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EX-12.1 - EX-12.1 - AMERICAN HONDA FINANCE CORPahfc-ex121_8.htm
EX-31.2 - EX-31.2 - AMERICAN HONDA FINANCE CORPahfc-ex312_9.htm
EX-32.2 - EX-32.2 - AMERICAN HONDA FINANCE CORPahfc-ex322_7.htm
EX-31.1 - EX-31.1 - AMERICAN HONDA FINANCE CORPahfc-ex311_6.htm
EX-32.1 - EX-32.1 - AMERICAN HONDA FINANCE CORPahfc-ex321_10.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 001-36111

 

AMERICAN HONDA FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

  

 

California

95-3472715

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

 

 

20800 Madrona Avenue, Torrance, California

90503

(Address of principal executive offices)

(Zip Code)

 

(310) 972-2555

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

x  (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    x  No

As of January 29, 2016, the number of outstanding shares of common stock of the registrant was 13,660,000 all of which shares were held by American Honda Motor Co., Inc. None of the shares are publicly traded.

 

 

REDUCED DISCLOSURE FORMAT

American Honda Finance Corporation, a wholly owned subsidiary of American Honda Motor Co., Inc., which in turn is a wholly owned subsidiary of Honda Motor Co., Ltd., meets the requirements set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

 

 

 

 

 

 

 


 

AMERICAN HONDA FINANCE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended December 31, 2015

Table of Contents

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements

 

1

 

 

Consolidated Balance Sheets (Unaudited)

 

1

 

 

Consolidated Statements of Income (Unaudited)

 

2

 

 

Consolidated Statements of Comprehensive Income (Unaudited)

 

2

 

 

Consolidated Statements of Changes in Equity (Unaudited)

 

3

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

4

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

48

Item 4.

 

Controls and Procedures

 

48

 

PART II – OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

49

Item 1A.

 

Risk Factors

 

49

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

49

Item 3.

 

Defaults Upon Senior Securities

 

49

Item 4.

 

Mine Safety Disclosures

 

49

Item 5.

 

Other Information

 

49

Item 6.

 

Exhibits

 

49

Signatures

 

50

Exhibit Index

 

51

 

 

 

i


 

Cautionary Statement Regarding Forward-Looking Statements

Certain statements included herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “scheduled,” or “anticipates” or similar expressions or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans, or intentions. In addition, all information included herein with respect to projected or future results of operations, cash flows, financial condition, financial performance, or other financial or statistical matters constitute forward-looking statements. Such forward-looking statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise and that may be incapable of being realized. The following factors, among others, could cause actual results and other matters to differ materially from those in such forward-looking statements:

 

·

declines in the financial condition or performance of Honda Motor Co., Ltd. or the sales of Honda or Acura products;

 

·

changes in economic and general business conditions;

 

·

fluctuations in interest rates and currency exchange rates;

 

·

the failure of our customers, dealers or counterparties in the financial industry to meet the terms of any contracts with us, or otherwise fail to perform as agreed;

 

·

our inability to recover the estimated residual value of leased vehicles at the end of their lease terms;

 

·

changes or disruption in our funding sources or access to the capital markets;

 

·

changes in our, or Honda Motor Co., Ltd.’s, credit ratings;

 

·

increases in competition from other financial institutions seeking to increase their share of financing of Honda and Acura products;

 

·

changes in laws and regulations, including as a result of financial services legislation, and related costs;

 

·

changes in accounting standards;

 

·

a failure or interruption in our operations; and

 

·

a security breach or cyber attack.

Additional information regarding these and other risks and uncertainties to which our business is subject is contained in our Annual Report on Form 10-K for the year ended March 31, 2015, as updated by our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. Readers of this Quarterly Report should review the additional information contained in those reports, and in any subsequent Quarterly Report on Form 10-Q that we file with the Securities and Exchange Commission. We do not intend, and undertake no obligation to, update any forward-looking information to reflect actual results or future events or circumstances, except as required by applicable law.

