 

Date: September 13, 2004

 


Table of Contents

July 28, 2004

 

Notice Regarding the Buyback of Company Stock

 

Tokyo, July 28, 2004— Honda Motor Co., Ltd. today announced its intention to implement a tender offer for acquisition of its outstanding company stock, the resolution for which was resolved as follows at the meeting of the Board of Directors held on July 28, 2004 in accordance with Article 211-3, Paragraph 1, Item 2 of the Commercial Code:

 

1. Reason for the Acquisition of Company Stock:

 

Mainly to improve capital efficiency.

 

2. Details of the Acquisition:

 

(1) Type of shares to be acquired

 

Common stock of Honda Motor Co., Ltd

 

(2) Maximum number of shares to be acquired

 

7,500,000 shares

(Ratio to total shares of common stock issued and outstanding before retirement, which was announced separately today: 0.77%)

 

(3) Maximum amount of acquisition

 

30,000,000,000 yen

 

(4) Period of acquisition

 

From August 3, 2004 to October 15, 2004


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July 28, 2004

 

Notice Regarding the Retirement of Treasury Stock

 

Tokyo, July 28, 2004— Honda Motor Co., Ltd. today announced its intention to retire the following treasury stock, the resolution for which was resolved as follows at the meeting of the Board of Directors held on July 28, 2004 in accordance with Article 212 of the Commercial Code:

 

(1) Type of shares to be retired

 

Common stock of Honda Motor Co., Ltd

 

(2) Number of shares to be retired

 

35,000,000 shares

(Ratio to total shares of common stock issued and outstanding before retirement: 3.59%)

 

(3) Scheduled date of retirement

August 23, 2004

 

Reference:

 

Total shares of common stock issued and outstanding after retirement 939,414,215 shares


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LOGO

 

ref. #M04-028

 

Honda Announces Electric Moped Prototype

 

August 24, 2004—Honda has developed an environmentally friendly electric moped prototype designed for convenient city driving and commuting. One step closer to a production electric bike for the general public, the prototype could eventually lead to a mass-market vehicle.

 

With a length of 1,290 mm and weighing 44 kg, the Moped-EV is compact and light. Its nickel hydrogen battery, located inside an aluminum frame, is extremely light, dissipates heat efficiently, and, at 360 watt-hours, offers exceptionally long life. Powerful enough to climb a twelve-degree incline, the electric moped offers performance comparable to that of an internal combustion engine bike of the same class.

 

Unlike most other bikes, which employ a grip throttle, the Moped-EV features a two-stage lever throttle located beneath the right handlebar. Worked easily by the thumb, the lever throttle helps make riding easy even for less-experienced riders.

 

The Moped-EV features a unified module in the rear swing arm that integrates the motor with a controller, which regulates the driving functions and the discharge and recharging of electricity.

 

Honda has long conducted research into the development of next-generation power sources that reduce noxious emissions and help slow global warming. In 1994, Honda developed the CUV ES, an electric scooter leased to government institutions. Following in the tracks of that revolutionary vehicle, the Moped-EV is designed to offer quiet, clean riding both for commuting and recreational use.

 

LOGO

Moped EV

 

Publicity materials for the Moped EV are available at the following URL:

http:// www.honda.co.jp/PR/

(The site is intended exclusively for the use of journalists.)


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LOGO

 

ref. #M04-029

 

Honda Develops Hybrid Scooter Prototype

 

August 24, 2004—Honda has developed a 50cc hybrid scooter prototype that offers reduced emissions, exceptional fuel economy, and ample storage space. Employing both an internal combustion engine and an electric motor, the new prototype takes Honda one step closer to a mass-market hybrid scooter.

 

The new prototype features an alternating current generator (ACG) with an idle stop function and the Honda PGM-FI electronic fuel injection system. In addition to an electronically controlled belt converter and a range of Honda environmental technologies, the new scooter features a dual series and parallel hybrid powertrain with a direct rear-wheel drive electric motor. Thanks to a compact power system and a rechargeable nickel hydrogen battery located under the front cowl, the hybrid scooter is about the same size as the Dio Z4, a standard-size 50cc scooter, and is only 10 kg heavier.

 

The hybrid scooter’s internal combustion engine and direct rear-wheel-drive electric motor function in two distinct modes. In series mode, when riding on flat ground and when high output is not required, the engine alone powers the electric motor. In parallel mode, used during acceleration and when high output is required, the electric motor assists the engine. In parallel mode, an electronically controlled belt converter automatically selects the optimum assist ratio.

 

To make the most efficient use of energy, the hybrid system charges the battery during deceleration and whenever possible and utilizes this power when higher output is required. In addition, the scooter enters idle stop mode, when the scooter is stopped, and whenever power is not needed, during deceleration. These advanced features allow the hybrid scooter to achieve 1.6 times the fuel economy of the Dio Z4 (when riding on flat ground at 30 km/h) and to produce 37% less carbon dioxide.

 

LOGO

Hybrid Scooter prototype

 

Publicity materials for the Hybrid Scooter prototype are available at the following URL:

http:// www.honda.co.jp/PR/

(The site is intended exclusively for the use of journalists.)


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LOGO

 

ref. #M04-030

 

Honda Develops Fuel Cell Scooter Equipped with

Honda FC Stack

 

August 24, 2004—Building on its success with fuel cell automobile technology, Honda has developed a scooter powered by its light, compact fuel cell system, the Honda FC Stack.

 

Capable of starting at sub-freezing temperatures, the high-efficiency next-generation Honda FC Stack has been made even lighter and smaller, and redesigned for use in scooters. Honda has applied their expertise gained in the development of fuel cells for automobiles, and further miniaturized the system, optimizing it for application to scooters.

 

The new vehicle is based on a 125cc scooter of the kind popular with commuters worldwide. Space has been conserved by placing the electric drive system on the rear-wheel swing arm, and by placing the Honda FC Stack fuel cell in the center of the vehicle, with auxiliary systems compactly arranged around it. The result is a scooter comparable in size to an internal combustion engine vehicle of the same class.

 

Honda plans to continue refining the new vehicle’s design to make it even more light and compact, so that the fuel cell scooter achieves the same range and offers storage space comparable to internal combustion engine vehicles of its class.

 

Honda has long been involved in the development of fuel cell systems as next-generation powerplants, since they emit no noxious emissions and can help reduce the demand for fossil fuels and slow global warming. In December 2002, Honda delivered FCX fuel cell vehicles to customers in Japan and the United States—a world’s first. In October 2003, Honda announced the development of the Honda FC Stack, a next-generation fuel cell capable of starting at subfreezing temperatures. Honda plans to deliver the Honda FC Stack-equipped FCX in the second half of 2004 to customers in the United States, and in 2005 to customers in Japan.

 

LOGO

Fuel Cell scooter

 

Publicity materials for the Fuel Cell Motorcycle are available at the following URL:

http:// www.honda.co.jp/PR/

(The site is intended exclusively for the use of journalists.)


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LOGO

 

ref. #A04-031

 

Honda Develops World’s First Intelligent Night Vision System

Able to Detect Pedestrians and Provide Driver Cautions

—Available on Legend model to be released in Fall 2004—

 

August 24, 2004—Honda Motor Co., Ltd. announced today that it has developed the world’s first Intelligent Night Vision System, which uses “far infrared” cameras to detect pedestrians in or approaching the vehicle’s path and provides the driver visual and audio cautions to help prevent accidents involving pedestrians. The new system will be available on the Honda Legend to be released in Japan in fall 2004.

 

The Intelligent Night Vision System uses images obtained from two far infrared cameras positioned in the lower section of the front bumper to detect the position and movement of infrared heat-emitting objects and determine whether they are in or approaching the vehicle’s path. Based on size and shape, the system also determines if the detected object is a pedestrian. In addition to the conventional night vision function of giving the driver an enhanced view of the road ahead, the system is the world’s first to provide cautions that inform the driver of the presence of pedestrians that are on the road or about to cross the vehicle’s path.

 

Pedestrian fatalities make up approximately 30% of all traffic accident fatalities in Japan*. In its ongoing efforts to reach a better understanding of the kinematics of pedestrian accidents and to develop technologies to protect pedestrians, Honda developed the world’s first pedestrian dummy, POLAR I, in 1988. This was followed by POLAR II in 2000, which features an even more human-like structure and more points of measurement. Honda places a high priority on the development of new pedestrian safety technologies. Given that 70% of all pedestrian fatalities are said to occur at night, the independently developed Intelligent Night Vision System addresses a vital problem. Honda is committed to the further development of technologies designed to help prevent accidents involving pedestrians.

 

* Source: ITARDA (Institute for Traffic Accident Research and Data Analysis) traffic statistics, 2003

 

LOGO   LOGO
Viewed with naked eye        

Viewed with Intelligent Night Vision System     

 

-1-


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· Intelligent Night Vision System configuration

 

Far infrared camera

 

The camera obtains a visual image based on the “far infrared” radiation emitted by humans and other objects. Because it uses far infrared radiation, it is capable of obtaining a viable image without the use of a light source, as is required by visible-light or “near infrared” cameras.

 

Heads-up display

 

The image is reflected in a mirror positioned on top of the dashboard, which retracts into the dashboard for daytime stowage.

 

Pedestrian detecting ECU

 

The ECU determines pedestrian position and motion based on the image from the cameras, along with vehicle speed and other vehicle information. The system detects pedestrians in or approaching the vehicle’s path, and provides caution to the driver via a visual enhancement frame around the pedestrian image and an audio caution.

 

Sensors

 

Headlight on/off information, windshield wiper setting, yaw rate, vehicle speed, ambient temperature.

 

· Control system flow

 

LOGO

 

Publicity materials for the Intelligent Night Vision System are available at the following URL:

http:// www.honda.co.jp/PR/

(The site is intended exclusively for the use of journalists.)

 

-2-


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LOGO

 

ref. #A04-032

 

Honda Develops Pop-up Hood for Pedestrian Safety;

Reduces Impact to Pedestrians in the Event of a Collision

 

August 24, 2004—Honda Motor Co., Ltd. today announced development of a pop-up hood system for pedestrian safety, which raises the engine hood in the event of a collision with a pedestrian to reduce the possibility of a serious impact to the pedestrian’s head region by providing added engine compartment clearance.

 

The pop-up hood for pedestrian safety employs three sensors located inside the front bumper and a vehicle speed sensor to determine if an impact with a pedestrian has occurred, then signals an actuator to raise the rear portion of the engine hood approximately 10cm. This provides a space between the hood, the engine and other hard components to reduce pedestrian head injuries.

 

Use of the pop-up hood for pedestrian safety can cause an approximately 40% reduction* in HIC (Head Injury Criteria) values according to Honda’s internal research. This achieves a higher level of pedestrian safety performance even in models where design considerations make it difficult to provide ample clearance between the hood, the engine and other hard components.

 

* Based on Honda in-house measurements using a head impactor device

 

Honda first introduced its Pedestrian Injury Reduction Body technologies with the HR-V in 1998, employing a body structure designed to reduce impact to the head, the area of many life-threatening injuries. With the release of the Civic in 2000, further measures were added to reduce harm to the legs—a common injury location. Impact-absorbing structures are employed in the engine hood, hood hinges, wiper pivots, front fenders, bumpers, and other components. Currently, most Honda automobiles feature the Pedestrian Injury Reduction Body technologies, with total sales of such models totaling more than 3 million vehicles in Japan.

 

Honda has long been involved in research into safety technologies based on real-world crash conditions. Particularly in the area of pedestrian-related accidents, Honda has taken the lead over other manufacturers, unveiling the world’s first pedestrian dummy, the POLAR I, in 1998, to help clarify the kinematics of accidents involving pedestrians and to support development of pedestrian protection technologies. This was followed in 2000 by the POLAR II, which features an even more human-like structure and is equipped with sensing devices at more key points of measurement. Honda is committed to the further development of technologies designed to help prevent accidents involving pedestrians.

 

LOGO

Crash testing of the pop-up hood system for pedestrian safety using the POLAR II

 

Publicity materials for the pop-up hood for pedestrian safety are available at the following URL:

http:// www.honda.co.jp/PR/

(The site is intended exclusively for the use of journalists.)


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LOGO

 

Ref.#C04-058

 

Honda Achieves Double-Digit Increase in Domestic Sales in July

 

August 26, 2004 – Honda Motor Co., Ltd. today announced production, domestic sales, and export results for the month of July. Domestic sales for the month showed a double-digit increase for the first time since May 2002, due to strong sales of all-new models and existing models that underwent minor model changes.

 

Both domestic and overseas production increased in July by 14.8% and 10.7% respectively compared to the same month a year ago. Domestic production increased due primarily to strong domestic sales and overseas production increased due to a major increase in production in Asia. Production in Asia has achieved record monthly production volumes for three consecutive months.

 

Total domestic sales increased 17.7% in July – the first double-digit increase in 26 months. Strong sales of new models such as Edix and Elysion, as well as the Fit —which underwent a minor model change — contributed to this growth. Fit was Honda’s best selling car for the month with sales of 14,525 units, while Life also remained strong with sales of 13,696 units, a 47.1% increase from the same month last year. Sales of the new Odyssey increased 191.1% compared to the same month last year, on sales of 7,059 units. New models are being well received, with July sales of Elysion and Edix reaching 7,919 units and 3,471 units, respectively.

 

Total exports in July declined slightly by 1% compared to the same month last year. July exports to North America fell by 28.6% due to increased local production of the Accord and Civic models while exports to Europe increased by 49.4% due to high demand for the Accord, Accord diesel and Jazz models. The year-to-date total increased 4.3% compared to last year.

 

 

PRODUCTION, SALES, EXPORTS (July 2004)

 

PRODUCTION

 

     July

    Annual Total - 2004

 
           Units       

     Vs.5/03  

    Units

     Vs.2003  

 

Domestic

   115,481    +14.8 %   720,574    +5.9 %

Overseas (CBU only)

   158,007    +10.7 %   1,113,676    +4.8 %
    
  

 
  

Worldwide Total

   273,488    +12.3 %   1,834,250    +5.2 %

 

-1-


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OVERSEAS PRODUCTION

 

     July

    Year-to-Date Total
(Jan - July 2004)


 
            Units       

   Vs.7/03

    Units

   Vs.2003

 

North America

   95,841    +1.1 %   711,887    -5.7 %

(USA only)

   62,319    -1.3 %   467,881    -7.7 %

Europe

   14,177    -1.0 %   113,810    +2.4 %

Asia

   43,222    +48.3 %   247,095    +43.1 %

Others

   4,767    +5.7 %   40,884    +71.4 %
    
  

 
  

Overseas Total

   158,007    +10.7 %   1,113,676    +4.8 %

SALES (JAPAN)

 

Vehicle type


   July

    Year-to-Date Total
(Jan - July 2004)


 
   Units

   Vs.7/03

    Units

   Vs.2003

 

Passenger Cars & Light Trucks

   48,211    +19.2 %   284,546    -4.2 %

(Imports)

   654    -67.5 %   5,810    -57.5 %

Mini Vehicles

   21,828    +14.6 %   155,549    +14.6 %
    
  

 
  

Honda Brand Total

   70,039    +17.7 %   440,095    +1.7 %

EXPORTS

 

     July

    Year-to-Date Total
(Jan - July 2004)


 
     Units

   Vs.7/03

    Units

   Vs.2003

 

North America

   15,062    -28.6 %   138,211    -4.6 %

(USA only)

   13,764    -31.9 %   126,037    -1.0 %

Europe

   13,467    +49.4 %   81,773    +9.5 %

Asia

   1,598    +7.9 %   9,992    -17.3 %

Others

   7,946    +15.7 %   56,447    +31.4 %
    
  

 
  

Total

   38,073    -1.0 %   286,423    +4.3 %

 

For further information, please contact:

 

Shigeki Endo

Tatsuya Iida

Honda Motor Co., Ltd.

Corporate Communications Division

Telephone: 03-5412-1512

Facsimile: 03-5412-1545

 

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LOGO

ANNUAL REPORT 2004

YEAR ENDED MARCH 31, 2004

 

Honda Motor Co., Ltd.


Table of Contents

LOGO

 

In October 2003, Honda announced the development of Honda FC Stack, a remarkably compact, next-generation fuel cell stack that delivers high performance, yet operates at temperatures as low as minus 20ºC. The photo shows the FCX fuel cell vehicle, equipped with the Honda FC Stack, undergoing performance tests on a public road in Furano, Hokkaido, Japan. During the tests, the FCX started up promptly and performed superbly in temperatures as low as minus 11ºC. In autumn 2004, Honda plans to start tests on public roads in the state of New York, U.S.A.

 

[COVER]

 

The FCX fuel cell vehicle features Honda’s original ultracapacitor, which enables the energy storage system to deliver excellent, highly efficient output, resulting in powerful, highly responsive performance. In the background is Honda’s solar-powered hydrogen fueling station, which was set up within the Los Angeles Center, of Honda R&D Americas, Inc. (HRA), in October 2003. The station features a Honda-made water electrolysis module—among the world’s most efficient—as well as next-generation thin-film solar panels (shown on rear right) made by Honda Engineering.

 

 

 

CONTENTS

 

  1

   Financial Highlights

  2

   To Our Shareholders

  4

   Review of Operations

  4

            Motorcycle Business

  8

            Automobile Business

13

            Financial Services

14

            Power Product & Other Businesses

15

   Honda’s U.S. Automobile Operations

22

   Environment and Safety

25

   Corporate Governance

30

   Risk Factors

32

   Board of Directors and Corporate Auditors

34

   Honda’s History

35

   Financial Section

84

   Corporate Information

86

   Honda’s Stock Price and Trading Volume

87

   Investor Information

 

 

CORPORATE PROFILE

 

Established in 1948, Honda Motor Co., Ltd., is one of today’s leading manufacturers of automobiles and the largest manufacturer of motorcycles in the world. The Company is recognized internationally for its expertise and leadership in developing and manufacturing a wide variety of products that incorporate Honda’s highly efficient internal combustion engine technologies, ranging from small general-purpose engines to specialty sports cars. Approximately 17.2 million Honda products were sold worldwide during the fiscal year ended March 31, 2004.

 

Throughout all of its operations—from product development and manufacture to sales—Honda maintains a commitment to materialize our company’s visions of “value creation”, “glocalization” and “commitment to the future” with the aim of sharing the joy with our customers worldwide, thus becoming a company that society wants to exist.

 

Seeking to maximize customer satisfaction levels, we work together with our numerous business partners to supply Honda products to countries worldwide. Integral in this effort is our global network of 441 subsidiaries and affiliates (317 consolidated subsidiaries, 21 non-consolidated subsidiaries and 103 affiliates).

 

 

This annual report contains the consolidated financial statements of Honda Motor Co., Ltd., and its subsidiaries, prepared for holders of Honda American and European shares. Please note that the financial statements appearing in the Notice of Convocation of the 80th Ordinary General Meeting of Stockholders, which was held in Tokyo, Japan, on June 23, 2004, were prepared on the basis of accounting principles generally accepted in Japan in accordance with the Japanese Commercial Code and related solely to Honda Motor Co., Ltd., and were not consolidated with those of its subsidiaries. On May 28, 2004, the original notice in the Japanese language was mailed to holders of Honda common stock in Japan and an English translation thereof was mailed to holders of Honda American shares.

