Honda Motor Co. (HMC) revealed a 38% fall in profit to ¥44.55 billion ($536 million) or ¥24.72 per share (30 cents per share) in the fourth quarter of the fiscal year ended March 31, 2011 from ¥72.18 billion or ¥39.78 per share in the same quarter of prior fiscal year.

The decline in profit was attributable to unfavorable currency translation effects, higher selling, general and administrative (SG&A) expenses and the tsunami and earthquake in Japan. These more than offset the positive impact from cost reduction measures, lower R&D expenses, increase in sales volume (except in the Automobile segment) and model mix, and operating income related to licensing agreements.

Consolidated net sales and other operating revenues slid 3% to ¥2.21 trillion ($26.62 billion) on the back of same factors outlined above, despite increased revenues in the motorcycle business and revenues related to licensing agreements. However, at constant exchange rates, revenues increased 3.3%. Consolidated operating profit plummeted 52% to ¥46.21 billion ($556 million) from ¥96.10 billion due to the same factors affecting the net income.

Segment Performance

Sales in the Automobile segment slipped 1.6% to 860,000 units. In Japan, sales decreased 22% to 142,000 units. However, outside of Japan, sales increased 4% to 718,000 units as higher sales in North America offset the lower sales in other countries.

Revenues from external customers in the segment dipped 4% to ¥1.65 trillion due to unfavorable currency translations. The segment had an operating loss of ¥39.18 billion compared with an operating profit of $24.00 billion a year ago.

Sales in the Motorcycle segment appreciated 13% to 2.93 million units, driven primarily by sales in Asia and Other regions including South America. In Japan, sales declined by 7,000 units to 52,000 units. Outside of Japan, sales rose 13% to 2.88 million units. Revenues from external customers inched up 5% to ¥353.11 billion. Operating income almost shot up 72% to ¥48.13 billion from ¥28.02 billion in the prior year.

Revenues from Financial Services segment went down 7% to ¥134.55 billion. Operating income fell 16% to ¥39.61 billion from ¥47.22 billion a year ago due to unfavorable foreign currency translation effects, despite the decreased allowance for losses on credit and lease residual values.

Honda Power Product and Other segment sales rose 7% to 1.75 million units due to an increase in unit sales in all the regions. In Japan, sales rose marginally by 2,000 units to 104,000 units. Outside of Japan, sales increased 7% to 1.64 million units.

Revenues from sales to external customers in the segment inched up 2% to ¥80.06 billion due to higher sales volume, offset partially by unfavorable currency translation effects. The segment reported a narrower operating loss of ¥2.36 billion in the quarter compared with the year-ago level of ¥3.14 billion due to cost reduction measures, higher sales volume and favorable product mix, despite higher SG&A expenses.

Annual Results

Honda’s profit nearly doubled to ¥534.09 billion ($6.42 billion) or ¥295.67 per share ($3.56 per share) for the fiscal year ended March 31, 2011 from ¥268.40 billion or ¥147.91 per share in the previous fiscal.

Consolidated revenues increased 4% to ¥8.94 trillion ($107.48 billion) due to higher revenues in the automobile business and the motorcycle business, despite the unfavorable currency translation effects. At the same exchange rate as that of the previous fiscal, revenues increased by 8.7%.

Consolidated operating income surged 57% to ¥569.78 billion (¥6.85 billion) from ¥363.78 billion in the prior fiscal year due to increased sales volume and model mix, decrease in fixed costs as volume of production increase and continuing cost reduction measures, despite increased SG&A expenses and R&D expenses, the unfavorable foreign currency effects, and the impact of the earthquake.

Financial Position

Consolidated cash and cash equivalents was ¥1.28 trillion as of March 31, 2011, a decline from ¥1.12 trillion in the corresponding period a year ago. Long-term debt amounted to ¥3.01 trillion as of the above date, translating into a long-term debt-to-capitalization ratio of 40%, almost flat compared with 41% a year ago.

In the fiscal year, cash flow from operations fell to ¥1.07 billion from ¥1.54 trillion in the fiscal year 2011, despite an improvement in income. Some of the factors that led to the decline in cash flow were a fall in equity in income of affiliates, a decrease in dividends from affiliates, a decline in trade accounts and notes payable and a rise in inventories. Meanwhile, capital expenditures reduced to ¥318.54 billion from ¥392.06 billion in the comparable period of 2010.

Our Take

Honda has been expanding its business in Asia, growing its global network to get more efficient, and introducing new products to cater the local markets. However, the backlash from the earthquake and tsunami in Japan will negatively affect its results in fiscal 2012. Consequently, it could not furnish any guidance for the fiscal six months ending September 30, 2011 or for the fiscal year ending March 31, 2012.

As a result, the company retains a Zacks #3 Rank on its stock, which translates to a short-term rating of “Hold” and we reiterate our long-term recommendation of “Neutral”. Honda’s nearest competitor, Toyota Motor Corp. (TM) will release its sales and earnings results in the beginning of May.

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