 

 

 

ii


 

PART I – FINANCIAL INFORMATION

Item1. Financial Statements

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(U.S. dollars in millions, except share amounts)

 

 

December 31,

 

 

March 31,

 

 

2015

 

 

2015

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

675

 

 

$

634

 

Finance receivables, net

 

35,725

 

 

 

38,464

 

Investment in operating leases, net

 

27,220

 

 

 

24,439

 

Due from Parent and affiliated companies

 

92

 

 

 

104

 

Income taxes receivable

 

659

 

 

 

66

 

Vehicles held for disposition

 

163

 

 

 

138

 

Other assets

 

725

 

 

 

723

 

Derivative instruments

 

212

 

 

 

237

 

Total assets

$

65,471

 

 

$

64,805

 

Liabilities and Equity

 

 

 

 

 

 

 

Debt

$

44,117

 

 

$

44,689

 

Due to Parent and affiliated companies

 

89

 

 

 

71

 

Accrued interest expense

 

110

 

 

 

93

 

Deferred income taxes

 

7,861

 

 

 

7,145

 

Other liabilities

 

1,287

 

 

 

1,246

 

Derivative instruments

 

244

 

 

 

371

 

Total liabilities

 

53,708

 

 

 

53,615

 

Commitments and contingencies

 

 

 

 

 

 

 

Shareholder’s equity:

 

 

 

 

 

 

 

Common stock, $100 par value. Authorized 15,000,000 shares; issued and outstanding

     13,660,000 shares as of December 31, 2015 and March 31, 2015

 

1,366

 

 

 

1,366

 

Retained earnings

 

9,894

 

 

 

9,248

 

Accumulated other comprehensive loss

 

(136

)

 

 

(75

)

Total shareholder’s equity

 

11,124

 

 

 

10,539

 

Noncontrolling interest in subsidiary

 

639

 

 

 

651

 

Total equity

 

11,763

 

 

 

11,190

 

Total liabilities and equity

$

65,471

 

 

$

64,805

 

 

The following table presents the assets and liabilities of consolidated variable interest entities. These assets and liabilities are included in the consolidated balance sheets presented above. Refer to Note 9 for additional information.

 

 

December 31,

 

 

March 31,

 

 

2015

 

 

2015

 

Finance receivables, net

$

7,865

 

 

$

7,354

 

Vehicles held for disposition

 

4

 

 

 

3

 

Other assets

 

295

 

 

 

270

 

Total assets

$

8,164

 

 

$

7,627

 

 

 

 

 

 

 

 

 

Secured debt

$

7,483

 

 

$

7,365

 

Accrued interest expense

 

3

 

 

 

2

 

Total liabilities

$

7,486

 

 

$

7,367

 

 

See accompanying notes to consolidated financial statements.

 

1


 

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(U.S. dollars in millions)

 

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct financing leases

 

 

$

16

 

 

$

34

 

 

$

59

 

 

$

109

 

Retail

 

 

 

297

 

 

 

322

 

 

 

899

 

 

 

985

 

Dealer

 

 

 

30

 

 

 

29

 

 

 

90

 

 

 

88

 

Operating leases

 

 

 

1,398

 

 

 

1,233

 

 

 

4,059

 

 

 

3,575

 

Total revenues

 

 

 

1,741

 

 

 

1,618

 

 

 

5,107

 

 

 

4,757

 

Depreciation on operating leases

 

 

 

1,119

 

 

 

986

 

 

 

3,236

 

 

 

2,832

 

Interest expense

 

 

 

148

 

 

 

142

 

 

 

431

 

 

 

438

 

Net revenues

 

 

 

474

 

 

 

490

 

 

 

1,440

 

 

 

1,487

 

Gain on disposition of lease vehicles

 

 

 

4

 

 

 

-

 

 

 

34

 

 

 

38

 

Other income

 

 

 

26

 

 

 

26

 

 

 

74

 

 

 

74

 

Total net revenues

 

 

 

504

 

 

 

516

 

 

 

1,548

 

 

 

1,599

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

 

98

 

 

 

99

 