 

CAUTION WITH RESPECT TO FORWARD-LOOKING STATEMENTS

 

This annual report 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 other major currencies, as well as other factors detailed from time to time.


Table of Contents

FINANCIAL HIGHLIGHTS

 

Financial Data

 

Honda Motor Co., Ltd. and Subsidiaries

Years ended or at March 31                      


  

Yen

(millions except

per share amounts)


   U.S. dollars
(millions except
per share amounts)


   2002

   2003

   2004

   2004

Net sales and other operating revenue

   ¥ 7,362,438    ¥ 7,971,499    ¥ 8,162,600    $ 77,232

Operating income*

     661,202      724,527      600,144      5,678

Income before income taxes and equity in income of affiliates

     551,342      609,755      641,927      6,073

Net income

     362,707      426,662      464,338      4,393

Per common share (Basic)

     372.23      439.43      486.91      4.61

Per American depositary share

     186.11      219.71      243.45      2.30

Cash dividends paid during the period

     24,360      30,176      33,541      317

Per common share

     25      31      35      0.33

Per American depositary share

     12.5      15.5      17.5      0.16

Stockholders’ equity

     2,573,941      2,629,720      2,874,400      27,197

Per common share

     2,641.55      2,734.69      3,054.90      28.90

Per American depositary share

     1,320.77      1,367.34      1,527.45      14.45

Total assets

     6,940,795      7,681,291      8,328,768      78,804

Depreciation

     194,944      220,874      213,445      2,020

Capital expenditures

     303,424      316,991      287,741      2,722
* Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the presentation used for the year ended March 31, 2004.

 

Operating Data

 

Years ended March 31   

Motorcycle

(thousands)


  

Automobile

(thousands)


   Power Products
(thousands)


Unit Sales Breakdown


   2002

   2003

   2004

   2002

   2003

   2004

   2002

   2003

   2004

Japan

   404    432    403    878    849    716    409    472    477

North America

   590    610    656    1,368    1,522    1,558    1,601    1,872    2,363

Europe

   315    305    299    176    207    231    1,012    1,290    1,261

Asia

   4,054    5,948    7,017    158    205    341    619    657    619

Other Regions

   732    785    831    86    105    137    285    293    327
    
  
  
  
  
  
  
  
  

Total

   6,095    8,080    9,206    2,666    2,888    2,983    3,926    4,584    5,047
    
  
  
  
  
  
  
  
  

 

Years ended March 31

 

 

Net Sales
Breakdown


 

Motorcycle Business

(Millions of yen)


 

Automobile Business

(Millions of yen)


 

Financial Services

(Millions of yen)


 

Power Products and Other Business

(Millions of yen)


  2002

  2003

  2004

  2002

  2003

  2004

  2002

  2003

  2004

  2002

  2003

   2004

Japan

  ¥ 101,587   ¥ 98,391   ¥ 93,203   ¥ 1,654,238   ¥ 1,513,596   ¥ 1,397,237   ¥ 22,407   ¥ 21,308   ¥ 20,043   ¥ 90,514   ¥ 115,411    ¥ 118,010

North America

    348,832     329,073     322,213     3,529,560     3,926,848     3,900,755     175,871     210,903     212,522     93,664     101,102      107,440

Europe

    172,378     175,736     182,400     336,844     420,292     516,108     3,628     5,548     7,448     50,702     60,385      64,154

Asia

    175,608     222,955     242,370     260,234     397,156     532,552     —       199     899     34,994     25,216      25,790

Other Regions

    149,495     151,940     156,104     148,866     182,202     245,372     —       —       1,784     13,016     13,238      16,196
   

 

 

 

 

 

 

 

 

 

 

  

Total

  ¥ 947,900   ¥ 978,095   ¥ 996,290   ¥ 5,929,742   ¥ 6,440,094   ¥ 6,592,024   ¥ 201,906   ¥ 237,958   ¥ 242,696   ¥ 282,890   ¥ 315,352    ¥ 331,590
   

 

 

 

 

 

 

 

 

 

 

  

 

LOGO

 

Throughout this annual report, the United States dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of ¥105.69=U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on March 31, 2004.

 

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LOGO

 

YEAR IN REVIEW

 

In fiscal 2004, ended March 31, 2004, the U.S. economy showed signs of recovery, while Asian economies continued posting solid growth, especially in the latter half of the year. However, the economies of major European nations remained generally weak. Meanwhile, the Japanese economy, despite sluggish personal spending, moved into a moderate recovery mode, boosted by increased exports, capital expenditures and other factors.

 

During the year under review, Honda sold more than 9.21 million motorcycles, 2.98 million automobiles and 5.04 million power products, representing new records in each category. Consolidated net sales also reached a record high thanks to revenue gains in all business segments. Although operating income declined, primarily because of the effects of a weakening U.S. dollar, income before income taxes and equity in income of affiliates, as well as net income, all increased to record highs.

 

Since my appointment as president in June 2003, one of our main focuses has been to reinforce those characteristics that are distinctive of Honda. In short, we are now focused on “technology,” “quality” and “motivation.” “Technology” refers to the skills employed in each area of our operations, including R&D, manufacturing and sales. Our focus on “quality” includes not only products but also overall quality, including how individual jobs and operations are executed. “Motivation” means the pride and passion exhibited by all Honda associates. As a result of further honing our strengths in these areas, we successfully improved the effectiveness of our strategies for the year, resulting in improved financial performance in fiscal 2004.

 

Our basic philosophy is that by manufacturing products in areas close to the customer, we can address customer needs quicker and more flexibly and thus achieve operations of the highest efficiency and effectiveness. For instance, approximately 80% of all Honda automobiles sold in the United States are produced in North America. Meanwhile, Honda has operations in various regions of the world. By effectively utilizing our resources in those regions, we are promoting the “Made by Global Honda” strategy, which targets further increases in customer satisfaction by broadening our product lineup while maximizing production efficiency and cost-competitiveness.

 

In the year under review, we expanded our global network in a number of ways. For example, we established a parts subsidiary in Asia, which has started exporting to other parts of Asia as well as Europe. We also increased exports of automobiles from Europe to North America.

 

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REDISTRIBUTION OF PROFITS TO OUR SHAREHOLDERS

 

Honda attempts to increase its corporate value by investing in R&D, which is essential for future growth, as well as through capital investments for business expansion. At the same time, we consider redistribution of profits to shareholders as one of our most important management issues. We will increase our annual dividend per common share by ¥10 to ¥42 for fiscal 2004 and plan to increase it by another ¥4, to ¥46 in fiscal 2005.

 

Between June 24, 2003 and May 11, 2004, we acquired 21.5 million shares of treasury stock, amounting to approximately ¥100 billion. This brings the total number of treasury shares acquired between June 25, 2002 and May 11, 2004 to 35.9 million, for a total purchase value of approximately ¥163 billion.

 

The Ordinary General Meeting of Stockholders, held on June 23, 2004, approved the addition of a new article to the Articles of Incorporation that allows the Company to acquire treasury stock, subject to a resolution of the Board of Directors. This will allow us to pursue more flexible capital strategies.

 

LOOKING AHEAD

 

Although the U.S. economy is expected to remain in recovery mode, we are concerned about a potential slowdown in personal spending there in the second half of 2004. Meanwhile, we anticipate that economies in Asia and elsewhere will show solid growth. Nevertheless, the business outlook remains difficult to predict, due to such uncertainties as the world political situation and currency exchange rates. In Japan, competition is expected to further intensify, due to languishing personal spending and other factors.

 

In response, Honda will further strengthen its commitment to technology, quality and motivation in an effort to bring joy to our customers and exceed their expectations. Also, while we make full use of the global network we have been establishing, we will further strengthen all areas of the company—R&D, product development, manufacturing, and sales & marketing—and we are applying a renewed focus on taking action “on the spot” and improving things at their very source.

 

Through these initiatives, we will reinforce our ability to swiftly and flexibly address changes in customer and societal needs and the business environment. Also, to improve the competitiveness of our products, we will strengthen our R&D and production capabilities and upgrade our sales capabilities. We will also further enhance product quality and target initiatives to improve safety and protect the environment.

 

Through these Company-wide activities, we will strive to materialize our Company’s visions of “value creation,” “glocalization,” and “commitment to the future” with the aim of sharing the joy with our customers world-wide, thus becoming a company that society wants to exist.

 

We look forward to the ongoing support of shareholders as we tackle the challenges of the future.

 

June 23, 2004

 

LOGO
Takeo Fukui
President and Chief Executive Officer

 

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LOGO

 

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S pacy 100 A four-stroke, 100cc scooter made by Wuyang–Honda Motors

(Guangzhou) of China and imported to Japan utilizing Honda’s global network.

 

 

UNIT SALES

Years ended March 31

 

     Thousands

   % change

 
     2003

   2004

   (2004/2003)

 

Japan

   432    403    (6.7 )%

North America

   610    656    7.5  

Europe

   305    299    (2.0 )

Asia

   5,948    7,017    18.0  

Other Regions

   785    831    5.9  
    
  
  

Total

   8,080    9,206    13.9 %
    
  
  

 

NET SALES

Years ended March 31

 

     Millions of yen

   % change

 
     2003

   2004

   (2004/2003)

 

Japan

   ¥ 98,391    ¥ 93,203    (5.3 )%

North America

     329,073      322,213    (2.1 )

Europe

     175,736      182,400    3.8  

Asia

     222,955      242,370    8.7  

Other Regions

     151,940      156,104    2.7  
    

  

  

Total

   ¥ 978,095    ¥ 996,290    1.9 %
    

  

  

 

 

LOGO

 

FISCAL 2004 RESULTS

 

Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC), in fiscal 2004 posted a solid 13.9% increase, to 9,206,000 units. This was due mainly to outstanding performance in Asia, where we reported a significant jump in sales of finished products, as well as in motorcycle parts supplied to affiliates for mass production by the parent company and its subsidiaries. As a result, net sales advanced 1.9%, to ¥996.2 billion, despite a negative translation effect. Operating income fell 25.9%, to ¥42.4 billion, and the operating margin was 4.3%.

 

JAPAN

 

In Japan, unit sales declined 6.7%, to 403,000 units. Sales of mini-sized motorcycles (126cc – 250cc) were solid, supported by strong sales of scooters, as were second-class motor-driven cycles (51cc – 125cc), which benefited from robust demand from corporate users. However, sales of 50cc and smaller models slowed following the initial popularity of newly released, low-priced scooters and the generally declining demand in the second half of the year. Sales of small-sized motorcycles (over 250cc) also declined, due to falling demand.

 

With respect to mini-sized and small-sized motorcycle models, one of the year’s highlights was the strong performance of the Fusion model following a full model change at the end of the previous fiscal year. During this fiscal year, we upgraded our lineup with the introduction of the Forza Type X. We also released the XR250 Motard and the CBR600RR, the latter of which features advanced RC211V technologies incorporated in high-performance MotoGP victory machines.

 

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Taking advantage of the success of the Today scooter, we launched two new Chinese-made models—Spacy 100 and Dio—that are fully equipped and environmentally friendly. In February 2004, we unveiled the Smart Dio Z4, which incorporates the world’s first electronic fuel injection system (Honda Programmed Fuel Injection System, or PGM-FI) for four-stroke 50cc scooters.

 

In these ways, we worked to upgrade our lineup of attractive models with both high-value-added leisure use and competitive price models in commuting use.

 

NORTH AMERICA

 

In North America, unit sales rose 7.5%, to 656,000 units.

 

New products launched in fiscal 2004 included the Valkyrie Rune, a flagship custom bike with attractive styling, and the CBR600RR, VTX1300C and CRF250R. Healthy sales of the XR/CRF series for kids and other models, such as the CRF450R and the Brazilian-made CRF230F and CRF150F, led to an 11.1% increase in unit sales of bikes, to 360,000 units. In June 2003, we commenced sales of the FourTrax Rancher AT, a 400cc ATV fitted with Honda’s original automatic transmission, and in January 2004 we launched the TRX450R, a flagship sports ATV. Despite slow sales during the first half of the fiscal year, the launch of these new models, coupled with aggressive marketing strategies and competitive pricing in the second half of the year, resulted in higher overall sales. Consequently, unit sales of ATVs and PWC for the year rose 3.5%, to 296,000 units.

 

EUROPE

 

In Europe, unit sales declined 2.0%, to 299,000 units.

 

We began importing and selling the Indian-made Lead scooter and the Brazilian-made XR125L, which is appropriate for both on- and off-road use. Both models were well received by the market. In the second half of the year, we released the CBR1000RR, the Italian-made CBF600, and the Thai-made CBR125R, and each of these models recorded steady sales. The CBR600RR, one of our mainstay products, took the No. 1 spot in Europe’s super sports category. In Germany, the CBF600 and the CBR125R earned first and second place, respectively, in registrations for the first three months of 2004 in their particular categories.

 

ASIA

 

In the Asian region, demand for motorcycles as a principal means of transportation has continued to grow. Total unit sales of motorcycles and motorcycle parts sold by Honda and its subsidiaries to affiliates in the region jumped 18.0%, to 7,017,000 units.

 

By country, sales in Thailand rose 24.4%, to 1,307,000 units. This was due to continued healthy sales of the popular Wave100, the affordable Wave Z and the Wave125i, which features a PGM-FI that delivers both favorable fuel economy and low emissions.

 

LOGO

 

Valkyrie Rune Impressive custom bike with low-and-long

‘Hot Rod’ styling, fitted with a 1,832cc ‘Flat Six’ engine.

 

LOGO   

LOGO

 

  

LOGO

 

Fusion A widely popular scooter with a low-slung seat and long wheelbase, featuring unique styling and a relaxed riding position.    FourTrax Rancher AT A 400cc ATV with Honda’s original automatic transmission.    Lead A clean, silent and stylish scooter with a four-stroke, single-cylinder engine, made in India and exported to Europe.

 

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P.T. Astra Honda Motor, an affiliate in Indonesia, recorded strong sales of the mainstay Supra, and in October 2003 it launched the affordable Supra Fit. Local sales by P.T. Astra Honda Motor in calendar 2003 totaled 1,576,000 units.

 

In India, we enjoyed healthy sales of the top-selling Splendor, made by our affiliate Hero Honda Motors Ltd. (HHML). HHML also launched the CD Dawn, a 100cc sports bike. Honda Motorcycle & Scooter India (Private) Ltd. (HMSI), a subsidiary, launched the Eterno, a sleek 150cc geared scooter with a sophisticated design and good fuel economy. Unit sales for both companies rose 29.5%, to 2,346,000 units.

 

In China, Sundiro Honda Motorcycle Co., Ltd., one of three motorcycle affiliates in China, recorded healthy sales of the Wave and Jialing-Honda Motors Co., Ltd. unveiled the CB125X, a sports bike with a sharp design that was well-received by the market. Sales of three affiliates, including Wuyang-Honda Motors (Guangzhou) Co., Ltd. for calendar 2003 rose 23.3%, to 1,136,000 units.

 

OTHER REGIONS

 

In other regions—covering Latin America, the Middle East and Africa and Oceania—unit sales grew 5.9%, to 831,000 units.

 

In Brazil, where the motorcycle market has continued to grow steadily, we launched the CG150 Titan in February 2004. This was the first full-model change since the CG125 series was introduced more than four years earlier. The market response has been overwhelming.

 

OUTLOOK FOR FISCAL 2005

 

In the year ending March 2005, we project that unit sales of motorcycles, ATVs and PWC, will edge up 0.9%, to 9,290,000 units.

 

By increasing local procurement of parts for Honda motorcycles produced and sold by our Asian affiliates, we are striving to enhance product competitiveness and expand our business in the region. This will lead to an increase in 100% locally procured models, which are not included in Honda’s unit sales. Specifically, the number of such motorcycles is projected to increase approximately 1,000,000 units in fiscal 2005, to 1,500,000 units, based on local sales projections.

 

In Japan, we will introduce a number of new models. In the growing mini-sized scooter category, we launched a new version of the mainstay Forza series in April 2004. In the sports model category, we unveiled the CBR1000RR, which features advanced RC211V technologies incorporated in high-performance MotoGP victory machines.

 

In June 2004, we launched the PS250, the fifth model in the N-project, which is aimed at the younger generation. Under this project, Honda’s young designers were given free range with their ideas, resulting in simple, yet unique designs.

 

We also upgraded our lineup in the mass-market commuter category, introducing the Dio Cesta, the fourth model manufactured and imported from China.

 

For fiscal 2005, we estimate unit sales in Japan of 370,000 units, amid a trend of declining demand that began in the autumn of 2003.

 

In North America, overall demand in calendar 2003 totaled approximately 1.88 million units, up 5.0% from 2002, and we expect demand to grow moderately again in 2004. Against this background, models introduced in the latter half of the period under review will contribute to fiscal 2005 results throughout the year. We will continue pursuing initiatives undertaken since the latter half of calendar 2003, centering on the timely introduction of new models and the pursuit of appropriate marketing strategies. For fiscal 2005, we are targeting sales of 715,000 units in North America, up 9.0%.

 

Although we expect the motorcycle market in Europe to remain largely unchanged, Honda is planning to sell 295,000 units. Factors in this increase include the new CBR1000RR and CBF600 models, which have been recording healthy sales since being launched in fiscal 2004 and will make a full-year contribution to sales in fiscal 2005. We also expect an increase in sales of affordable bikes, such as the Brazilian-made XR125L and the Thai-made CBR125R, which have already been well-received by the market.

 

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Eterno A widely acclaimed scooter made by HMSI that offers low fuel economy and is user friendly.    CB125X Attractively priced sports bike for young people introduced by Jialing-Honda Motors, with a sharp design and powerful air-cooled four-stroke, two-cylinder engine.    Wave125i The first Honda motorcycle in Southeast Asia with a PGM-FI features low fuel economy and meets Thailand’s fifth emission standard.

 

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For fiscal 2005, we project overall unit sales in Asia to remain largely unchanged, at 6,980,000 units. Sales of 100% locally procured Honda motorcycles produced and sold by affiliates are forecast to increase approximately 1,000,000 units.

 

In Thailand, where Honda holds a market share of over 70%, we will pursue a number of activities to boost sales. These include providing high-quality services to complement our products, as well as enhanced rider safety initiatives and increased efforts to develop an amateur participation-type motor sports culture.

 

By adding design development and prototype testing functions to our motorcycle research center in Thailand, we will strengthen research and development of motorcycles aimed at the ASEAN region.

 

In Indonesia, P.T. Astra Honda Motor plans to launch a derivative of the popular Karisma in July 2004, targeting the younger generation and women. Combined with efforts to expand sales of products with high added value, they expect to post record sales for calendar 2004.

 

In India, our aim is to increase sales through the launch of new locally-produced models and by continuing to enhance the dealer network. By March 2004, HHML’s annual production capacity had risen to 2,400,000 units and HMSI’s capacity to 450,000 units, for a total of 2,850,000. We plan to reach full-scale production during fiscal 2005.

