DBRS Comments on Honda’s Fourth Quarter Results
DBRS is commenting on Honda Motor Co. Ltd. (Honda or the Company), which today announced its financial results for the fourth quarter and fiscal 2008 year (ending March 31, 2008). The earnings announcement included a negative earnings surprise, with the Company’s fourth quarter net income amounting to 25.4 billion yen, which represents a year-over-year decline of 86%. The primary factor adversely impacting the fourth quarter results relates to an extraordinary event, as the Company recognized a tax expense in accordance with Financial Accounting Standards Board Interpretation No. 48 (FIN48), in connection with a transfer pricing issue and the allocation of profit earned over the five-year period ended March 31, 2006, between Honda and its Chinese joint venture companies. DBRS notes that this issue currently remains unresolved, as the Company has yet to receive a final result of this tax examination.
Despite the lower fourth quarter results, DBRS notes that Honda continues to perform solidly. The key automotive segment (responsible for the significant majority of revenues and profits) posted unit sales increases across all regions, notwithstanding ongoing challenges in the vital United States market related to the weakening U.S. dollar and continued economic difficulties attributable to the sub-prime crisis. DBRS further notes that Honda’s full year results for fiscal 2008 still improved year-over-year to a record net income level of 600 billion yen. The fundamentals of the Company’s very strong business profile remain unchanged. Honda’s core automotive models are very well positioned to benefit from the structural shift in consumer preference toward more fuel efficient vehicles, spurred by ever increasing fuel prices. Regarding the U.S., Honda’s competitive position going forward will be bolstered by the forthcoming introductions of the new Fit, Pilot and Acura TSX. Additionally, the Company’s foreign exchange exposure with respect to the U.S. dollar, while still very significant, will be somewhat alleviated with the new manufacturing facility in Greensburg, Indiana, coming on line later this year.
DBRS notes that Honda today also revised its financial outlook for fiscal 2009 moderately downward. However, the revised outlook incorporates more conservative currency assumptions and, in the opinion of DBRS, possibly some minor revisions regarding U.S. sales volumes given the extent of the ongoing economic difficulties in that market. Despite the revised forecast, DBRS notes that Honda’s profitability is expected to remain strong, with the Company’s financial and business profiles still well commensurate with the current ratings.
Honda still expects total unit sales to increase in fiscal 2009, with much of the improvement attributable to continued growth in the Asian and Latin American markets. It is this expected ongoing growth that prompted DBRS to assign a positive trend to the Company’s long-term ratings on March 12, 2008. (For further information, please refer to DBRS’s rating report on Honda as of that date.) As such, absent further negative earnings surprises, DBRS would consider upgrading the ratings over the medium term should Honda’s global growth not be significantly impeded by the pending challenges in the U.S. market.
Note:
All figures are in Japanese yen unless otherwise noted.