 

 

301

 

 

 

298

 

Provision for credit losses

 

 

 

43

 

 

 

34

 

 

 

109

 

 

 

85

 

Early termination loss on operating leases

 

 

 

1

 

 

 

11

 

 

 

30

 

 

 

29

 

Loss on lease residual values

 

 

 

4

 

 

 

2

 

 

 

7

 

 

 

4

 

Loss on derivative instruments

 

 

 

65

 

 

 

61

 

 

 

62

 

 

 

193

 

Gain on foreign currency revaluation of debt

 

 

 

(71

)

 

 

(71

)

 

 

(36

)

 

 

(250

)

Total expenses

 

 

 

140

 

 

 

136

 

 

 

473

 

 

 

359

 

Income before income taxes

 

 

 

364

 

 

 

380

 

 

 

1,075

 

 

 

1,240

 

Income tax expense

 

 

 

141

 

 

 

172

 

 

 

385

 

 

 

474

 

Net income

 

 

 

223

 

 

 

208

 

 

 

690

 

 

 

766

 

Less: Net income attributable to noncontrolling interest

 

 

 

15

 

 

 

14

 

 

 

44

 

 

 

49

 

Net income attributable to

   American Honda Finance Corporation

 

 

$

208

 

 

$

194

 

 

$

646

 

 

$

717

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(U.S. dollars in millions)

 

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

 

December 31,

 

 

December 31,

 

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

 

$

223

 

 

$

208

 

 

$

690

 

 

$

766

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

(51

)

 

 

(54

)

 

 

(117

)

 

 

(75

)

Comprehensive income

 

 

 

172

 

 

 

154

 

 

 

573

 

 

 

691

 

Less: Comprehensive income/(loss) attributable to

   noncontrolling interest

 

 

 

(10

)

 

 

(12

)

 

 

(12

)

 

 

13

 

Comprehensive income attributable to

   American Honda Finance Corporation

 

 

$

182

 

 

$

166

 

 

$

585

 

 

$

678

 

  

See accompanying notes to consolidated financial statements.

2


 

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(U.S. dollars in millions)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

comprehensive

 

 

Common

 

 

Noncontrolling

 

 

Total

 

 

earnings

 

 

income/(loss)

 

 

stock

 

 

interest

 

Balance at March 31, 2014

$

10,393

 

 

$

8,306

 

 

$

27

 

 

$

1,366

 

 

$

694

 

Net income

 

766

 

 

 

717

 

 

 

-

 

 

 

-

 

 

 

49

 

Other comprehensive loss

 

(75

)

 

 

-

 

 

 

(39

)

 

 

-

 

 

 

(36

)

Balance at December 31, 2014

$

11,084

 

 

$

9,023

 

 

$

(12

)

 

$

1,366

 

 

$

707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2015

$

11,190

 

 

$

9,248

 

 

$

(75

)

 

$

1,366

 

 

$

651

 

Net income

 

690

 

 

 

646

 

 

 

-

 

 

 

-

 

 

 

44

 

Other comprehensive loss

 

(117

)

 

 

-

 

 

 

(61

)

 

 

-

 

 

 

(56

)

Balance at December 31, 2015

$

11,763

 

 

$

9,894

 

 

$

(136

)

 

$

1,366

 

 

$

639

 

 

See accompanying notes to consolidated financial statements.

 

3


AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(U.S. dollars in millions)

 

 

Nine months ended

 

 

December 31,

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

690

 

 

$

766

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Debt and derivative instrument valuation adjustments

 

(118

)

 

 

(201

)

Loss on lease residual values and provision for credit losses

 

116

 

 

 

89

 

Early termination loss on operating leases

 

30

 

 

 

29

 

Depreciation and amortization

 

3,239

 

 

 

2,837

 

Accretion of unearned subsidy income

 

(830

)

 

 

(810

)

Amortization of deferred dealer participation and IDC

 

239

 

 

 

254

 

Gain on disposition of lease vehicles and fixed assets

 

(34

)

 

 

(38

)