 

With respect to the Chinese market, in June 2004 our affiliate Sundiro Honda Motorcycle launched the 125cc Xin-Gaian, which delivers enhanced driving performance and handling while consuming minimal fuel. Sales of the Ziyou Today, which is already available in the Japanese market as the Today, commenced in June in China. Moreover, various models produced by our Chinese joint venture companies already meet the Euro 2 exhaust emission regulations, which were introduced in 2004, thanks to the adoption of Honda’s leading low emission technologies. Sundiro Honda Motorcycle began construction of a new plant in Tianjin in May 2004, with the aim of improving production and distribution efficiency. The new facility is scheduled for completion at the end of 2004.

 

Unit sales in other regions are expected to increase 11.9%, to 930,000 units. In Brazil, where Honda claims a more than 80% share of the motorcycle market, total annual demand is fast approaching 1,000,000 units. We therefore expect to post record-high sales in Brazil in fiscal 2005. We will raise the annual production capacity of our Brazilian plants by 250,000 units, to 1,000,000, by the end of 2004, to meet this huge domestic demand, as well as growing overseas demand. In the Middle East and Africa, we plan to increase sales of highly competitive products, including motorcycles made in China, India, Thailand and Brazil.

 

LOGO

 

CBR1000RR Newly designed 1000cc, liquid-cooled, four-stroke, DOHC incline

four-cylinder engine, featuring advanced racing technologies inherited from

Honda’s RC211V, which in 2003 won the ultimate challenge, the MotoGP World

Championship Series, for the second successive year.

 

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LOGO

 

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Odyssey The all-new, third-generation Odyssey is equipped with a

2.4-liter DOHC i-VTEC engine and newly developed CVT+7 speed

mode transmission, providing superior driving performance. The new

low-floor platform ensures spacious interior. For Japanese market.

 

UNIT SALES

Years ended March 31

 

     Thousands

   % change

 
     2003

   2004

   (2004/2003)

 

Japan

   849    716    (15.7 )%

North America

   1,522    1,558    2.4  

Europe

   207    231    11.6  

Asia

   205    341    66.3  

Other Regions

   105    137    30.5  
    
  
  

Total

   2,888    2,983    3.3 %
    
  
  

 

NET SALES

Years ended March 31

 

     Millions of yen

   % change

 
     2003

   2004

   (2004/2003)

 

Japan

   ¥ 1,513,596    ¥ 1,397,237    (7.7 )%

North America

     3,926,848      3,900,755    (0.7 )

Europe

     420,292      516,108    22.8  

Asia

     397,156      532,552    34.1  

Other Regions

     182,202      245,372    34.7  
    

  

  

Total

   ¥ 6,440,094    ¥ 6,592,024    2.4 %
    

  

  

 

LOGO

 

FISCAL 2004 RESULTS

 

In fiscal 2004, unit sales of automobiles rose 3.3%, to 2,983,000 units, due mainly to strong automobile sales in Asia and North America and increased sales of parts for automobile production to Guangzhou Honda Automobile Co., Ltd., an affiliate of Honda. Sales increased 2.4%, to ¥6,592.0 billion, due to increased overseas sales and other factors, which compensated for the negative impact of the yen’s appreciation against the U.S. dollar. Operating income declined 20.4%, to ¥438.8 billion, and the operating margin was 6.7%.

 

JAPAN

 

Total domestic automobile demand in Japan remained largely unchanged, at 5,880,000 units. Honda’s unit sales in Japan declined 15.7%, to 716,000 units. Despite a decline in sales of some models, including the Fit subcompact, which has now been on the market for two years, we enjoyed strong sales of the all new Life minicar and Odyssey mini-van.

 

New products launched in Japan included the Element light truck, which was developed and produced in the United States and imported to Japan utilizing the “Made by Global Honda” network. We also launched the all-new Inspire, featuring a newly developed, environmentally friendly 3.0l i-VTEC engine equipped with Variable Cylinder Management (VCM) technology, as well as the world’s first Collision Mitigation Brake System (CMS).

 

In September 2003, we completed a full model change of the Life minicar, delivering a functional and unique design and enhanced safety and environmental performance by incorporating a new crash-compatible body frame to provide greater safety in collisions, as well as offering top-class fuel economy. In October, we unveiled the all-new Odyssey, which incorporates a newly developed low-floor platform and combines both spaciousness and performance. For two consecutive months from December 2003, the Odyssey ranked number one in monthly vehicle registrations in Japan.

 

By strengthening our performance in the mini-van segment, we are improving the model mix of sales and in turn steadily increasing unit prices.

 

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LOGO

 

Inspire Featuring the world’s first CMS and Honda’s E-Pretensioner seatbelt safety

system, the Inspire offers a 3.0-liter V6 i-VTEC engine with Honda’s newly developed

VCM technology for ample power and fuel economy.

 

LOGO

 

Life All models in the Life series have crash-compatible body frames to alleviate

vehicle-to-vehicle collisions and are fitted with newly developed i-DSI engine.

The new Life is certified as an ULEV and was ranked No. 1 in a minicar

ranking for three consecutive months from October 2003.

 

 

NORTH AMERICA

 

In calendar 2003, automobile demand in the United States remained high, totaling 16.68 million units.

 

In the passenger car segment, sales of Honda’s flagship model in North America, the Accord, remained high. Also, the newly released Acura TSX sports sedan and the Acura TL luxury performance sedan, which underwent a full model change in October 2003, both showed steady sales. At the same time, demand for light truck models in North America has continued to increase, with sales of Honda’s light trucks, notably the Element, Pilot and Acura MDX, also increasing significantly.

 

As a result, overall sales in North America increased 2.4%, to nearly 1,558,000 units, an all-time record, despite a downturn in the Canadian market.

 

In 1982, Honda began manufacturing the Accord at its plant in Marysville, Ohio, becoming the first Japanese automobile manufacturer to establish local production of passenger cars in the United States. Since then, we have steadily expanded our production capacity with the addition of auto plants in Alliston, Canada, in 1986; East Liberty, Ohio, in 1989; and Lincoln, Alabama in 2001. We now have a very high local production ratio in North America, with approximately 80% of Honda automobiles sold in the United States being made locally.

 

In fiscal 2004, cumulative unit sales of Honda cars and trucks in North America reached the 20 million unit mark. Cumulative production output in the U.S. also increased, surpassing the 10 million unit mark, while production in Canada reached the 3 million mark. In April 2004, we commenced production at the second production line of our Alabama plant of the Pilot SUV, a model that has been popular since it first appeared on the market. As a result, we now have an annual production capacity in North America of 1.4 million units.

 

LOGO   LOGO   LOGO
Element The Element incorporates a center-pillarless body construction and freestyle door arrangement on both sides for convenient loading of outdoor gear.   Accord Approximately 400,000 units of the mainstay Accord are sold annually in the United States.   Acura TSX This sports sedan features a 2.4-liter i-VTEC engine, which produces 200 horsepower of maximum output and 166lbs–ft of maximum torque.

 

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EUROPE

 

In Europe, overall automobile demand remained almost unchanged in calendar 2003 at 16.5 million units. Nevertheless, Honda’s unit sales jumped 11.6%, to 231,000 units. This was due mainly to a twofold surge in sales of the Accord series, boosted by the launch of the Accord Tourer in April 2003, and steady demand for Honda’s top selling Civic models and Jazz subcompact, which has remained popular since its launch.

 

Demand for diesel-powered automobiles continued to grow in Europe. Following the success of the diesel-powered Civic, which was introduced in 2002, at the end of calendar 2003 we launched a new Accord model, equipped with the first Honda-made i-CTDi diesel engine. Sales of the diesel-powered Accord, which combines a top-class engine quietness and excellent fuel efficiency with high performance, substantially boosted sales in fiscal 2004.

 

LOGO

 

Acura TL Fitted with the newly developed 3.2-liter V6 VTEC engine, this

sedan offers 270 horsepower of maximum output. Developed and manufactured

in the United States as a mainstay model in the Acura channel, it also

meets California’s strict LEV-2 ULEV exhaust emission regulations.

 

LOGO   LOGO   LOGO
Acura MDX Launched in October 2000, this is the first SUV to be sold through the Acura network. With a powerful 3.5-liter V6 VTEC engine, it provides excellent fuel economy for its class.   Pilot Fitted with a 3.5-liter V6 VTEC engine and the Honda VTM-4 four-wheel-drive system, this midsize SUV delivers 240 horsepower performance and high endurance.   Accord Tourer (Diesel) The Accord Tourer is fitted with Honda’s original 2.2-liter i-CTDi diesel engine, which offers excellent efficiency and quietness. It delivers superb performance and meets Euro 4 emission regulations.

 

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ASIA

 

Our automobile business in Asia expanded considerably in fiscal 2004. Total unit sales of automobiles and automobile parts sold by Honda and its subsidiaries to affiliates soared 66.3%, to 341,000 units.

 

In China, the passenger car market continued to expand, with sales of more than two million vehicles recorded during calendar 2003. Guangzhou Honda, an affiliate of Honda, recorded healthy sales of the Accord and the Odyssey, and also launched the Fit Saloon subcompact in September 2003. As a result, unit sales rose a tremendous 98.1%, to 117,000 units. To meet the rapidly growing demand, Guangzhou Honda doubled its annual production capacity, from 120,000 units to 240,000 units, in February 2004.

 

Following its successful launch in Thailand, we launched the all-new City in Indonesia, Malaysia, the Philippines, Pakistan and India, starting in April 2003. In the ASEAN region, sales rose 47.3%, to 190,000 units, due largely to the launch of the Jazz subcompact in November 2003.

 

We raised the annual production capacity of our plant in Thailand from 70,000 units to 120,000 units. In August 2003, we began production of manual transmissions in the Philippines, and in the following month we started making automatic transmissions in Indonesia. Both plants are now shipping products to Europe and throughout Asia. Through this, we are able to further utilize the “Made by Global Honda” network to a greater effect.

 

OTHER REGIONS

 

Unit sales in other regions grew 30.5%, to 137,000 units, thanks mainly to increased sales in Brazil, Turkey and the Gulf countries.

 

In Brazil sales increased considerably due to the commencement of production and sales of the Fit in April 2003, our second locally produced model after the Civic.

 

LOGO

Accord Production of the Accord in China began when

Guangzhou Honda commenced operations in 1999. Since then, sales

have been solid, and local procurement has risen from 60% to 70%.

The Accord offers both quality and driving performance, and

meets Euro 3 emission regulations.

 

LOGO   LOGO   LOGO
Jazz The Jazz offers the best fuel economy in its class and levels of spaciousness and safety that belie its small appearance.   Fit Saloon The new Fit Saloon combines high quality and safety with excellent driving performance, outstanding comfort and advanced styling.   Fit In April 2004, Honda Automoveis do Brasil began sales of the Fit, produced at its Sumaré plant. In addition to innovative safety and environmental features, the new model offers excellent power and fuel economy.

 

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OUTLOOK FOR FISCAL 2005

 

For fiscal 2005, the total unit sales of automobiles is expected to rise 9.1%, to 3,255,000 units.

 

In Japan, we will focus on strengthening our presence in the mini-van market. Having launched the Elysion in May 2004, we plan, in July, to introduce the new-concept Edix, a six-passenger mini-van that seats three people in the front and three in the back. We also plan to launch an all-new Legend, featuring the new Super Handling All-Wheel Drive (SH-AWD) system, which will give the driving experience Honda buyers have come to expect. Honda is not only strengthening the competitiveness of its products, in terms of business operations, it is also raising customer satisfaction and operational efficiency, as well as reinforcing its sales and service capabilities. For fiscal 2005, we forecast a 7.5% increase in domestic unit sales, to 770,000 units.

 

In North America, we will increase sales of the Pilot, which went into production on the second line of the Alabama plant in April 2004. We will also strengthen our presence in the ever-expanding light truck segment by reinforcing sales of existing models. In the passenger vehicle segment, we will launch the all-new Acura RL in the fall of 2004. This will be followed in the second half of fiscal 2005 by the Accord Hybrid, which will feature a V6 engine with Honda’s Integrated Motor Assist (IMA) system to provide high performance and deliver the same level of fuel economy as the Civic. For fiscal 2005, we project unit sales in North America of more than 1,565,000 units, up 0.4%.

 

In Europe, we expect to strengthen our position in the expanding diesel automobile market by launching a diesel-powered CR-V in a number of European nations in fiscal 2005, in addition to the highly praised diesel-powered Accord. Also, in the fall of 2004 we plan to unveil a new-concept model. Accordingly, we project a 10.4% increase in unit sales in Europe, to 255,000 units.

 

Fiscal 2005 is expected to be a year of major expansion in Asia, where we forecast a 49.6% jump in unit sales, to 510,000 units. In China, where rapid growth is expected to continue, we forecast an increase in sales by Guangzhou Honda. Dongfeng Honda Automobile (Wuhan) Co., Ltd., an affiliate based in Wuhan, also began production and sales of the CR-V sport utility vehicle in April 2004. In addition, Honda Automobile (China) Co., Ltd., an affiliate that will be Honda’s third automobile production base in China, will begin production of the Jazz , exclusively for export to Europe and elsewhere in Asia, from the end of 2004.

 

Outside of China, we anticipate solid growth in Thailand and India, where sales are expected to continue increasing. Sales of the Jazz, which was launched in November 2003, and the Civic, which underwent a major face-lift in the first half of 2004, are expected to pave the way for yet another substantial increase in sales for fiscal 2005.

 

In other regions, we project unit sales of 155,000 units, up 13.1% from fiscal 2004. In addition to steady demand in Brazil, we forecast increased sales in the growing Turkish market.

 

LOGO   LOGO   LOGO
Elysion The Elysion is based on the “next-generation premium 8-passenger” concept, offering spacious interior and a low center of gravity for a stable and comfortable drive.   Acura RL (Prototype) Incorporating the world’s first SH-AWD system, the Acura RL has a 3.5-liter V6 VTEC engine and delivers 300 horsepower performance.   CR-V In April 2004, Dongfeng Honda Automobile (Wuhan) produced its first model: the mainstay CR-V, fitted with a 2.0-liter i-VTEC engine.

 

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LOGO

 

FINANCE SUBSIDIARIES-RECEIVABLES, NET

Years ended March 31

 

     Millions of yen

   % change

 
     2003

   2004

   (2004/2003)

 

Non-current

   ¥ 2,230,020    ¥ 2,377,338    6.6 %

Current

     1,097,541      1,264,620    15.2  
    

  

  

Total

   ¥ 3,327,561    ¥ 3,641,958    9.4 %
    

  

  

 

LOGO

 

FISCAL 2004 RESULTS

 

Though our financial services business, we offer an array of financial services to our customers and dealers, with the goal of supporting sales of our products. These services are provided through financial subsidiaries in the United States, Japan, Canada, the United Kingdom, Germany, Brazil and Thailand. In fiscal 2004, net sales of our financial services, including inter-segment sales within Honda, rose 2.0%, to ¥245.8 billion, due mainly to strong sales of automobiles in North America. This was achieved despite the negative effect of the yen’s appreciation against the U.S. dollar. Operating income climbed 0.6%, to ¥108.4 billion.

 

OUTLOOK FOR FISCAL 2005

 

Based on expectations of further growth in our automobile business, we expect further expansion in fiscal 2005 of our financial services business, which will support sales in our automobile business in fiscal 2005.

 

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LOGO

 

LOGO   LOGO   LOGO   LOGO

Salad

Mini tiller

 

GX35

360-degree-inclinable,

four-stroke engine

 

BF150

Four-stroke outboard engine

 

UMK435

Four-stroke brush cutter

 

FISCAL 2004 RESULTS

 

In fiscal 2004, unit sales of power products rose 10.1%, to 5,047,000 units, due largely to increased sales of general-purpose engines, mainly in North America.

 

Net sales from power product and other businesses, including power products, grew 4.7%, to ¥341.6 billion, due primarily to increased unit sales. Operating income surged 28.3%, to ¥10.3 billion.

 

 

UNIT SALES

Years ended March 31

 

     Thousands

   % change

 
     2003

   2004

   (2004/2003)

 

Japan

   472    477    1.1 %

North America

   1,872    2,363    26.2  

Europe

   1,290    1,261    (2.2 )

Asia

   657    619    (5.8 )

Other Regions

   293    327    11.6  
    
  
  

Total

   4,584    5,047    10.1 %
    
  
  

 

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In Japan, unit sales of power products grew 1.1%, to 477,000 units. In North America, unit sales increased 26.2%, to 2,363,000 units, as the result of healthy demand for lawnmowers and general-purpose engines. Unit sales in Europe decreased 2.2%, to 1,261,000 units. Unit sales in Asia decreased 5.8%, to 619,000 units. In other regions, unit sales increased 11.6%, to 327,000 units.

 

During fiscal 2004, the Salad mini-tiller, introduced in fiscal 2003, continued to record favorable sales. Throughout the world, we also introduced the BF135 and BF150 series of four-stroke outboard engines, which achieve outstanding low emission levels and superb performance by using Honda’s advanced technologies. Furthermore, in Japan and Europe we launched the new GX35, a 360-degree-inclinable, four-stroke general-purpose engine that has superb environmental performance and the UMK435 brush cutter, which features the GX35. In North America and Europe, we commenced sales of the GSV160A and GSV190A series of high performance 4-stroke engines. In India, we began production and sales of the low noise portable EXK2800 and EXK2800S generators, which meet the strictest noise regulations in the world.

 

OUTLOOK FOR FISCAL 2005

 

In fiscal 2005, we will further capitalize on the cost-competitive benefits of making engines in Asia and utilizing the “Made by Global Honda” network to deliver those benefits to our customers around the world.

 

Demand for our power generators in Europe and North America remains steady, and we expect sales to increase in the coming fiscal year. In Asia and the Middle East, the effort to expand sales will focus on pumps made in Thailand.

 

In fiscal 2005, we expect unit sales of power products to grow 11.0%, to 5,600,000 units.

 

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Honda’s U.S.

AUTOMOBILE OPERATIONS

 

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Honda’s U.S.

AUTOMOBILE OPERATIONS

 

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Headquarters of American Honda Motor

soon after its establishment

 

Poster for the “You meet the nicest people on a Honda”

advertising campaign, which was highly successful

 

LOGO

N600, released in 1969

LOGO

Civic, fitted with CVCC engine, unveiled in 1973

LOGO

Accord, launched in 1976

 

ENTERING THE MARKET

 

As Honda first looked to expand its motorcycle business overseas, our thinking was “Unless a product can become a ‘hit’ in the United States, the center of the world’s economy, it cannot be a hit anywhere in the world.” Honda first came to America in 1959 with the establishment of a wholly owned subsidiary, American Honda Motor Co., Inc., which created its own dealer network and began selling motorcycles.

 

The U.S. motorcycle market at that time was limited in scope. However, with the release of the Super Cub and our “You meet the nicest people on a Honda” advertising campaign, we offered a refreshing new image of motorcycles and created a new market.

