Honda's Profits Rise by $3 Billion

| About: Honda Motor (HMC)

Honda Motor Co. (NYSE:HMC) posted a profit of ¥272.5 billion ($3.1 billion) for the first quarter of its fiscal year 2011 that rose remarkably by ¥264.9 billion ($3 billion) from ¥7.6 billion ($85 million) in the same quarter of the previous fiscal year. This was equivalent to earnings per share of ¥150.27 ($1.70), an increase of ¥146.10 ($1.65) from ¥4.17 (5 cents) for the corresponding period last year.

Consolidated net sales and other operating revenues in the quarter appreciated 18% to ¥2.4 trillion ($26.7 billion) due to higher revenues in the Automobile segment, partially offset by unfavorable currency translation effects. At constant exchange rates, Honda’s revenues increased 19.5%.

Consolidated operating income increased more than ninefold to ¥234.4 billion ($2.65 billion) from ¥25.2 billion ($284 million). This was attributable to higher revenues, favorable product mix and benefit from cost reduction measures, partially offset by increased research and development expenses and unfavorable currency translation effects.

Segment Results

Sales in the Automobile segment rose 17% to 899,000 units. In Japan, sales increased 13% to 145,000 units due to higher sales of CR-Z, Fit and Step WGN models. Outside of Japan, sales went up 18% to 754,000 units due to improved sales in North America and Asia that more than offset the lower sales in Europe.

Revenues from sales to external customers in the segment escalated 19% to ¥1.81 trillion ($20.5 billion) due to increased sales volume. Operating income was ¥148.9 billion ($1.7 billion) versus a loss of ¥21.4 billion ($242 million) in the same period last year, due to higher sales volume, favorable product mix and benefit from cost reduction measures, partially offset by increased research and development expenses, selling, general and administrative expenses, and unfavorable currency translation effects.

Sales in the Motorcycle segment grew 28% to 2.9 million units. In Japan, sales were flat at 45,000 units. Outside of Japan, sales increased 29% to 2.8 million units driven by a rise in sales volume in Asia, particularly in India, Indonesia and Thailand, and South America.

Revenues from sales to external customers advanced 25% to ¥320.2 billion ($3.6 billion) due to improved sales volume and favorable currency translation effects. Operating income jumped about sixfold to ¥31.3 billion ($354 million) from ¥5.6 billion ($63 million) a year ago.

Revenue from sales to external customers in the Financial Services segment fell 4% to ¥149.4 billion ($1.7 billion) due to unfavorable currency translation effects. Operating income rose 17% to ¥54.6 billion ($618 million), due to a fall in allowance for losses on credit and lease residual values.

Honda Power Product and Other segment sales went up 23% to 1.4 million units. In Japan, sales rose substantially by 39% to 99,000 units. Outside of Japan, sales increased 22% to 1.3 million units, driven by improved sales globally.

Revenue from sales to external customers in the segment grew 18% to ¥78.7 billion ($889 million) due to higher sales volume, partially offset by unfavorable currency translation effects. The segment witnessed a narrower operating loss of ¥453 million ($5 million) in the quarter, compared to the year-ago level of ¥5.9 billion ($67 million) in the same period of last year, due to favorable sales volume and product mix.

Financial Position

Consolidated cash and cash equivalents was ¥1.2 trillion ($13.6 billion) as of June 30, 2010, compared to ¥814 billion ($9.2 billion) as of the year-ago period. Long-term debt amounted to ¥3.1 trillion ($34.6 billion). The long-term debt-to-capitalization remained flat at 41% compared to the year-ago level.

In the quarter, cash flow from operating activities fell to ¥338 billion ($3.8 billion) from ¥406 billion ($4.6 billion), despite an improvement in income. The decline in cash flow was attributable to increased payments for parts and raw materials on the back of higher production in the Automobile segment. Meanwhile, capital expenditures reduced significantly to ¥53.2 billion ($602 million) from ¥128.9 billion ($1.5 billion) a year-ago.

Guidance

Despite the improved results, Honda lowered its revenue guidance for the first half of fiscal 2011 and full-year 2011. This can be mainly attributable to appreciation in the value of Japanese yen against most foreign currencies, including the U.S. dollar, British pound and euro.

For the first half of fiscal year 2011 ending September 30, 2010, Honda projected a 13.3% increase in sales to ¥4.6 trillion ($52 billion) compared to the earlier projection of a 14.8% rise in sales to ¥4.66 trillion ($53 billion).

However, the profit is expected to rise 468.2% to ¥350 billion ($4 billion) compared to the earlier guidance of a 216.6% rise in profit to ¥195 billion ($2.2 billion). Earnings per share are expected to be ¥193.25 ($2.18).

For the full fiscal year 2011 ending March 31, 2011, Honda projected a 6.1% increase in sales to ¥9.1 trillion ($103 billion) compared to the earlier projection of an 8.9% increase in net sales and other operating revenues to ¥9.34 trillion ($106 billion).

Unit sales are expected to rise by 248,000 vehicles to 3.6 million vehicles in the Automobile segment; 1.18 million motorcycles to 10.8 million motorcycles in the Motorcycle segment; and 801,000 components to 5.5 million components in the Power Product and Other segment.

The profit is expected to grow 69.5% to ¥455 billion ($5 billion) compared to the earlier guidance of a 26.7% rise in profit to ¥340 billion ($3.8 billion). Earnings per share are expected to be ¥251.23 ($2.84).

(Exchange Rate: $1=¥88.48)