Deferred income tax benefit

 

735

 

 

 

437

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Income taxes receivable/payable

 

(594

)

 

 

(20

)

Other assets

 

-

 

 

 

37

 

Accrued interest/discounts on debt

 

31

 

 

 

35

 

Other liabilities

 

83

 

 

 

6

 

Due to/from Parent and affiliated companies

 

28

 

 

 

(28

)

Net cash provided by operating activities

 

3,615

 

 

 

3,393

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Finance receivables acquired

 

(10,951

)

 

 

(13,077

)

Principal collected on finance receivables

 

12,907

 

 

 

13,662

 

Net change in wholesale loans

 

98

 

 

 

352

 

Purchase of operating lease vehicles

 

(11,566

)

 

 

(10,458

)

Disposal of operating lease vehicles

 

5,055

 

 

 

4,569

 

Cash received for unearned subsidy income

 

998

 

 

 

977

 

Other investing activities, net

 

(41

)

 

 

3

 

Net cash used in investing activities

 

(3,500

)

 

 

(3,972

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of commercial paper

 

27,424

 

 

 

31,729

 

Paydown of commercial paper

 

(26,852

)

 

 

(29,913

)

Proceeds from issuance of related party debt

 

15,338

 

 

 

32,031

 

Paydown of related party debt

 

(16,654

)

 

 

(32,581

)

Proceeds from issuance of medium term notes and other debt

 

5,832

 

 

 

7,353

 

Paydown of medium term notes and other debt

 

(5,301

)

 

 

(6,678

)

Proceeds from issuance of secured debt

 

3,503

 

 

 

2,991

 

Paydown of secured debt

 

(3,354

)

 

 

(3,820

)

Net cash (used in)/provided by financing activities

 

(64

)

 

 

1,112

 

Effect of exchange rate changes on cash and cash equivalents

 

(10

)

 

 

-

 

Net increase in cash and cash equivalents

 

41

 

 

 

533

 

Cash and cash equivalents at beginning of year

 

634

 

 

 

138

 

Cash and cash equivalents at end of year

$

675

 

 

$

671

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest paid

$

386

 

 

$

429

 

Income taxes paid

 

254

 

 

 

65

 

 

See accompanying notes to consolidated financial statements.

 

 

4


 

AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1)

Interim Information

 

(a)

Organizational Structure

American Honda Finance Corporation (AHFC) is a wholly owned subsidiary of American Honda Motor Co., Inc. (AHM or the Parent). Honda Canada Finance Inc. (HCFI) is a majority-owned subsidiary of AHFC. Noncontrolling interest in HCFI is held by Honda Canada Inc. (HCI), an affiliate of AHFC. AHM is a wholly owned subsidiary and HCI is an indirect wholly owned subsidiary of Honda Motor Co., Ltd. (HMC). AHM and HCI are the sole authorized distributors of Honda and Acura products, including motor vehicles, parts, and accessories in the United States and Canada.

Unless otherwise indicated by the context, all references to the “Company”, “we”, “us”, and “our” in this report include AHFC and its consolidated subsidiaries, and references to “AHFC” refer solely to American Honda Finance Corporation (excluding AHFC’s subsidiaries).

 

(b)

Basis of Presentation

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim information, and instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these unaudited interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results of operations, cash flows, and financial condition for the interim periods presented. Results for interim periods should not be considered indicative of results for the full year or for any other interim period. These unaudited interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements, significant accounting policies, and the other notes to the consolidated financial statements for the fiscal year ended March 31, 2015 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on June 26, 2015. All significant intercompany balances and transactions have been eliminated upon consolidation.

 

(c)

Recently Adopted Accounting Standards

Effective April 1, 2015, the Company adopted Accounting Standards Update (ASU) 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This ASU states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings under the line-of-credit arrangement. The adoption of these ASU’s did not have material impact on the consolidated financial statements.

 

(d)

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers and created the new Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and added ASC Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date for the Company from April 1, 2017 to April 1, 2018 while permitting early adoption as of April 1, 2017. The Company is currently assessing the impact the adoption of this guidance will have on the consolidated financial statements.