 

Having established a solid brand presence for motorcycles, in 1969 American Honda introduced the first Honda automobile, the N600 in Hawaii. We subsequently built a local foundation for our automobile business with the launch of the Civic in 1973 and the Accord in 1976.

 

The first oil crisis in 1973 had a major impact on the U.S. automotive industry. It prompted many people to shift their attention from large, luxury vehicles to cars that offered greater fuel efficiency.

 

In 1974, Honda led the industry in its response to the enactment of the U.S. Clean Air Act, which placed strict regulations on tailpipe emissions, by introducing a Civic equipped with Honda’s original CVCC engine – becoming the first car to meet the new law. The Civic also placed first in fuel efficiency tests conducted by the U.S. Environmental Protection Agency in 1974. Combining high performance with unparalleled efficiency in terms of lower emissions and fuel costs, the new Civic was an overwhelming success. Almost 39,000 units were sold in its first fiscal year, with annual sales exceeding 100,000 units three years after its release.

 

Thanks to the warm acceptance of the Civic, Honda secured its position as an automaker in the United States.

 

Honda went on to launch the Accord in 1976, establishing a new standard for family vehicles. For three consecutive years, from 1989 to 1991, the Accord was the top-selling vehicle in the U.S. passenger car market, and has continued as one of the contenders for the top position to the present day.

 

Since 1997, the Civic and Accord have been Honda’s “bread and butter” models in the United States, with annual sales of approximately 300,000 and 400,000 units, respectively.

 

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LOGO

 

Honda Dealership

 

LOGO

 

Acura Dealership

 

STRONGER SALES SYSTEM AND CUSTOMER SERVICE FOCUS

 

We began developing the U.S. automobile market by using the motorcycle sales network established by American Honda. Due to the advanced nature of the U.S. automobile market, however, consumers generally purchased cars from auto dealers. For this reason, we needed to develop our own automobile sales network.

 

We started with a team of a dozen or so salespeople, who visited other companies’ dealers around the nation, one by one, persuading them to add the Civic to their advertised lineups. By developing a sales network in this way, we built a foundation for our U.S. automobile business just as the Civic rose to national recognition.

 

Seeking to create a network regarded as No. 1 in terms of customer satisfaction, we engaged the market research services of J.D. Power and Associates. Based on the results of that research, from 1976, we refined our sales activities to better reflect the opinions and demands of customers and adopted a more customer-oriented approach to our services. These improvements were applied consistently throughout our dealer network.

 

We also established and expanded our network of exclusive Honda dealers, to ensure a more accurate and widespread understanding of our marketing initiatives and product lineup enhancements.

 

By 1986, approximately 70% of the outlets selling our automobiles in the United States were exclusive Honda dealers—the highest ratio in the industry. With more than 900 dealers nationwide, we had established a strong sales network that customers could trust.

 

Seeking to further broaden its customer base, American Honda decided to set up a second dealership network devoted to luxury performance models. This resulted in the establishment in 1986 of the Acura network, which began with sales of the Legend and Integra models.

 

Today, there are 1,270 Honda dealers throughout the United States, including 262 Acura stores.

 

In 1980, American Honda entered the vehicle financing business with the formation of American Honda Finance Corp. (AHFC), its wholly owned subsidiary. The new company initially provided dealer financing for motorcycle buyers, then launched retail financing services for automobile customers in 1985. With the synergistic benefits of American Honda’s expanding operations and the unparalleled services of AHFC, our financial services business in the United States has grown steadily. Today, over half of the customers purchasing Honda and Acura automobiles use the services of AHFC, which has served a total of more than 2.5 million customers.

 

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Honda’s U.S.

AUTOMOBILE OPERATIONS

LOGO

 

U.S.-made Accord leaves the production line

 

LOGO

 

Accord Coupe models, exported by Honda of

America Mfg., Inc., arrive in Japan

 

FIRST JAPANESE AUTOMAKER TO EXPORT FROM UNITED STATES

 

With its growing local production capabilities, in 1987 Honda became the first Japanese automaker to export vehicles from the United States. In 1988, we began exporting Accord Coupe models to Japan, and today we export U.S.-made cars to more than 50 nations. With growing product development capabilities in America, export models have included the Accord Wagon, Civic Coupe, Element and Acura MDX, with cumulative exports surpassing 700,000 units.

 

MAJOR EXPANSION OF NORTH AMERICA PRODUCTION CAPACITY

 

Based on a policy of “building products close to the customer,” Honda started producing motorcycles in the United States in 1979. Then, in November 1982, Honda of America Mfg., Inc., became the first Japanese company to manufacture automobiles in the United States, when it began making Accord models at its Marysville Auto Plant in Ohio.

 

In April 1986, we completed a second production line at the Marysville Auto Plant to keep pace with growing sales, bringing that facility’s annual capacity to 300,000 units. Currently, the capacity is 440,000 units.

 

In December 1989, we opened a new plant in East Liberty, Ohio, which now has an annual capacity of 240,000 vehicles.

 

These three production lines together give Honda of America Mfg. an annual capacity of 680,000 units. In April 2004, the 10 millionth vehicle rolled off of Honda of America’s production lines.

 

To meet growing demand for light trucks, Honda constructed a new plant in Lincoln, Alabama, in 2001 and added a second line in April 2004. Today, the Lincoln Plant has an annual capacity of 300,000 vehicles. Combined with the second line of the Alliston Plant, light truck production capacity is approximately 500,000 units.

 

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LOGO

 

Los Angeles Center of HRA

 

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Ohio Center of HRA

 

Including its facilities in Mexico, Honda has an annual North American automobile production capacity of 1.4 million units. Moreover, approximately 80% of all Honda vehicles sold in United States are made locally.

 

In addition to finished vehicles, we are also expanding the local manufacturing of engines and transmissions.

 

The Anna Engine Plant in Ohio started making motorcycle engines in July 1985 and automobile engines in September 1986. Today, all of Honda’s locally-produced vehicles are equipped with locally-produced engines. In July 1996, we began making transmissions in a separate plant in North America, and its production reached 1,015,000 units in the fiscal year ended March 2004.

 

While expanding the scope of its local production operations, Honda is also promoting more extensive local procurement of parts and components. Today, we purchase approximately US$8.1 billion of motorcycle and automobile parts annually for our production operations in North America from 440 local manufacturers. In 1985, 57% of parts were procured locally; that figure has grown to more than 95% today for all vehicles, and as high as 98% for the Accord.

 

RESEARCH & DEVELOPMENT IN NORTH AMERICA

 

Honda has also localized its R&D activities in North Americas focusing on developing products that best meet the needs of the local market, providing support for local production of these products and working with local parts makers to increase the ratio of local procurement.

 

In 1975, we established the California office of Japan-based Honda R&D Co., Ltd., for the purpose of undertaking market research in North America. In 1984, we upgraded that operation into a subsidiary, Honda R&D Americas, Inc. (HRA), to support development and design of products destined for sale in North America, as well as to assist in development of locally procured parts.

 

HRA opened its Los Angeles Center in 1975, primarily to support vehicle planning and design. It played a role in the design of such products as the CR-X and Civic Hatchback (1984 models); Accord Hatchback and Integra (1986 models); Accord Coupe, Civic and Prelude (1988 models).

 

In 1985, HRA increased its R&D staff with the establishment of its Ohio Center. Located near Honda’s automobile plants in Marysville and East Liberty, the Ohio Center develops products for the local market while working closely with local suppliers to jointly develop components for new vehicles and providing extensive technical support for Honda’s various manufacturing facilities across North America. HRA also operates full-scale automobile test tracks in Ohio and California.

 

Using these various resources, HRA has participated in the design and development of derivative models such as the Accord Wagon (1990 and 1994 models) and Civic Coupe (1993), and in 1996 developed the Acura CL, a dedicated U.S. model. Since then, it has participated in the design and development of various vehicles for the local market, including the Civic Coupe (2001 model), Acura TL (1999 and 2004 models), Acura MDX (2001 model), Pilot (2003 model) and Element (2003 model). Of the 18 Honda and Acura vehicles currently sold in United States, HRA was responsible for the development of five.

 

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Honda’s U.S.

AUTOMOBILE OPERATIONS

 

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Five models developed by HRA

 

In 2003, HRA built a crash safety testing facility at its Ohio Center, complete with a high-resolution crash-barrier block, the world’s first pitching crash test simulator and other safety labs, expanding its local R&D capabilities. HRA currently has approximately 1,300 associates—almost four times the 1990 number—and has the capability to work on three models simultaneously.

 

FUTURE INITIATIVES

 

At present, approximately 11 million Honda and Acura vehicles are on the road in the United States. Going forward, we will strive even harder to meet the diversified needs of customers.

 

Since 2000, the U.S. market has remained strong, with annual demand at approximately 17 million vehicles. Within that total, however, the passenger car and light truck markets have fluctuated, with the latter growing and accounting for 54% of overall demand in 2003.

 

Honda entered the expanding light truck segment in 1993 with the launch of the Passport, made by Isuzu Motors. In the following year, we released the Odyssey. Since then, we have steadily expanded our presence with the introduction of original Honda products, including the CR-V, Acura MDX, Pilot and Element. However, light trucks account for only 39% of Honda’s unit sales in the United States. For this reason, we will continue to expand our lineup to achieve further increases in light truck sales.

 

In fall 2004, we will introduce a full model change of the Odyssey. Further, at the 2004 North American International Auto Show in Detroit, we unveiled the brand-new Honda SUT Concept, which will form the basis of a new light truck model to be released in 2005. Under this concept, we have brought together the packaging efficiency and ride comfort of an SUV with the cargo and utility capabilities of a light truck, to create a new type of vehicle with highly attractive styling and excellent driving performance. In the first half of 2006, we also plan to launch a new SUV through our Acura network.

 

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Prototype of Acura RL, to be released

in fall of 2004

 

Honda SUT Concept vehicle, scheduled

for launch in 2005

 

For the passenger car segment, a traditional Honda stronghold, in the latter half of 2004 we plan to launch a hybrid version of the Accord that delivers impressive power with fuel efficiency similar to that of a Civic. This is achieved by combining a V6 engine with Honda’s original IMA and VCM technology. The six-cylinder Accord Hybrid will augment our existing line of hybrid vehicles—the three-cylinder Insight and the four-cylinder Civic Hybrid—giving customers an even greater choice of fuel-efficient vehicles.

 

In fall 2004, we will unveil a new version of the Acura RL, fitted with a 3.5-liter V6 VTEC engine and featuring Honda’s original SH-AWD, resulting in a vehicle that delivers both high performance and excellent safety. It will also have Acura Link, which incorporates the industry’s first satellite communication system, as well as real-time traffic and maintenance information—all of which can be controlled through use of the monitor of the vehicle’s navigation system. Committed to meeting the future needs of customers, Honda will continue introducing innovative, attractive products that offer higher levels of value while providing sales and services that keep customers satisfied. In these ways, we will strive to further expand our business in the United States.

 

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ENVIRONMENT AND SAFETY

 

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Honda established and announced the “Honda Environment Statement” in 1992, in which it announced that “as a responsible member of society whose task lies in the preservation of the global environment, Honda will make every effort to contribute to human health and the preservation of the global environment in each phase of its corporate activity. Only in this way will we be able to count on a successful future not only for our company, but for the entire world.”

 

Based on this statement and Honda’s “Commitment to the Future” as one of the directions within Honda’s 2010 vision, we continue our focus on the contributions to safety and the environment. Honda fulfills this commitment through its ongoing development of safety technology, its development of technology aimed at reducing emissions, its corporate activism, and its focus on developing alternative forms of energy. The following is a review of Honda’s achievement in this area in fiscal 2004.

 

MOTORCYCLES

 

In the area of motorcycles, we made further progress in expanding the use of 4-stroke engines to achieve cleaner exhaust emissions. We have also made efforts to introduce new technologies to improve fuel economy and applied these technologies to small motorcycles.

 

Main targets for fiscal 2004 in Japan

 

To expand the use of 4-stroke engines

 

To improve the fuel economy of new models

 

Main achievements in fiscal 2004 in Japan

 

Adopted 4-stroke engines for all models released in fiscal 2004 (4-stroke motorcycles as a percentage of all motorcycles manufactured by Honda: 89.5%)

 

Improved the average fuel economy 30.5% for all models marketed in fiscal 2004

 

Achieving Cleaner Exhaust Gas

 

Targets

 

Up to fiscal 2005: To reduce total exhaust emissions of HC* to approximately 1/3 for new vehicles (compared with fiscal 1995)

 

* Total for Japan, the United States, the European Union and Thailand

 

Progress

 

In fiscal 2004, HC emissions from new motorcycles were kept at 30.9% of the 1995 level, a 3.3 percentage point increase over the previous year’s level. HC emissions were maintained at about 1/3 of the 1995 level due to proper emission reduction measures and despite the fact that sales increased 15.2% (sales increased 45% in Thailand).

 

In Japan, HC emissions stood at approximately 16.2% of the 1995 level, approximately a 3 percentage point decrease from the previous year’s level, as sales of 4-stroke motorcycles accounted for roughly 90% of total sales in the domestic market.

 

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Improvement in Fuel Economy

 

Targets

 

Up to fiscal 2005: To improve the average fuel economy* by approximately 30% (compared with fiscal 1995)

 

* Total average for Japan, the United State, the European Union, and Thailand

 

Progress

 

Honda expanded the use of 4-stroke engines in motorcycles not only in Japan but also overseas. As a result, the average fuel economy in fiscal 2004 improved 33.7% over that in 1995, and the improvement rate surpassed the target of 30%. The average fuel economy in Japan also improved 30.5% over the 1995 level. Honda announced earlier that its FI technology would be applied to 50cc motorcycles by 2005. In January 2004, we succeeded in marketing the Smart Dio Z4, which employs FI technology and has the smallest engine displacement for a mass-produced motorcycle in the world, in the domestic market.

 

AUTOMOBILES

 

Besides achieving cleaner exhaust gas and improved fuel economy for Honda automobiles, efforts are under way to develop products using alternative forms of energy.

 

Main targets for fiscal 2004 in Japan

 

To increase the number of vehicles approved by the Ministry of Land, Infrastructure and Transport as “Ultra Low Emission Vehicles”

 

To achieve earlier compliance with the 2005 exhaust emissions regulations of the Ministry of Land, Infrastructure and Transport

 

To improve average fuel economy by category

 

Main achievements in fiscal 2004 in Japan

 

Nine additional models were approved as “Ultra Low Emission Vehicles” (16 in total)

 

Achieved compliance of all models with 2005 exhaust emissions regulations

 

Six models approved as vehicles with 75% lower emissions than the 2005 exhaust emissions standards Fourteen models approved as vehicles with 50% lower emissions than the 2005 exhaust emissions standards

 

Attained the fuel economy standards for fiscal 2010 by six categories among seven

 

Achieving Cleaner Exhaust Gas

 

Targets

 

Up to fiscal 2005: To reduce the total exhaust emissions of HC and NOx by approximately 75% for new vehicles (compared with fiscal 1995)*1

 

Up to fiscal 2005: To have almost all Honda passenger vehicles approved as “Ultra Low Emission Vehicles” by the Ministry of Land, Infrastructure and Transport

 

Progress

 

In fiscal 2004, total exhaust emissions of HC and NOx for new automobiles were reduced approximately 83.7%, and the target for 2005 was attained.

 

Total HC emission level: Reduced approx. 83.7% (compared with 1995)*2
Total NOx emission level: Reduced approx. 83.7% (compared with 1995)*2
The percentage of models approved as “Ultra Low Emission Vehicles”*3 by the Ministry of Land, Infrastructure and Transport increased from 10% (seven models, seven types) to 43% (16 models, 30 types).

 

On October 1, 2003, a new low emission vehicle approval scheme under the 2005 exhaust emissions standards was introduced. Therefore, Honda made all models comply with the 2005 exhaust emissions standards by March 2004. Six models (12 types) were approved as “«««« low emission vehicles” 4, and 14 models (26 types) were approved as “««« low emission vehicles.”

 

Improvement in Fuel Economy

 

Targets

 

Up to fiscal 2005: To achieve the new fuel efficiency standards of Japan for fiscal 2010 for all weight categories
Up to fiscal 2005: To improve the average fuel economy approximately 25% (compared with fiscal 1995)*

 

* Targets in Japan

 

Progress

 

Honda has achieved the above standards in six out of seven weight categories.

 

Average fuel economy was improved approximately 35% (compared with fiscal 1995)* and achieved the objective for 2005 (improvement in average fuel economy by approximately 25%) consecutively for two years from fiscal 2003.

 

* Average fuel economy in Japan (for gasoline-powered vehicles)

 

SAFETY

 

New Crash Compatibility Body Frame Structure

 

Honda recently developed a crash compatibility body frame structure that uses the engine compartment to efficiently disperse and absorb collision energy during a vehicle-to-vehicle collision, thus significantly improving self-protection while also reducing aggressivity toward other vehicles. We first used this new technology in the all-new Life minicar, released in September 2003. During future full model changeovers, all vehicles built on new platforms will be equipped with the new crash compatibility body frame structure.

 

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POWER PRODUCTS

 

For power products, our environmental commitment was made in anticipation of stringent regulations in advance, in focusing on cleaner exhaust gases, and improved fuel economy in all product areas.

 

Main targets for fiscal 2004 in Japan

 

To comply with stringent regulations in advance

 

To improve the fuel economy for new product models

 

Main achievements in fiscal 2004 in Japan

 

Achieved compliance with future regulations for all models released in fiscal 2004

 

Improved fuel economy 20% for the BF150 outboard engine

 

Achieving Cleaner Exhaust Gas

 

Targets

 

Up to fiscal 2005: To reduce the average exhaust emissions* of HC and NOx by approximately 30% for new products (compared with fiscal 1995)

* Average emission levels worldwide

 

Progress

 

We were able to achieve an approximate 30% reduction in average HC and NOx emission levels in fiscal 2002. In fiscal 2004, we succeeded in realizing an approximate 36% reduction by continuously taking the measures described.

 

Improvement in Fuel Economy

 

Targets

 

Up to fiscal 2005: To improve the average fuel economy approximately 30% (compared with fiscal 1995)

 

Progress

 

We were able to improve the average fuel economy approximately 25% by the end of fiscal 2004.

 

FUEL CELL VEHICLES

 

First in the World to Lease to Private Sector Corporations

 

In July 2003, Honda became the first automaker in the world to deliver a fuel cell vehicle, the FCX, to a private sector company. Since December 2002, when shipments of the FCX began in Japan and the United States, we have delivered five vehicles in Japan (including to the aforementioned company), five in Los Angeles and two in San Francisco.

 

Honda FC Stack

 

In October 2003, we announced the development of Honda FC Stack, a remarkably compact, next-generation fuel cell stack that delivers high performance, yet operates at temperatures as low as minus 20°C. It is the world’s first fuel stack to feature a stamped metal separator structure and newly developed electrolyte membranes. The FCX fuel cell vehicle, equipped with the Honda FC Stack, was certified in September 2003 by the Japanese Ministry of Land, Infrastructure and Transport. Since then, we have begun full-scale testing to confirm the vehicle’s cold-start abilities and driving performance. A Honda FC Stack-equipped FCX took the role of lead car in the 80th Tokyo–Hakone Ekiden relay race in January 2004.

 

The Honda FC Stack offers much more than high output and excellent cold starts. By replacing many special materials with more readily available materials, Honda has developed a next-generation fuel cell stack with a view to volume production and the ultimate need to recycle fuel cell vehicles.

 

GREEN FACTORIES

 

Goals for Fiscal 2004

 

Honda’s fiscal 2004 goal was to achieve an energy unit target of 21.9 CO2 tons per ¥100 million, a 20.4% reduction from 1990 levels.

 

Progress Report

 

In fiscal 2004, Honda reported an energy unit of 22.3 CO2 tons per ¥100 million, down 18.9% from 1990 levels.

*1. To give greater impetus to the use of “Low Emission Vehicles”, the Ministry of Land, Infrastructure and Transport of Japan instituted this approval system. “Low Emission Vehicles” with HC and NOx emission levels below the 2000 exhaust emissions standards are classed into three categories for approval.

25% lower than the standards: “Good”

50% lower than the standards: “Excellent”

75% lower than the standards: “Ultra”

*2. This is a new approval scheme established by the Ministry of Land, Infrastructure and Transport to accelerate the diffusion of “Low Emission Vehicles”. “Low Emission Vehicles” with HC and NOx emission levels below the 2005 exhaust emissions standards are classified into two categories for approval.

50% lower than the standards:«««

75% lower than the standards:««««

 

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CORPORATE GOVERNANCE

 

Based on its fundamental corporate philosophies, the Company is working to improve its corporate governance as one of the most important management issues, with the aim of ensuring that Honda will be a company that our shareholders, customers and society want to exist.

 

Honda’s organization reflects its fundamental corporate philosophies. Each regional operation carries out its businesses so as to quickly and efficiently respond to customer needs around the world, while each business operation makes arrangements for each product, establishing a system of high effectiveness and efficiency.

 

In addition, the Audit Office intends to carry out more effective audits of the performance of each division’s business, and each division aims to enhance compliance and risk management, while advancing the self-reliance of each organization.

 

To ensure objective control of the Company’s management, outside directors and corporate auditors are appointed as members of the Board of Directors and the Board of Corporate Auditors, which are responsible for the supervision and auditing of the Company. With regard to the directors, the term of their office is limited to one year and the amount of remuneration payable to them is determined according to a standard that reflects their contributions to the Company. The goal is to heighten maneuverability so as to cope with any changes in the management environment.

 

For shareholders and investors, Honda’s basic policy emphasizes the disclosure of financial results on a quarterly basis, as well as the timely and accurate disclosure of its management strategies. Honda will remain committed to such disclosures in the future.

 

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1. Management Organization

 

The Company supervises and audits its business activities through its Board of Directors and Board of Corporate Auditors.

 

The Board of Directors consists of 36 directors, including one outside director, and makes decisions on statutory matters including the execution of important businesses. The Board of Directors also supervises the execution of the Company’s businesses. In order to ensure proactive decision-making, the Board of Directors set up an Assets and Loan Management Committee, which is responsible for making decisions related to the disposal of the Company’s important assets.

 

The Board of Corporate Auditors is composed of five corporate auditors, including three outside corporate auditors. In accordance with the rules of auditing policy and the apportionment of responsibilities as determined by the Board of Corporate Auditors, each corporate auditor audits the directors’ execution of duties. This is accomplished through various means, including attendance at meetings of the Board of Directors and inspections regarding the status of Company assets and liabilities. To further strengthen the auditing structure, one outside corporate auditor was elected at the Company’s Ordinary General Meeting of Shareholders held on June 23, 2004. The Company has five auditors in total. In addition to this, to provide direct support to the Board of Corporate Auditors, a Corporate Auditors’ Office was established.

 

2. Fees for and Services Provided by the Independent Auditor

 

The table below sets out the fees for the independent auditor and its affiliate, both of who verify Honda’s audits under the Securities Exchange Act of the U.S.A.:

 

Millions of yen


   2004

   2003

Audit fees

   581    570

Fees for audit-related businesses

   221    78

Fees for tax audits

   484    391

Other fees

   2    131
    
  

Total

   1,288    1,170
    
  

 

“Audit fees” are fees for professional services of the independent auditors’ audit of the Company’s financial statements, and for general services provided by the independent auditors in relation to documents to be submitted by law or regulation.

 

“Fees for audit-related businesses” are fees for the independent auditors’ providing of assurance reasonably related to the implementation of audits and reviews of financial statements and fees for other services related thereto. This covers, for example, audits of the employee wage system, accounting consultancy, reviews of internal controls, providing of assurance that are not required by law, regulations, or the like, and consultations related to financial accounting reports.

 

“Fees for tax audits” are fees for services provided to ensure compliance with tax legislation and regulations, tax advice, and tax planning.

 

“Other fees” are fees of all other services provided by the independent auditors other than auditing services, auditing-related services and tax services. This includes education and other various support services.

 

Policy on and Procedures for Obtaining Board of Corporate Auditors’ Prior Consent

 

To ensure that the independent auditor and its affiliate under the Securities Exchange Act of the U.S.A. act in accordance with all applicable laws and regulations and maintain complete independence from the Company, it is required to obtain the prior consent of the Company’s Board of Corporate Auditors before they carry out the auditing services, auditing-related services, tax services and other services for Honda.

 

The Company’s initial policy required that each contractual agreement must have a separate prior consent from the Board of Corporate Auditors, but in order to make the decision-making process more efficient we are working toward streamlining procedures by establishing categories of matters requiring comprehensive prior consent. These categories of matters requiring comprehensive prior consent are reviewed regularly by the Board of Corporate Auditors. Any matter that does not fall under one of these categories still requires separate consent of the Board of Corporate Auditors.

 

The Company’s departments and subsidiaries that receive the auditing services, auditing-related services, tax services and other services, all report to the Board of Corporate Auditors on the details of services received, and fees paid for those services, during the relevant business year.

 

The Board of Corporate Auditors takes these reports into consideration when it reviews the categories of matters requiring comprehensive prior consent.

 

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3. Business Execution System

 

The Company has established the Management Council, which is composed of seven representative directors and three managing directors. Along with discussing in advance the items to be resolved at meetings of the Board of Directors, the Management Council discusses important management issues as directed by the Board of Directors.

 

As for execution of business, the Company has six Regional Operations in the world to promote its business based on its fundamental corporate philosophies with long-term vision and rooted in the local society. Regional executive officers are assigned to be in charge of the Business Operations in each region, with the aim of enhancing localized business development and ensuring speedy decision-making. Each regional executive council located at each Regional Operations discusses important management issues in the region within the scope of the authority conferred upon them by the Management Council.

 

The Company’s four Business Operations—motorcycles, automobiles, power products, and spare parts—formulate the medium- and long-term plans for their business development, and each Operation aims to maximize its business performance on a global basis. The Company’s Production and Purchasing operations support production-related departments so that they can implement the most efficient allocation of production and procurement in the world. These efforts are aimed at increasing company-wide efficiencies.

 

In April 2004, the Company established a Customer Service Operations aiming at obtaining satisfaction of higher level of our global customers.

 

At the Company’s major production facilities in Japan and overseas, operational executive officers are assigned and are responsible for rapid decision-making. In addition, the Business Management and the Business Support operations make adjustments on a company-wide basis with the aim of ensuring the optimal allocation of resources.

 

Research and development activities are conducted principally at the independent subsidiaries of the Company. Honda R&D Co., Ltd. is responsible for research and development on products, while Honda Engineering Co., Ltd. is responsible for research and development in the area of production technology. The Company actively carries out research and development with advanced technologies with the aim of creating products that are distinct and internationally competitive.

 

4. Internal Control

 

The Audit Office is an independent supervisory department under the direct control of the president. This office audits the performance of each department.

 

In addition to the “Honda Conduct Guideline” to be shared within the entire Honda Group, the Company has also set up a systematic framework for compliance and risk management in which each division of the Honda Group works to ensure compliance and prevent management risks, and to verify the status on a regular basis under the supervision by the director in charge. In addition to the appointment of a director in charge of compliance and risk management, the Company has also established organizations such as a “Business Ethics Committee” to deliberate matters related to corporate ethics and compliance and a “Business Ethics Improvement Proposal Line” to receive suggestions related to corporate ethics issues.

 

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Companies listed on 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 provision of Section 303A.

 

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 large Japanese companies, including Honda, which employ a corporate governance system based on a board of corporate auditors (the “corporate auditor system”), 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.

 

Large Japanese companies, including Honda, are required to have at least one “outside” corporate auditor who must meet independence requirements under Japan’s company law. An outside corporate auditor is defined as a corporate auditor who has not served as a director, executive officer, manager or any other employee of the company or any of its subsidiaries for the last five years prior to the appointment.

 

Currently, Honda has three outside corporate auditors. Starting on the date of the ordinary meeting of shareholders of Honda relating to the fiscal year ending March 31, 2006, at least 50% of Honda’s corporate auditors will be required to be outside corporate auditors.

 

Also, starting on the same date, the independence requirements for outside corporate auditors will be strengthened by extending the five-year period referred to above to any time prior to the appointment.

 

Honda’s current corporate auditor system meets this new requirements.

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 companies, Honda employs the corporate auditor 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.

 

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

 

Starting on July 31, 2005, when the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees become applicable to foreign private issuers, Honda expects to rely on an exemption under that rule which is available to foreign private issuers with boards of corporate auditors meeting certain criteria. Honda expects to make a disclosure regarding such reliance in its annual reports on Form 20-F for the fiscal year ending March 31,2006 and thereafter.

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 adopt a resolution requesting 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 concerning the issuance and exercise of the stock options.

 

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RISK FACTORS

 

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 could trigger a decline in demand for automobiles, motorcycles and power products that may affect Honda’s result of operations.

 

Prices for automobiles, motorcycles and power products can be volatile

 

Prices for automobiles, motorcycles and power products in certain markets have, at times, experienced sharp changes over short periods of time.

 

This volatility is caused by many factors, including short-term fluctuations in demand, shortages of certain supplies, volatility in underlying economic conditions, changes in import regulations, excess inventory and increased competition. There can be no assurance that such price volatility will not continue 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.

 

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, balance sheets and cash flows, as well as Honda’s competitiveness, which will over time affect its results.

 

Since Honda exports many products and components from Japan and generates a substantial portion of its revenues in currencies other than the Yen, Honda’s results of operations would be adversely affected by an appreciation of the 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 risk, Honda uses derivative financial instruments in order to reduce the effects of currency fluctuations and interest rate exposure.

 

As with all hedging instruments, there are risks associated with the use of foreign currency forward contracts, currency swap agreements and currency option contracts, as well as interest rate swap agreements.

 

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 has entered into, and expects to continue to enter into, such hedging arrangements. Honda manages exposure to counterparty credit risk by limiting the counter-parties to major international banks and financial institutions meeting established credit guidelines.

 

However, any default by such counterparties might have an adverse effect on Honda.

 

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

 

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

 

Honda owns or otherwise has rights in a number of patents and trademarks relating to the products it manufactures, which have been obtained over a period of years. These patents and trademarks have been of value in the growth of Honda’s business and may continue to be of value in the future. Honda does not regard any of its businesses as being dependent upon any single patent or related group of patents. However, an inability to protect this intellectual property generally, or the illegal breach of some or a large group of Honda’s intellectual property rights, would have an adverse effect on Honda’s operations.

 

Honda’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.

 

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

 

Honda purchases raw materials, and certain components and parts, from numerous external suppliers, and relies on some key suppliers for some items and the raw materials it uses in the manufacture of its products. Honda’s ability to continue to obtain these supplies in an efficient and cost-effective manner is subject to a number of factors, some of which are not within Honda’s control. These factors include the ability of its suppliers to provide a continued source of supply and Honda’s ability to compete with other users in obtaining the supplies. Loss of a key supplier in particular may affect our production and increase our costs.

 

Honda may be adversely affected by its joint ventures

 

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 may be affected by changes in the business condition or policy of these local entities, which in turn may adversely affect Honda’s business, financial condition or results of operations.

 

Honda may be adversely affected by natural disasters, wars, terrorism and labor strikes

 

Honda conducts its businesses worldwide, and its operations may variously be subject to natural disasters, disease, wars, terrorism or labor strikes which may delay or disrupt Honda’s local operations in the affected regions, including the acquisition of raw materials and parts, the manufacture, sales and distribution of products and the provision of services. If such delay or disruption occurs and continues for a long period of time, Honda’s business financial condition or results of operations may be adversely affected.

 

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BOARD OF DIRECTORS AND CORPORATE AUDITORS

 

LOGO

 

Representative Directors

 

(front row)         President and Chief Executive Officer
Takeo Fukui
  

Executive Vice President

Koichi Amemiya

    
(back row)    Senior Managing Director
Satoshi Aoki
  

Senior Managing Director

Minoru Harada

   Senior Managing Director
Michiyoshi Hagino
   Senior Managing Director
Motoatsu Shiraishi
   Senior Managing Director
Satoshi Dobashi

 

 

President and

Chief Executive Officer

   Takeo Fukui     

Executive Vice President

   Koichi Amemiya    President and Director of Honda North America, Inc.

Senior Managing Director

   Michiyoshi Hagino    General Supervisor, Purchasing Policy

Senior Managing Director

   Minoru Harada    Chief Operating Officer for Motorcycle Operations

Senior Managing Director

   Motoatsu Shiraishi   

Chief Operating Officer for Production Operations

Risk Management Officer

General Supervisor, Information Systems

General Supervisor, Production

Senior Managing Director

   Satoshi Aoki   

Chief Operating Officer for Business Management Operations

Compliance Officer

Senior Managing Director

   Satoshi Dobashi   

Chief Operating Officer for Regional Sales Operations (Japan)

Chief Officer of Driving Safety Promotion Center in Regional Sales Operations (Japan)

Government & Industrial Affairs

 

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Managing Director

  Atsuyoshi Hyogo   Chief Operating Officer for Regional Operations (China)
        President of Honda Motor (China) Investment Co., Ltd.

Managing Director

  Satoshi Toshida   Chief Operating Officer for Regional Operations (Asia & Oceania)
        President and Director of Asian Honda Motor Co., Ltd.
        President and Director of Honda Leasing (Thailand) Co., Ltd.

Managing Director

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

Managing Director

  Koichi Kondo   Chief Operating Officer for Regional Operations (North America)
        President and Director of American Honda Motor Co., Inc.

Managing Director

  Yasuo Ikenoya   Deputy Chief Operating Officer for Regional Operations (China)

Managing Director

  Toru Onda   Chief Operating Officer for Purchasing Operations

Managing Director

  Akira Takano   Chief Operating Officer for Customer Service Operations

Managing Director

  Takanobu Ito   General Supervisor, Motor Sports
        President and Director of Honda R&D Co., Ltd.

Managing Director

  Mikio Yoshimi   Chief Operating Officer for Business Support Operations

Managing Director

  Shigeru Takagi   Chief Operating Officer for Regional Operations (Europe)
        President and Director of Honda Motor Europe Ltd.

Managing Director

  Hiroshi Kuroda   Chief Operating Officer for Automobile Operations

Director

  Satoru Kishi   Adviser of the Board of The Bank of Tokyo-Mitsubishi, Ltd.

Director and Advisor

  Hiroyuki Yoshino    

Director

  Masaaki Kato   President and Director of Honda Manufacturing of Alabama, L.L.C.

Director

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

Director

  Teruo Kowashi   Automobile Production for Production Operations

Director

  Tetsuo Iwamura   Chief Operating Officer for Regional Operations (South America)
        President and Director of Honda South America Ltda.
        President and Director of Moto Honda da Amazonia Ltda.
        President and Director of Honda Automoveis do Brasil Ltda.

Director

  Takashi Yamamoto   Quality, Certification & Regulation Compliance

Director

  Masaru Takabayashi   General Manager of IT Division

Director

  Tatsuhiro Oyama   Chief Operating Officer for Parts Operations

Director

  Suguru Kanazawa   Senior Managing Director of Honda R&D Co., Ltd.
        President and Director of Honda Racing Corporation

Director

  Manabu Nishimae   Deputy Chief Operating Officer for Regional Sales Operations (Japan)
        General Manager of Automobile Sales Operations for Regional Sales Operations (Japan)

Director

  Fumihiko Ike   Chief Operating Officer for Power Products Operations

Director

  Masaya Yamashita   General Manager of Automobile Purchasing Division 1 in Purchasing Operations

Director

  Hiroshi Kobayashi   President and Director of Honda Canada Inc.

Director

  Kazuo Sagawa   General Manager of Saitama Factory of Production Operations

Director

  Kazuto Iiyama   Executive Vice President and Director of Honda Motor Europe Ltd.
        President and Director of Honda of the U.K. Manufacturing Ltd.

Director

  Hiroshi Oshima   Corporate Communications, Motor Sports
        General Manager of Corporate Communications Division in Business Support Operations

Director

  Sho Minekawa   President of Guangzhou Honda Automobile Co., Ltd.

 

(Note) Mr. Satoru Kishi is an outside director, as set forth in Article 188, Paragraph 2, Item 7-2 of the Japanese Commercial Code.

Corporate Auditor (full-time)

  Hiroshi Okubo    

Corporate Auditor (full-time)

  Koji Miyajima    

Corporate Auditor

  Koukei Higuchi   Advisor of the Tokio Marine and Fire Insurance Co., Ltd.

Corporate Auditor

  Kuniyasu Yamada   President of MTB Apple Planning Co., Ltd.

Corporate Auditor

  Fumihiko Saito   Attorney-at-law of Haarmann Hemmelrath Saito Law Office

 

(Note) Corporate Auditors Mr. Koukei Higuchi, Mr. Kuniyasu Yamada and Mr. Fumihiko Saito are outside corporate auditors as provided in Article 18, Section 1, of the Law for Special Exceptions to the Japanese Commercial Code Concerning Audits, etc., of Kabushiki Kaisha.

 

(As of June 23, 2004)

 

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Honda’s HISTORY

 

1946   • Soichiro Honda establishes Honda Technical Research Institute
1947   • Honda’s first product, the A-type bicycle engine, produced
1948   • Honda Motor Co., Ltd., incorporated (capital: one million yen)
1949   • Dream D-type (two-stroke, 98cc), Honda’s first motorcycle, produced
1952   • Head office moved to Tokyo
1957   • Listed on the Tokyo Stock Exchange
1958   • Super Cub motorcycle released
1959   • American Honda Motor Co., Inc., established
    • Honda racing team participates in the Isle of Man TT Race, taking sixth place in the 125cc class
1960   • Motorcycle production begins at Suzuka Factory
    • Honda R&D Co., Ltd., established
1961   • Honda racing team sweeps first five places in Isle of Man TT Race (125cc, 250cc)
1962   • American Depositary Receipts (ADRs) issued at market price Adopted consolidated accounting using U.S. Securities and
   Exchange Commission (SEC) standards
    • Construction of Suzuka Circuit completed
1963   • Honda Benelux N.V. (Belgium) begins production of motorcycles
    • Honda’s first sports car (S500) and light truck (T360) released
1964   • Automobile production begins at Saitama Factory, Sayama
1965   • Thai Honda Mfg. Co., Ltd. (Bangkok) established
    • Honda U.K. Ltd., established in London
    • E300 portable generator introduced
    • Honda wins its first F1 victory, in Mexico
1966   • S800 sales and export commenced
1967   • Motorcycle production begins in Thailand
    • Automobile production begins at Suzuka Factory
1968   • Cumulative motorcycle production reaches 10 million units
1969   • Automobile and motorcycle production commenced in Malaysia
    • Cumulative domestic power product production reaches one million units
1971   • Knockdown motorcycle production begins in Mexico
1972   • Details of CVCC low-emission engine system announced
    • CVCC engine complies with the U.S. Muskie Act of 1975 Civic released
1973   • Motorcycle production begins in the Philippines
1974   • Motorcycle production begins in Indonesia
1975   • Automobile production begins in Indonesia
1976   • Kumamoto Factory inaugurated
    • Motorcycle production begins at Honda Italia Industriale S.p.A.
    • Accord CVCC (1,600cc) introduced
    • Civic series cumulative production reaches one million units
1977   • ADRs listed on the New York Stock Exchange (NYSE)
    • Consolidated financial disclosure commenced
    • Motorcycle production begins at Moto Honda da Amazonia Ltda., in Manaus, Brazil
1979   • Quarterly financial disclosure commenced
    • Honda of America Mfg., Inc., begins motorcycle production
1980   • Cumulative Accord production reaches one million units
1981   • Listed on the London Stock Exchange
    • Cumulative power products production reaches five million units
1982   • Honda of America Mfg., Inc., begins automobile production
1983   • Listed on the Zurich, Geneva and Basel stock exchanges
    • Honda signs joint development agreement with Rover Group Ltd.
1984   • Automobile production commenced in Thailand
    • Cumulative motorcycle production in Belgium reaches one million units
1985   • Listed on the Paris Stock Exchange
    • Motorcycle engine production begins in the U.S.
    • Motorcycle production commenced in India
    • Motorcycle engine production commenced in Malaysia
    • Cumulative power products production reaches 10 million units
1986   • Automobile production begins at Honda Canada Inc.
    • Motorcycle production commenced in Spain
    • Power products production commenced in France
1987   • Cumulative motorcycle production in Brazil reaches one million units
    • Cumulative domestic motorcycle production reaches 50 million units, a world first
    • Cumulative Civic production reaches five millions units
1988   • Motorcycle production begins in Mexico
    • Automobile production begins at Honda New Zealand
    • Cumulative automobile production reaches 15 million units
    • High-performance VTEC engine announced
1989   • Second automobile plant in the U.S. begins production in East Liberty, Ohio
    • Honda Motor Europe Ltd. (U.K.) established
    • Cumulative power products production reaches 15 million units
1991   • Honda posts its 60th Grand Prix victory in the Brazil GP
1992   • Automobile production in the U.K. begins
    • Cumulative Super Cub production reaches 20 million units, a world record
    • Cumulative automobile production reaches 20 million units
    • Cumulative power products production reaches 20 million units
1993   • Honda’s power product engines meet California emission regulations, a world first
1994   • Automobile production commenced in the Philippines
    • Automobile production commenced in Pakistan
    • New automobile plant constructed in Thailand
1995   • Honda introduced first gasoline-powered vehicle to meet ULEV (Ultra Low Emission Vehicle) standards
    • Cumulative world production for the Civic reaches 10 million units
    • Cumulative automobile production in North America reaches five million units
    • Cumulative automobile production reaches 30 million units
    • Automobile production begins in Mexico
1996   • Motorcycle production begins in Turkey
    • Step Wagon released
    • Human robot prototype announced
1997   • ISO 14001 certification achieved for Hamamatsu Factory and Tochigi Factory
    • Automobile production begins in Brazil
    • Automobile production begins in Turkey
    • ISO 14001 certification achieved for Belgium auto parts plant
    • Motorcycle production commenced in Vietnam
    • Cumulative motorcycle production reaches 100 million units
    • Construction of Twin Ring Motegi completed
1998   • 50th anniversary
    • Cumulative automobile production reaches seven million units in North America
    • Automobile production commenced in India
1999   • Automobile production commenced at Guangzhou Honda Automobile Co., Ltd., in China
    • Fuel cell vehicle FCX-V1 and FCX-V2 announced
2000   • Cumulative Accord production in the U.S. reaches 5 million units
    • FCX-V3 fuel cell vehicle announced
    • ASIMO humanoid robot announced
2001   • Honda Headquarters achieves ISO 14001 environmental management certification
    • Cumulative total of automobiles manufactured in North America reaches 10 million
    • Production begins at new motorcycle production company in India
    • New small car, the Fit, released
    • FCX-V4 fuel cell vehicle announced
    • Minimum investment unit lowered to 100 shares, from 1,000
    • Second automobile plant in the U.K. commenced operations
    • New automobile plant in the U.S., Honda Manufacturing of Alabama, LLC, commenced operations
2002   • Common stock-to-ADR exchange ratio changed from two shares of common stock to one ADR, to one share of common
   stock to two ADRs
    • Celebrated 25th anniversary of listing on the NYSE; ASIMO rang the opening bell for trading
    • Government certification to the passenger car plant in China exclusively for export
    • Honda FCX fuel cell vehicle delivered both in Japan and the U.S
2003   • Cumulative automobile production in the United Kingdom reaches one million units
    • New automobile plant in Taiwan commenced operations
    • New automobile plant in Malaysia commenced operations
    • New automobile plant in Indonesia commenced operations
2004   • Honda FC Stack, a next-generation fuel cell stack capable of cold-starts and operation at temperatures as low as minus 20ºC,
   developed
    • Cumulative automobile production in the United States reaches ten million units
    • Cumulative automobile production in Canada reaches three million units
    • Production capacity at Guangzhou Honda Automobile Co., Ltd., in China, expanded to 240 thousand units
    • Production of CR-V commences at Dongfeng Honda Automobile (Wuhan) Co., Ltd., in China
    • Second line at Alabama plant in the United States commences operations
    • Cumulative automobile production at Ohio plant in the United States reaches ten million units

 

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Financial Section

 

CONTENTS

 

36   Financial Summary
38   Financial Review
52   Consolidated Balance Sheets
54   Consolidated Statements of Income
55   Consolidated Statements of Stockholders’ Equity
56   Consolidated Statements of Cash Flows
57   Notes to Consolidated Financial Statements
82   Report of Independent Registered Public Accounting Firm
83   Selected Quarterly Financial Data (Unaudited and Not Reviewed)
83   Net Sales and Operating Income by Business Segment

 

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FINANCIAL SUMMARY

 

Honda Motor Co., Ltd. and Subsidiaries

Years ended or at March 31

 

                                                  
     1994

    1995

    1996

    1997

    1998

    1999

 

Sales, income, and dividends

                                                

Net sales and other operating revenue

   ¥ 3,862,716     ¥ 3,966,164     ¥ 4,252,250     ¥ 5,293,302     ¥ 5,999,738     ¥ 6,231,041  

Operating income

     75,834       106,936       138,741       397,238       456,852       540,978  

Income before income taxes and equity in income of affiliates

     46,890       94,287       115,134       390,722       443,351       520,511  

Income taxes

     33,719       44,904       58,281       189,044       201,278       229,624  

Equity in income of affiliates

     10,528       12,142       13,948       19,490       18,552       14,158  

Net income

     23,699       61,525       70,801       221,168       260,625       305,045  

As percentage of sales

     0.6 %     1.6 %     1.7 %     4.2 %     4.3 %     4.9 %

Cash dividends paid during the period

     13,631       13,635       13,638       13,640       16,563       20,463  

Research and development

     188,815       203,004       220,573       251,128       285,863       311,632  

Interest expense

     35,379       34,382       30,601       27,514       27,655       27,890  

Assets, long-term debt, and stockholders’ equity

                                                

Total assets

   ¥ 2,921,084     ¥ 3,014,410     ¥ 3,516,113     ¥ 4,191,294     ¥ 4,815,265     ¥ 5,034,247  

Long-term debt

     612,511       589,537       656,461       734,255       677,750       673,084  

Total stockholders’ equity

     967,345       1,017,462       1,144,540       1,388,430       1,607,914       1,763,855  

Depreciation

     143,229       125,115       125,007       141,351       153,337       177,666  

Capital expenditures

     121,838       128,644       150,489       217,782       309,517       237,080  

Per common share

                                                

Net income:

                                                

Basic

   ¥ 24.34     ¥ 63.16     ¥ 72.68     ¥ 227.00     ¥ 267.49     ¥ 313.05  

Diluted

     24.28       63.00       72.63       226.97       267.45       313.05  

Cash dividends paid during the period

     14       14       14       14       17       21  

Stockholders’ equity

     993.47       1,044.44       1,174.73       1,425.04       1,650.14       1,810.20  

Per American share

                                                

Net income:

                                                

Basic

     12.17       31.58       36.34       113.50       133.74       156.52  

Diluted

     12.14       31.50       36.31       113.48       133.72       156.52  

Cash dividends paid during the period

     7.0       7.0       7.0       7.0       8.5       10.5  

Stockholders’ equity

     496.73       522.22       587.36       712.52       825.07       905.10  

Sales progress

                                                

Sales amounts:*

                                                

Japan

   ¥ 1,282,771     ¥ 1,326,487     ¥ 1,540,463     ¥ 1,826,284     ¥ 1,710,813     ¥ 1,556,333  
       33 %     33 %     36 %     35 %     29 %     25 %

Overseas

     2,579,945       2,639,677       2,711,787       3,467,018       4,288,925       4,674,708  
       67 %     67 %     64 %     65 %     71 %     75 %

Total

   ¥ 3,862,716     ¥ 3,966,164     ¥ 4,252,250     ¥ 5,293,302     ¥ 5,999,738     ¥ 6,231,041  
       100 %     100 %     100 %     100 %     100 %     100 %

Unit sales:

                                                

Motorcycles

     4,251       4,910       5,488       5,325       5,257       4,295  

Automobiles

     1,753       1,794       1,887       2,184       2,343       2,333  

Power Products

     1,632       1,909       2,268       2,521       2,857       3,412  
    


 


 


 


 


 


Number of employees

     91,300       92,800       96,800       101,100       109,400       112,200  
    


 


 


 


 


 


Exchange rate (yen amounts per U.S. dollar)

                                                

Rates for the period-end

   ¥ 103     ¥ 89     ¥ 106     ¥ 124     ¥ 132     ¥ 121  

Average rates for the period

     108       99       96       113       123       128  

 

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Table of Contents
                           

Yen

(millions)


    U.S. dollars
(millions)


    2000

    2001

    2002

    2003

    2004

    2004

Sales, income, and dividends

                                             

Net sales and other operating revenue

  ¥ 6,098,840     ¥ 6,463,830     ¥ 7,362,438     ¥ 7,971,499     ¥ 8,162,600     $ 77,232

Operating income

    418,639       401,438       661,202       724,527       600,144       5,678

Income before income taxes and equity in income of affiliates

    416,063       384,976       551,342       609,755       641,927       6,073

Income taxes

    170,434       178,439       231,150       245,065       252,740       2,391

Equity in income of affiliates

    16,786       25,704       42,515       61,972       75,151       711

Net income

    262,415       232,241       362,707       426,662       464,338       4,393

As percentage of sales

    4.3 %     3.6 %     4.9 %     5.4 %     5.7 %      

Cash dividends paid during the period

    20,463       22,412       24,360       30,176       33,541       317

Research and development

    334,036       352,829       395,176       436,863       448,967       4,248

Interest expense

    18,920       21,400       16,769       12,207       10,194       96

Assets, long-term debt, and stockholders’ equity

                                             

Total assets

  ¥ 4,898,428     ¥ 5,667,409     ¥ 6,940,795     ¥ 7,681,291     ¥ 8,328,768     $ 78,804

Long-term debt

    574,566       368,173       716,614       1,140,182       1,394,612       13,195

Total stockholders’ equity

    1,930,373       2,230,291       2,573,941       2,629,720       2,874,400       27,197

Depreciation

    172,139       170,342       194,944       220,874       213,445       2,020

Capital expenditures

    222,891       285,687       303,424       316,991       287,741       2,722
                            Yen

    U.S. dollars

Per common share

                                             

Net income:

                                             

Basic

  ¥ 269.31     ¥ 238.34     ¥ 372.23     ¥ 439.43     ¥ 486.91     $ 4.61

Diluted

    269.31       238.34       372.23       439.43       486.91       4.61

Cash dividends paid during the period

    21       23       25       31       35       0.33

Stockholders’ equity

    1,981.07       2,288.87       2,641.55       2,734.69       3,054.90       28.90

Per American share

                                             

Net income:

                                             

Basic

    134.65       119.17       186.11       219.71       243.45       2.30

Diluted

    134.65       119.17       186.11       219.71       243.45       2.30

Cash dividends paid during the period

    10.5       11.5       12.5       15.5       17.5       0.16

Stockholders’ equity

    990.53       1,144.43       1,320.77       1,367.34       1,527.45       14.45
                           

Yen

(millions)


    U.S. dollars
(millions)


Sales progress

                                             

Sales amounts:*

                                             

Japan

  ¥ 1,612,191     ¥ 1,740,340     ¥ 1,868,746     ¥ 1,748,706     ¥ 1,628,493     $ 15,408
      26 %     27 %     25 %     22 %     20 %      

Overseas

    4,486,649       4,723,490       5,493,692       6,222,793       6,534,107       61,824
      74 %     73 %     75 %     78 %     80 %      

Total

  ¥ 6,098,840     ¥ 6,463,830     ¥ 7,362,438     ¥ 7,971,499       8,162,600       77,232
      100 %     100 %     100 %     100 %     100 %      
                            Thousands

     

Unit sales:

                                             

Motorcycles

    4,436       5,118       6,095       8,080       9,206        

Automobiles

    2,473       2,580       2,666       2,888       2,983        

Power Products

    4,057       3,884       3,926       4,584       5,407        
   


 


 


 


 


     

Number of employees

    112,400       114,300       120,600       126,900       131,600        
   


 


 


 


 


     

Exchange rate (yen amounts per U.S. dollar)

                                             

Rates for the period-end

  ¥ 106     ¥ 124     ¥ 133     ¥ 120     ¥ 106        

Average rates for the period

    112       111       125       122       113        

Notes:

(1) The amounts for the fiscal year ended March 31, 2004, have been translated into U.S. dollars at the rate of ¥105.69=US$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on March 31, 2004.
(2) Net income per common (or American) share amounts are computed based on Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share.” All net income per common (or American) share data presented prior to fiscal 1998 has been restated to conform with the provisions of SFAS No. 128.
(3) Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Net unrealized gains on marketable equity securities, less related income taxes, are included in accumulated other comprehensive income (loss) in the statements of stockholders’ equity, and net income for the fiscal year ended March 31, 1995, was not affected by the adoption of this Statement.
(4) Effective fiscal 2000, due to the change in method of business segment categorization, all prior years’ unit sales under Sales progress have been restated to reflect the change: i.e., unit sales of all-terrain vehicles (ATVs) are now included in Motorcycles, but were previously included in Power Products.
(5) Previously, revenue from domestic sales of general-purpose engines to customers who install them in products that are subsequently exported were recorded as overseas sales. However, owing to various factors including changes in transaction formats and contract terms, as of fiscal 2002, such sales are now recorded as domestic sales. The sales amount from such sales for fiscal 2002 amounted to ¥5,468 million.
(6) Honda’s common stock-to-ADR exchange ratio was changed from two shares of common stock to one ADR, to one share of common stock to two ADRs, effective January 10, 2002. Per American share information has been restated for all periods presented to reflect this four-for-one ADR split.
(7) Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the presentation used for the year ended March 31, 2004. Certain gains and losses on sale and disposal of property, plant and equipment, which were previously recorded in other income (expenses), have been reclassified to selling, general and administrative expenses in the year ended March 31, 2004. In addition, net realized gains and losses on interest rate swap contracts not designated as accounting hedges by finance subsidiaries, which were previously recorded in cost of sales, have been reclassified to and included in other income (expenses)—other.

 

 * The geographic breakdown of sales amounts is based on the location of customers.

 

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FINANCIAL REVIEW

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter “net sales”) for fiscal 2004, ended March 31, 2004, amounted to ¥8,162.6 billion, up 2.4% from the previous fiscal year.

 

Of this amount, domestic net sales decreased by ¥120.2 billion, or 6.9%, to ¥1,628.4 billion, while overseas net sales increased by ¥311.3 billion, or 5.0% to ¥6,534.1 billion.

 

Operating Income

 

Operating income amounted to ¥600.1 billion, which was a decrease of 17.2% from the previous fiscal year.

 

This decrease was primarily due to negative impacts of the depreciation of the U.S. dollar against the yen and an increase in selling, general and administrative expenses, which offset positive impacts of increased revenue from increased unit sales and ongoing cost reduction effects.

 

Selling, General and Administrative Expenses/Research and Development Expenses

 

SG&A expenses for fiscal 2004 increased by ¥57.7 billion, or 4.0%, to ¥1,503.6 billion, reflecting increases in labor expenses, product warranty-related expenses and reserves with respect to our finance business in connection with growing unit sales in North America.

 

R&D expenses increased by ¥12.1 billion or 2.8%, to ¥448.9 billion.

 

Income before Income Taxes and Equity in Income of Affiliates

 

Income before Income Taxes and Equity in Income of Affiliates was up 5.3%, to ¥641.9 billion.

 

Other income & expenses, net improved by ¥156.5 billion from the previous fiscal year, due mainly to a decline in losses on derivative instruments and a decline in losses on impairment losses on available for sale marketable equity securities.

 

Equity in Income of Affiliates

 

Equity in income of affiliates increased 21.3%, to ¥75.1 billion, over the prior fiscal year. This increase was due mainly to increases in the results of affiliates in Asia.

 

Net Income

 

Net income amounted to ¥464.3 billion, an increase of 8.8%. The effective tax rate was 39.4%, a decline by 0.8 percentage points from the previous fiscal year.

 

Basic net income per common share amounted to ¥486.91, compared with ¥439.43 in fiscal 2003.

 

Liquidity and Capital Resources

 

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

 

Honda’s main business is the manufacture 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 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 upgrade, rationalize and renew production facilities, as well as to expand and reinforce research and development and sales facilities.

 

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 and commercial paper, as well as securitization of finance receivables.

 

 

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Table of Contents

Cash Flows

 

Consolidated cash and cash equivalents at end of year amounted to ¥724.4 billion as of March 31, 2004, up ¥177.0 billion from a year earlier.

 

Year-end cash and cash equivalents of business subsidiaries increased as net income, depreciation and other items sufficiently compensated for purchases of production-related property and equipment, as well as funds required for investments in Asian affiliates. Year-end cash and cash equivalents of finance subsidiaries, however, remained largely unchanged.

 

Net cash provided by operating activities amounted to ¥712.9 billion. Factors increasing cash flows included ¥464.3 billion in net income, ¥213.4 billion in depreciation and a ¥132.5 billion increase in trade payables related to Japanese and North American operations. By contrast, there was a ¥84.7 billion devaluation loss on derivative instruments and related others, which have no relation to cash flows.

 

Net cash used in investing activities totaled ¥967.4 billion. This was mainly due to a ¥749.4 billion increase in finance subsidiaries’ receivables associated with higher sales of automobiles in North America and elsewhere, as well as ¥287.7 billion in purchases of property, plant and equipment to upgrade, streamline and renew production facilities in North America and Asia. These factors outweighed ¥50.6 billion, including dividends from affiliates.

 

Net cash provided by financing activities was ¥459.5 billion. During the year, Honda raised ¥885.1 billion in long-term debt through the issue of bonds and medium-term notes, to meet capital requirements associated with an increase in liabilities of finance subsidiaries, as well as to repay ¥289.1 billion in long-term debt. By contrast, Honda also made ¥95.3 billion in payments for purchase of treasury stock and ¥33.5 billion in cash dividends paid.

 

The ¥724.4 billion in cash and cash equivalents at end of year corresponds to approximately one 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, financial subsidiaries carry total short-term borrowings of ¥1,170.5 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 ¥674.4 billion. In addition, Honda currently has ample credit limits, extended by prominent international banks, that are not subject to contracts.

 

Honda’s short- and long-term debt securities are rated by credit rating agencies, such as Moody’s Investors Service, Inc., and Standard & Poor’s Rating Services. Major current ratings, which are shown below, indicate that 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 at the date of filing of this annual report.

 

     Short-term
unsecured
debt securities


   Long-term
unsecured
debt securities


Moody’s Investors Service

   P-1    A1

Standard & Poors Rating Services

   A-1    A+

 

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.

 

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, 2004, we had guarantees of approximately ¥77.4 billion of bank loans of employees 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 approximately ¥77.4 billion. As of March 31, 2004, 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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Table of Contents

Tabular Disclosure of Contractual Obligations

 

The following table shows our contractual obligations at March 31, 2004:

 

     (Millions of yen)

     Payments due by period

     Total

   Less than
1 year


   1-3 years

   3-5 years

         5 years      

Long-term debt

   1,881,737      487,125    1,010,203      377,142    7,267

Operating leases

   94,911    24,350    27,549    12,341    30,671

Purchase commitments

   29,707    29,707    —      —      —  
(*) Honda had commitments for purchases of property, plant and equipment at March 31, 2004.

 

At March 31, 2004, 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.

 

Capital Expenditures

 

Manufacturing-related expenditures in fiscal 2004 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 ¥287,741 million, down ¥29,250 million from the previous year. Spending by business segment is shown below.

 

     (Millions of yen)

Fiscal year ended March 31


   2003

   2004

Motorcycle Business

   ¥ 37,496    ¥ 35,041

Automobile Business

     270,263      240,416

Financial Services

     646      430

Power Products and Other Businesses

     8,586      11,854
    

  

Total

   ¥ 316,991    ¥ 287,741
    

  

 

In the motorcycle business, we invested ¥35,041 million to upgrade, modernize and rationalize various facilities in the fiscal year ended March 31, 2004. This included investments in reforming our production organization.

 

In the automobile business, we made capital investments associated with introducing new models and reforming our production organization. We also constructed a second production line at Honda Manufacturing of Alabama, LLC, where we manufacture finished vehicles and engines. Capital investments in this segment totaled ¥240,416 million in the fiscal year ended March 31, 2004.

 

In the financial services segment, capital expenditures amounted to ¥430 million in the fiscal year ended March 31, 2004. Capital investments in power products and other businesses, totaling ¥11,854 million in the fiscal year ended March 31, 2004 were deployed to upgrade and modernize manufacturing facilities for power products and renovate facilities related to motor sports.

 

The Company did not sell or dispose of any major facilities in the fiscal year ended March 31, 2004.

 

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Research and Development

 

The aim of the Honda Group’s research and development activities is to create original and internationally competitive products using advanced technologies. To this end, research and development activities is mainly conducted by subsidiaries managed with a high degree of independence, in which engineers can approach their tasks with greater independence.

 

Product-related research and development is spearheaded by the Honda Research Institute in Japan, Honda R&D Americas, Inc., in the United States and Honda R&D Europe (Deutschland) GmbH in Germany. All three entities work in close association with customers and business operations of their respective regions. Similarly, research and development with respect to production technologies, carried out mainly at Honda Engineering Co., Ltd., in Japan and Honda Engineering North America, Inc., is also working in close association with customers and business operations at local levels.

 

Total research and development expenditures for fiscal year ended March 31, 2004 amounted to ¥448,967 million. Research and development activities for each business segment are outlined below.

 

R&D Activities

 

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 technologies that lead the industry in addressing safety and environmental issues.

 

Major fiscal 2004 achievements in research and development activities in Japan include the release of the Smart Dio Z4. This scooter is equipped with the world’s first electronically controlled programmed fuel injection (PGM-FI) system for use in a four-stroke 50cc engine and features enhanced start-up performance and response, as well as improved fuel economy and cleaner exhaust emissions. Also released in Japan was the Spacy 100, a scooter manufactured in China with a highly reliable four-stroke 100cc engine and air injection (secondary air supply) system that reduces pollutant gases in emissions.

 

In North America, we released the FourTrax Rancher AT, a 400cc four-wheel-drive ATV equipped with Honda’s proprietary automatic transmission. In Europe, we began sales of the CBF600, a sports bike fitted with an antilock braking system, as well as the CBR1000RR, which incorporates advanced technology and new styling developed originally for Honda’s racing motorcycles. The CBR1000RR is a super sports model featuring an electronically controlled steering damper that optimizes dampening characteristics in accordance with riding speed and acceleration. In India, we began sales of the Eterno, a scooter with a wheel-side engine combining the engine and drive system in one unit, providing a compact design and excellent fuel economy.

 

Research and development expenses in the Motorcycle Business Segment in fiscal 2004 totaled ¥73,094 million.

 

Automobile Business

 

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

 

Major achievements in Japan in fiscal 2004 include the development of the world’s first Collision Mitigation Brake System (CMS). This innovative system determines the likelihood of a collision based on distance to the vehicle ahead and relative speeds, warns the driver to take preventive action and initiates braking to reduce the vehicle’s speed. We also developed the E-Pretensioner, a seatbelt retraction mechanism that gently tightens seatbelts when a collision is likely, and also increases seatbelt tension to hold the driver more securely in place when a collision is deemed unavoidable. The E-Pretensioner and the CMS were installed in the Inspire and the Odyssey, both of which underwent a full model change. The new Inspire is also equipped with Honda’s new V6 3.0-liter engine with a variable cylinder system that improves fuel economy by varying the number of cylinders employed depending on driving conditions. Another development was a crash-compatibility body frame structure, designed to provide both improved self-protection and reduced aggressivity toward other vehicles during a vehicle-to-vehicle collision; this technology was also installed in the newly remodeled Life and Odyssey models. The new Odyssey also features a low floor platform, providing a more spacious interior than the previous model while reducing the vehicle’s roofline and offering powerful and sporty performance.

 

In North America, Honda released the all-new Acura TSX sports sedan, featuring a six-speed manual transmission. The Acura TL, newly remodeled luxury performance sedan is equipped with a new V6 3.2-liter engine that provides high performance yet meets California’s strict LEV-2 ULEV exhaust emission regulations. In Europe, we began sales of the diesel-powered Accord with a lightweight and compact engine that meets Euro 4 emissions gas regulations thanks to highly intelligent combustion control technology and Honda’s proprietary aluminum block manufacturing technology.

 

With respect to fuel cell vehicles, public road tests of the Honda FCX were held in Hokkaido, where the vehicle’s driving performance and ability to start in sub-zero temperatures were proved. The FCX is equipped with the Honda FC STACK, a next-generation fuel cell stack that is considerably smaller than earlier Honda prototype units, but with greatly increased output and possessing the ability to start at 20 degrees below freezing.

 

Research and development expenses in the Automobile Business Segment in fiscal 2004 totaled ¥364,334 million.

 

Power Products and Other Businesses

 

In the Power Products Business, we seek to develop products that meet customer’s lifestyles and needs while strengthening our lineup of products that address environmental issues.

 

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We began sales of two new four-stroke outboard engines, the BF150 and the BF135, around the world. Both engines provide outstanding performance and meet emission regulations for 2008 set by the California Air Resources Board owing to Honda’s first ever lean-burn control system. We also began sales of the new GX35, a four-stroke engine with Honda’s original oil lubrication system that allows operation in any position. The GX35 was installed in the new UMK435 brushcutter, which began sales in the Japanese and European markets after undergoing a full model change. In India, we began sales of two low-noise generators, the EXK2800 and the EXK2800S. These generators meet the most stringent noise regulations in the world as a result of a noise dampening design with a three-chamber structure for the alternator (generator) and engine.

 

Research and development expenses in this segment in fiscal 2004 amounted to ¥11,539 million.

 

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

 

Major recent research projects include the test operation of a new hydrogen supply system as part of our development of fuel cell technology. In addition to extracting hydrogen from natural gas for delivery to fuel cell vehicles, the system also supplies heat and electricity. We have installed the system at the Los Angeles research facility of Honda R&D Americas and are conducting trials for supplying electricity to the facility while providing hydrogen to the Honda FCX.

 

Another in-house development, a new electrolysis unit that generates hydrogen from water, we believe is the most efficient electrolysis unit in the world. It has been incorporated in a solar-powered water electrolyzing hydrogen station, which has undergone trial operation at the Los Angeles facility since 2001. Advanced thin-film solar panels made by Honda Engineering have also been installed at the facility. The results are enhanced hydrogen production efficiency and lower amounts of energy consumed during the manufacture of hydrogen devices. Honda plans to continue with its tests in hydrogen production adopting these two methods, and to engage in research into hydrogen supply stations.

 

In the area of small aircraft, Honda has developed the HF118 Turbofan Engine, which is both lightweight and fuel-efficient. The engine has been mounted on the HondaJet, an experimental compact business jet that commenced test flights in the United States in December 2003.

 

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

 

On March 31, 2004, Honda owned more than 8,900 patents and 600 utility model registrations in Japan and more than 13,000 patents abroad. Honda also had applications pending for more than 19,600 patents in Japan and for more than 15,500 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.

 

Segment Information

 

Business segments

 

Motorcycles

 

In fiscal 2004, domestic units sales of motorcycles fell 6.7%, to 403,000 units. Overseas unit sales, by contrast, rose 15.1%, to 8,803,000 units. As a result, total unit sales of motorcycles amounted to 9,206,000 units, up 13.9%. Net sales in the motorcycle segment increased 1.9%, to ¥996.2 billion, due mainly to higher unit sales, which compensated for negative currency translation effects. Operating income, however, declined 25.9%, to ¥42.4 billion.

 

Automobiles

 

Domestic unit sales of automobiles in fiscal 2004 fell 15.7%, to 716,000 units, while overseas unit sales climbed 11.2%, to 2,267,000 units. Consequently, total unit sales of automobiles grew 3.3%, to 2,983,000 units, compared to the prior fiscal year. Net sales in this segment increased 2.4%, to ¥6,592.0 billion, thanks to increased unit sales overseas, which outweighed negative currency translation effects. Operating income fell 20.4%, to ¥438.8 billion.

 

Financial Services

 

Net sales from Honda’s financial services business rose 2.0%, to ¥245.8 billion, compared to the prior fiscal year. Operating income edged up 0.6%, to ¥108.4 billion.

 

Power Products and Other Businesses

 

Domestic unit sales of power products grew 1.1%, to 477,000 units. Overseas unit sales climbed 11.1%, to 4,570,000 units. Accordingly, total unit sales of power products rose 10.1%, to 5,047,000 units, compared to the prior fiscal year.

 

Net sales from power products and other businesses increased 4.7%, to ¥341.6 billion, due mainly to higher unit sales of power products. Operating income increased 28.3%, to ¥10.3 billion.

 

Geographical segments

 

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

 

Japan

 

Despite a decline in domestic sales of automobiles, net sales in Japan remained largely unchanged, at ¥3,930.8 billion, owing mainly to an increase in automobile exports. Domestic operating income also remained relatively unchanged, at ¥192.4 billion.

 

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North America

 

Net sales in North America edged down 0.8%, to ¥4,673.0 billion, due mainly to negative currency translation effects, which offset increased unit sales of motorcycles, automobiles and power products. Operating income dropped 30.2%, to ¥310.1 billion over the prior fiscal year.

 

Europe

 

Increased units sales of automobiles, together with positive currency translation effects, boosted net sales in Europe 15.0%, to ¥948.5 billion. Operating income increased 78.3%, to ¥25.8 billion over the prior fiscal year.

 

Asia

 

Net sales in Asia increased 34.6%, to ¥704.1 billion, as increased unit sales of motorcycles and automobiles compensated for negative currency translation effects. Operating income rose 18.2%, to ¥44.6 billion over the prior fiscal year.

 

Other Regions

 

Higher unit sales of motorcycles, automobiles and power products led to a 26.9% rise in net sales in other regions, to ¥348.2 billion over the prior fiscal year. Operating income was up 2.5%, to ¥23.7 billion over the prior fiscal year.

 

Application of Critical Accounting Policies

 

Critical accounting policies are those that require the application of our most difficult, subjective or complex judgments, often requiring us to make estimates about the effect of matters that are inherently uncertain and 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 consolidated financial statements. We have identified the following critical accounting policies with respect to our financial presentation.

 

Product Warranty

 

We warrant our product for specific periods of time. Product warranties vary depending upon the nature of the product, the geographic location of its sales and other factors. Our warranty expense accruals are costs for general warranties on products we sell, product recalls and service actions outside the general warranties. We provide for estimated warranty expenses at the time products are sold to customers or new warranty programs are initiated. Estimated warranty expenses 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. As the manufacturing suppliers typically warrant these parts, expected receivables from warranties of these suppliers are deducted from our estimates of warranty expense accruals.

 

We believe that the accounting estimate related to warranty expense accruals is a “critical accounting estimate” because changes in it can materially affect net income, and it requires us to estimate the frequency and amounts of future claims, which are inherently uncertain.

 

Our policy is to continuously monitor warranty expense accruals to determine their adequacy. Therefore, warranty expense accruals are maintained at an amount we deem adequate to cover estimated warranty expense.

 

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

 

Allowance for 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.

 

An allowance for credit losses is maintained to cover estimated losses on finance subsidiaries-receivables. To determine the overall allowance amount, receivables are segmented into pools with common characteristics such as product and collateral types. 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 that the accounting estimate related to allowance for credit losses is a “critical accounting estimate” because it requires us to make assumptions about inherently uncertain items including 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 on our owned portfolio of finance receivables. Actual losses may differ from original estimate 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 an effect on the provision and allowance for credit losses. If we had experienced a 10% increase in net credit losses during fiscal 2004 in our North America portfolio, the provision for fiscal 2004 and the allowance balance at the end of fiscal 2004 would have increased by approximately ¥4.1 and ¥2.4 billion, respectively. Note that these sensitivities may be asymmetric, and are specific to the base condition in fiscal 2004.

 

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Additional narrative of the Change in provision for credit loss as below

 

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

 

     (Billions of yen)

 
     2002

    2003

    2004

 

Charge-offs (net of recoveries)

   ¥ 7.4     ¥ 13.2     ¥ 16.2  

Provision for credit losses

     13.3       21.9       28.8  

Allowance for credit losses

     11.6       16.6       23.7  

Ending receivable balance

     2,500.6       3,051.0       3,301.5  

Average receivable balance

     2,075.8       2,692.0       3,201.0  

Charge-offs as a % of average receivable balance

     0.36 %     0.49 %     0.51 %

Allowance as a % of ending receivable balance

     0.47 %     0.55 %     0.72 %

 

Fiscal Year 2004 Compared with Fiscal Year 2003

 

Net charge-offs in our North America portfolio increased by ¥3.0 billion, or 23%, primarily due to the increase in the size of our owned portfolio of finance receivables, continued economic weakness contributing to increased customer defaults, and continued weakness in used car markets reducing recoveries from sales of repossessed vehicles.

 

However, charge-offs as a percentage of average receivables remained consistent with the previous fiscal year, increasing by only 0.02%.

 

This can be attributed to the growth in receivables in the current fiscal year, which reduced this percentage.

 

The provision for credit losses in our North America portfolio increased by ¥6.8 billion, or 31%, due to increased charge-offs and the increase in the allowance balance.

 

The allowance in our North America portfolio was increased by ¥7.0 billion, or 42%, primarily due to an increase in Finance receivables, as well as an increase in our estimate of probable credit losses in the portfolio.

 

We expect charge-offs to increase due recent growth in new loan contracts.

 

Historically, the majority of customer defaults occur when loans are between one-half to one year old. As a result of recent growth in new loan contracts, charge-offs were estimated to increase accordingly in one-half to one year. Therefore, we estimated the allowance as a percentage of the amount of receivables as of March 31, 2004 to be 0.72%, which was 0.17% higher than for the fiscal year ended March 31, 2003.

 

Fiscal Year 2003 Compared with Fiscal Year 2002

 

Net charge-offs in our North America portfolio increased by ¥5.7 billion, or 77%.

 

The significant increase in charge-offs was due primarily to an increase in contract over the prior fiscal year, the weakening economy, and weakness in used car markets. However, charge-offs as a percentage of average finance receivables increased by 0.13% (from 0.36% to 0.49%).

 

This can be attributed to the growth in finance receivables in fiscal 2003, which reduced this percentage.

 

The provision for credit losses increased by ¥8.6 billion, or 65%, and the allowance increased by ¥5.0 billion, or 43%, due to an increase in finance receivables, increased charge-offs, and an increase in our estimate of probable credit losses in the portfolio.

 

Allowance for Losses on Lease Residual Values

 

End-customers of vehicles leased under a direct financing lease typically have an option to buy the leased vehicle from the car dealership (dealer) for the estimated residual value of the vehicle or to return the leased vehicle to the dealer at the end of the lease term. Likewise, dealers have the option to return the vehicle to our finance subsidiaries or to buy the leased vehicle at the end of the lease term from 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 and the residual value estimated at the time of inception of the lease.

 

Our finance subsidiaries initially determine the residual value of the leased vehicle by using our estimation of future used vehicle values, which take into consideration data gathered from third parties. Our finance subsidiaries recognize a loss on the excess of the actual residual value over the fair market value of a returned vehicle when the leased vehicle is returned to the finance subsidiary at the end of the lease term. Our finance subsidiaries purchase insurance to cover a portion of the estimated residual value at the end of the lease term of vehicles leased to customers under direct financing leases. An allowance for expected losses on lease residual values is maintained to cover estimated losses on the uninsured portion of the vehicles’ residual values.

 

We project two important components of losses in determining our allowance for losses on lease residual values: 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 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. 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 the accounting estimate related to allowance for 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.

 

The allowance is maintained at an amount we deem adequate to cover estimated losses on the uninsured portion of the vehicles’ lease residual values. Evaluating the adequacy of the allowance requires us to make assumptions of inherently uncertain factors, including changes in economic conditions. As a result, actual losses incurred may differ from original estimates.

 

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If future auction values for all Honda and Acura vehicles in our US lease portfolio as of March 31, 2004, were to decrease by approximately ¥10,000 per unit from our present estimates, the total impact would be an increase of our allowance for losses on residual value by about ¥1.6 billion, which would be charged to our provision for losses on residual values in the current year.

 

Similarly, if future return rates for our existing portfolio of Honda and Acura vehicles were to increase by one percentage point from our present estimates, the total impact would be to increase our allowance for losses on residual values by about ¥0.4 billion, which would be charged to our provision for losses on residual values in the current year.

 

Note that these sensitivities may be asymmetric, and are specific to the base conditions in fiscal 2004.

 

Pension and Other Postretirement Benefits

 

We have various pension plans covering substantially all of our employees in Japan and in certain foreign countries. Benefit obligations and pension costs are based on assumptions of many factors, including discount rate, rate of salary increase and 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, 2004 were 2.0% and 2.3%, respectively, and our assumed expected long-term rate of return for the year ended March 31, 2004 was 4.0% for Japanese plans. Our assumed discount rate and rate of salary increase as of March 31, 2004 were 5.8-6.8% and 4.3-6.7%, respectively, and our assumed expected long-term rate of return for fiscal 2004 was 6.8-8.5% for foreign plans.

 

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

 

Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expenses and recorded obligations in future periods.

 

We believe that the assumptions used are appropriate. However, differences in actual experience 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 on our funded status, equity and pension expense from a 0.5% change in the assumed discount rate and the expected long-term rate of return.

 

Japanese Plans              (Billions of yen)

Assumptions


   Percentage point change

   Funded status

   Equity

   Pension expense

Discount rate

   +0.5/-0.5    -137.6/+157.2    +69.3/-77.3    -8.4/+11.9

Expected long-term rate of return

   +0.5/-0.5    —      —      -4.0/+4.0
Foreign Plans                    

Assumptions


   Percentage point change

   Funded status

   Equity

   Pension expense

Discount rate

   +0.5/-0.5    -21.9/+23.1    +7.6/-7.1    -2.4/+3.3

Expected long-term rate of return

   +0.5/-0.5    —      —      -0.8/+0.8

 

(*1) Note that these sensitivities may be asymmetric, and are specific to the base conditions at March 31, 2004.
(*2) Funded status for fiscal 2004 is affected by March 31, 2004 assumptions.

Pension expense for fiscal 2004 is affected by March 31, 2003 assumptions.

 

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 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 Risk

 

Foreign currency forward 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.

 

The tables below provide information about our derivatives related to foreign exchange risk as of March 31, 2003 and 2004. For forward exchange contracts and currency options, the table presents the contract amount and fair value. All forward exchange contracts and currency options to which we are party have original maturities of less than one year.

 

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Table of Contents

Foreign Exchange Risk

 

     2003

   2004

     (Millions of yen)

   

Average

contractual
rate


   (Millions of yen)

   

Average

contractual
rate


     Contract
  amounts  


   Fair
value


       Contract
amounts


   Fair
value


   

Forward Exchange Contract

                                   

To sell US$

   ¥ 187,765    (1,650 )   119.96    ¥ 260,110     4,345     107.34

To sell EUR

     82,117    (2,613 )   127.92      67,123    2,176     132.80

To sell CAD

     33,616    (1,052 )   81.45      22,716    110     80.93

To sell GBP

     26,126    198     189.01      21,695    (13 )   191.70

To sell other foreign currencies

     22,532    (339 )   —        14,140    315     —  

To buy US$

     4,536    56     118.41      3,774    (74 )   107.62

To buy other foreign currencies

     64    (1 )   —        32    6     —  

Cross-currencies

     185,909    1,176     —        173,108    (437 )   —  
    

  

      

  

   

Total

   ¥ 542,665    (4,225 )        ¥ 562,698    6,428      
    

  

      

  

   

Currency Option

                                   

Option purchased to sell US$

   ¥ 141,001    1,257     —      ¥ 50,497    1,454     —  

Option written to sell US$

     141,879    (1,096 )   —        64,497    (192 )   —  

Option purchased to sell other currencies

     12,804    90     —        2,050    151     —  

Option written to sell other currencies

     21,744    (396 )   —        4,099    (10 )   —  

Option purchased to buy other currencies

     6,166    74     —        —      —       —  

Option written to buy other currencies

     6,166    (40 )   —        —      —       —  
    

  

      

  

   

Total

   ¥ 329,760    (111 )        ¥ 121,143    1,403      
    

  

      

  

   

 

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 swap agreements are mainly used to convert floating rate financing to (normally 3-5 years) 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, 2003 and 2004. For finance receivables and long-term debt, these tables present principal cash flows, fair value and related weighted average interest rates. For interest rate swaps and currency and interest rate swaps, the table presents notional amounts, fair value and weighted average interest rates. Variable interest rates are determined using formulas such as LIBOR+ a and an index at the fiscal year end.

 

Interest Rate Risk

 

Finance Subsidiaries-Receivables

 

    2003

  2004

 
    (Millions of yen)

  (Millions of yen)

  

Average

interest
rate


 
                Expected maturity date

  
    Total

 

Fair

value


  Total

 

Within

1-year


  1-2
years


  2-3
years


  3-4
years


  4-5
years


  Thereafter

 

Fair

value


  

Direct Finance Leases:

                                                  

JP¥

  ¥ 12,580   *   ¥ 22,817   13,357   4,892   2,801   1,181   584   2   *    5.90 %

US$

    1,495,739   *     1,454,460   460,147   390,696   402,437   201,161   19   —     *    5.03 %

Other

    193,128   *     244,439   74,845   58,389   58,946   51,886   329   44   *    6.23 %
   

 
 

 
 
 
 
 
 
 
  

Total—Direct Finance Leases

  ¥ 1,701,447   *   ¥ 1,721,716   548,349   453,977   464,184   254,228   932   46   *       
         
 

 
 
 
 
 
 
 
      

Other Finance Receivables:

                                                  

JP¥

  ¥ 336,198   304,648   ¥ 331,559   124,041   88,982   59,307   34,020   15,616   9,593   301,749    5.90 %

US$

    1,253,115   1,272,876     1,510,120   513,342   297,993   288,009   253,294   142,095   15,387   1,522,724    5.03 %

Other

    230,514   224,201     264,546   140,520   50,044   38,162   25,036   9,902   882   256,201    7.38 %
   

 
 

 
 
 
 
 
 
 
  

Total—Other Finance Receivables

  ¥ 1,819,827   1,801,725   ¥ 2,106,225   777,903   437,019   385,478   312,350   167,613   25,862   2,080,674       
         
 

 
 
 
 
 
 
 
      

Retained interest in the sold pool of finance receivables**

    67,024   67,024     61,072                           61,072       
   

 
 

                         
      

Total

  ¥ 3,588,298       ¥ 3,889,013                                   
   

     

                                  
*: Under accounting principles generally accepted in the United States of America, disclosure of fair values of direct finance leases is not required.
**: The retained interest in the sold pool of finance receivables is accounted for as “trading” securities and is reported at fair value.

 

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Table of Contents

Long-Term Debt (including current maturities)

 

    2003

  2004

 
    (Millions of yen)

  (Millions of yen)

 

Average
interest
rate


 
                Expected maturity date

 
    Total

 

Fair

value


  Total

 

Within

1-year


  1-2
years


  2-3
years


  3-4
years


  4-5
years


  Thereafter

 

Fair

value


 

Japanese yen bonds

  ¥ 141,000   142,250   ¥ 171,000   30,000   —     61,000   50,000   30,000   —     170,989   0.75 %

Japanese yen medium-term notes

    228,788   231,608     379,707   45,500   93,079   56,607   96,511   84,810   3,200   382,677   0.53 %

U.S. dollar medium-term notes

    764,833   767,662     1,028,039   388,252   334,339   215,239   —     90,209   —     1,033,548   1.54 %

U.S. dollar commercial paper

    210,223   210,223     184,690   —     184,690   —     —     —     —     184,690   1.04 %

Loans and others—primarily fixed rate

    99,680   99,838     118,301   23,373   45,682   19,567   20,963   4,649   4,067   118,482   2.60 %
   

 
 

 
 
 
 
 
 
 
     

Total

  ¥ 1,444,524   1,451,581   ¥ 1,881,737   487,125   657,790   352,413   167,474   209,668   7,267   1,890,386      
   

 
 

 
 
 
 
 
 
 
     

 

Interest Rate Swaps

 

        2003

    2004

 
        (Millions of yen)

    (Millions of yen)

    Average
receive
rate


    Average
pay rate


 

Notional
principal
currency


 

Receive/
Pay


            Expected maturity date

 

Fair

value


     
    Contract
amounts


 

Fair

value


    Contract
amounts


 

Within

1 year


 

1-2

years


 

2-3

years


 

3-4

years


 

4-5

years


  Thereafter

     

JP¥

  Float/Fix   ¥ 10,268   (174 )   ¥ 5,499   20   108   2,076   1,160   1,135   1,000   (103 )   0.84 %   1.32 %

US$

  Float/Fix     1,791,621   (40,293 )     1,997,417   187,539   379,131   792,942   637,805   —     —     (21,866 )   1.12 %   2.69 %
    Fix/Float     2,404   94       114,145   —     2,114   22,194   —     89,837   —     4,064     3.60 %   1.30 %
    Float/Float     65,028   13       71,975   47,666   24,309   —     —     —     —     (2 )   1.26 %   1.21 %

CA$

  Float/Fix     312,719   (2,311 )     238,581   18,831   54,534   54,406   93,439   17,371   —     (5,409 )   2.29 %   4.10 %
    Fix/Float     —     —         19,877   5,205   2,374   —     35   12,263   —     261     4.28 %   2.25 %
    Float/Float     55,349   227       19,878   —     —     —     19,878   —     —     (94 )   2.25 %   2.35 %

GBP

  Float/Fix     32,633   (539 )     66,232   24,266   19,327   14,966   6,316   1,357   —     83     4.45 %   4.72 %
    Fix/Float     17,050   58       22,575   7,651   6,873   4,926   2,514   611   —     83     4.82 %   4.19 %

NZD

  Float/Fix     664   (1 )     —     —     —     —     —     —     —     —                
       

 

 

 
 
 
 
 
 
 

           

Total

      ¥ 2,287,736   (42,926 )   ¥ 2,556,179   291,178   488,770   891,510   761,147   122,574   1,000   (22,983 )            
       

 

 

 
 
 
 
 
 
 

           

 

Currency & Interest Rate Swaps

 

            2003

    2004

 
            (Millions of yen)

    (Millions of yen)

   

Average
receive
rate


   

Average
pay rate


 

Receiving
side
currency


 

Paying

side
currency


 

Receive/
Pay


            Expected maturity date

 

Fair

value


     
      Contract
amounts


 

Fair

value


    Contract
amounts


  Within
1 year


 

1-2

years


 

2-3

years


 

3-4

years


 

4-5

years


  Thereafter

     

JP¥

  US$   Fix/Float   ¥ 150,579   319     ¥ 255,323   16,605   69,789   29,113   73,444   66,372   —     25,836     0.63 %   1.40 %
        Float/Float     63,685   1,623       81,678   22,227   9,055   23,517   13,490   13,389   —     8,540     0.22 %   1.37 %

JP¥

  EUR   Fix/Float     11,253   (995 )     12,000   12,000   —     —     —     —     —     198     0.05 %   2.04 %

JP¥

  CA$   Float/Float     13,848   50       8,647   1,072   4,301   —     —     —     3,274   (329 )   0.65 %   2.47 %

JP¥

  GBP   Fix/Float     43,626   (587 )     13,028   13,028   —     —     —     —     —     (70 )   0.06 %   4.45 %

Other

  Other   Fix/Float     1,893   (290 )     1,665   1,665   —     —     —     —     —     39     8.95 %   1.12 %
        Float/Float     17,857   291       29,915   29,915   —     —     —     —     —     (260 )   1.35 %   4.53 %
           

 

 

 
 
 
 
 
 
 

           
    Total       ¥ 302,741   411     ¥ 402,256   96,512   83,145   52,630   86,934   79,761   3,274   33,954              
           

 

 

 
 
 
 
 
 
 

           

 

Equity Price Risk

 

Honda is exposed to equity price risk as a result of its holdings in marketable equity securities. Marketable equity securities included in Honda’s investment portfolio are generally securities of domestic Japanese companies and are held for purposes other than trading. At March 31, 2003 and 2004, the estimated fair value of marketable equity securities was ¥66.8 billion and ¥98.3 billion, respectively.

 

Additionally, Honda has convertible notes and convertible preferred stocks with conversion features that enable Honda to convert its investment into common shares of the issuer. Convertible features are accounted for as embedded derivatives.

 

The conversion features are measured at fair value in our consolidated balance sheets, and the changes in fair value are recognized as other income or expenses in our consolidated statements of income.

 

47


Table of Contents

Business Segment Information

 

     Yen (millions)

 

Years ended or at March 31


   2003

    2004

 

Net sales and other operating revenue:

                

Motorcycle Business

                

Sales to unaffiliated customers

   ¥ 978,095     ¥ 996,290  

Automobile Business

                

Sales to unaffiliated customers

     6,440,094       6,592,024  

Financial Services

                

Sales to unaffiliated customers

     237,958       242,696  

Intersegment sales

     3,037       3,138  
    


 


Total

     240,995       245,834  

Power Products and Other Businesses

                

Sales to unaffiliated customers

     315,352       331,590  

Intersegment sales

     10,971       10,070  
    


 


Total

     326,323       341,660  

Eliminations

     (14,008 )     (13,208 )
    


 


Consolidated

   ¥ 7,971,499     ¥ 8,162,600  
    


 


Operating income:

                

Motorcycle Business

   ¥ 57,230     ¥ 42,433  

Automobile Business

     551,392       438,891  

Financial Services

     107,813       108,438  

Power Products and Other Businesses

     (8,092 )     10,382  
    


 


Consolidated

   ¥ 724,527     ¥ 600,144  
    


 


Assets:

                

Motorcycle Business

   ¥ 798,530     ¥ 764,893  

Automobile Business

     3,624,639       3,727,259  

Financial Services

     3,505,017       3,818,915  

Power Products and Other Businesses

     241,085       247,451  

Corporate assets and eliminations

     (487,980 )     (229,750 )
    


 


Consolidated

   ¥ 7,681,291     ¥ 8,328,768  
    


 


Depreciation:

                

Motorcycle Business

   ¥ 25,311     ¥ 25,156  

Automobile Business

     187,839       181,266  

Financial Services

     804       359  

Power Products and Other Businesses

     6,920       6,664  
    


 


Consolidated

   ¥ 220,874     ¥ 213,445  
    


 


Capital expenditures:

                

Motorcycle Business

   ¥ 37,496     ¥ 35,041  

Automobile Business

     270,263       240,416  

Financial Services

     646       430  

Power Products and Other Businesses

     8,586       11,854  
    


 


Consolidated

   ¥ 316,991     ¥ 287,741  
    


 


 

48


Table of Contents

Geographical Segment Information

 

     Yen (millions)

 

Years ended or at March 31


   2003

    2004

 

Net sales and other operating revenue:

                

Japan

                

Sales to unaffiliated customers

   ¥ 1,975,518     ¥ 1,879,141  

Transfers between geographical segments

     1,943,465       2,051,729  
    


 


Total

     3,918,983       3,930,870  

North America

                

Sales to unaffiliated customers

     4,580,004       4,552,941  

Transfers between geographical segments

     131,906       120,069  
    


 


Total

     4,771,910       4,673,010  

Europe

                

Sales to unaffiliated customers

     663,032       756,312  

Transfers between geographical segments

     161,551       192,235  
    


 


Total

     824,583       948,547  

Asia

                

Sales to unaffiliated customers

     487,415       637,163  

Transfers between geographical segments

     35,710       67,009  
    


 


Total

     523,125       704,172  

Others

                

Sales to unaffiliated customers

     265,530       337,043  

Transfers between geographical segments

     8,865       11,222  
    


 


Total

     274,395       348,265  

Eliminations

     (2,281,497 )     (2,442,264 )
    


 


Consolidated

   ¥ 7,971,499     ¥ 8,162,600  
    


 


Operating income:

                

Japan

   ¥ 191,419     ¥ 192,451  

North America

     444,383       310,150  

Europe

     14,498       25,843  

Asia

     37,809       44,672  

Others

     23,211       23,799  

Eliminations

     13,207       3,229  
    


 


Consolidated

   ¥ 724,527     ¥ 600,144  
    


 


Assets:

                

Japan

   ¥ 2,392,252     ¥ 2,370,214  

North America

     4,182,861       4,539,320  

Europe

     535,507       571,419  

Asia

     362,432       435,815  

Others

     109,827       141,851  

Corporate assets and eliminations

     98,412       270,149  
    


 


Consolidated

   ¥ 7,681,291     ¥ 8,328,768  
    


 


 

49


Table of Contents

Consolidated Balance Sheets Divided into Non-Financial Services Businesses and Finance Subsidiaries

 

     Yen (millions)

 

At March 31, 2003 and 2004


   2003

    2004

 

Assets

                

Non-financial services businesses

                

Current Assets:

   ¥ 2,987,609     ¥ 3,033,178  

Cash and cash equivalents

     530,343       707,917  

Trade accounts and notes receivable

     450,241       377,049  

Inventories

     751,980       765,433  

Other current assets

     1,255,045       1,182,779  

Investments and advances

     557,971       743,427  

Property, plant and equipment, at cost

     1,376,137       1,418,397  

Other assets

     325,398       269,073  
    


 


Total assets

     5,247,115       5,464,075  

Finance subsidiaries

                

Cash and cash equivalents

     17,061       16,504  

Finance subsidiaries––short-term receivables, net

     1,106,917       1,271,171  

Finance subsidiaries––long-term receivables, net

     2,231,804       2,378,345  

Other assets

     149,235       152,895  
    


 


Total assets

     3,505,017       3,818,915  

Eliminations

     (1,070,841 )     (954,222 )
    


 


Total assets

   ¥ 7,681,291     ¥ 8,328,768  
    


 


Liabilities and Stockholders’ Equity

                

Non-financial services businesses

                

Current liabilities:

   ¥ 1,950,980     ¥ 2,017,607  

Short-term debt

     241,039       200,784  

Current portion of long-term debt

     9,753       6,912  

Trade payables

     835,302       913,649  

Accrued expenses

     653,570       691,637  

Other current liabilities

     211,316       204,625  

Long-term debt

     32,805       28,370  

Other liabilities

     789,031       724,331  
    


 


Total liabilities

     2,772,816       2,770,308  

Finance subsidiaries

                

Short-term debt

     1,400,962       1,170,538  

Current portion of long-term debt

   <