5


AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. The amendments are effective for the fiscal year ending March 31, 2017 and interim periods thereafter. The adoption of this new standard is not expected to have an impact on the consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. Under the amendments in this update, all reporting entities are within the scope of Subtopic 810-10, Consolidation—Overall, including limited partnerships and similar legal entities, unless a scope exception applies. The amendments are effective for the Company beginning on April 1, 2016. The Company is currently assessing the impact on the consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments are effective for the Company beginning April 1, 2018, including interim periods within this fiscal year. The Company is currently assessing the impact on the consolidated financial statements.

(2)

Finance Receivables

Finance receivables consisted of the following:

 

 

December 31, 2015

 

 

Lease

 

 

Retail

 

 

Dealer

 

 

Total

 

 

(U.S. dollars in millions)

 

Finance receivables

$

1,115

 

 

$

30,934

 

 

$

4,152

 

 

$

36,201

 

Allowance for credit losses

 

(2

)

 

 

(91

)

 

 

-

 

 

 

(93

)

Write-down of lease residual values

 

(11

)

 

 

-

 

 

 

-

 

 

 

(11

)

Unearned interest income and fees

 

(31

)

 

 

-

 

 

 

-

 

 

 

(31

)

Deferred dealer participation and IDC

 

2

 

 

 

366

 

 

 

-

 

 

 

368

 

Unearned subsidy income

 

(38

)

 

 

(671

)

 

 

-

 

 

 

(709

)

 

$

1,035

 

 

$

30,538

 

 

$

4,152

 

 

$

35,725

 

 

 

March 31, 2015

 

 

Lease

 

 

Retail

 

 

Dealer

 

 

Total

 

 

(U.S. dollars in millions)

 

Finance receivables

$

1,956

 

 

$

32,792

 

 

$

4,256

 

 

$

39,004

 

Allowance for credit losses

 

(2

)

 

 

(84

)

 

 

-

 

 

 

(86

)

Write-down of lease residual values

 

(13

)

 

 

-

 

 

 

-

 

 

 

(13

)

Unearned interest income and fees

 

(64

)

 

 

-

 

 

 

-

 

 

 

(64

)

Deferred dealer participation and IDC

 

3

 

 

 

390

 

 

 

-

 

 

 

393

 

Unearned subsidy income

 

(80

)

 

 

(690

)

 

 

-

 

 

 

(770

)

 

$

1,800

 

 

$

32,408

 

 

$

4,256

 

 

$

38,464

 

 

Finance receivables include retail loans with a principal balance of $8.0 billion and $7.4 billion as of December 31, 2015 and March 31, 2015, respectively, which have been transferred to securitization trusts and considered to be legally isolated but do not qualify for sale accounting treatment. These finance receivables are restricted as collateral for the payment of the related secured debt obligations. Refer to Note 9 for additional information.

The uninsured portions of the lease residual values were $184 million and $298 million at December 31, 2015 and March 31, 2015, respectively. Included in the gain or loss on disposition of lease vehicles are end of term charges on both direct financing and operating leases of $7 million and $6 million for the three months ended December 31, 2015 and 2014, respectively, and $20 million and $16 million for the nine months ended December 31, 2015 and 2014, respectively.

6


AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Credit Quality of Financing Receivables

Credit losses are an expected cost of extending credit. The majority of the credit risk is with consumer financing and to a lesser extent with dealer financing. Credit risk can be affected by general economic conditions. Adverse changes such as a rise in unemployment rates can increase the likelihood of defaults. Declines in used vehicle prices can reduce the amount of recoveries on repossessed collateral. Credit risk on dealer loans is affected primarily by the financial strength of the dealers within the portfolio. Exposure to credit risk is managed through purchasing standards, pricing of contracts for expected losses, focusing collection efforts to minimize losses, and ongoing reviews of the financial condition of dealers.

Allowance for Credit Losses

The allowance for credit losses is management’s estimate of probable losses incurred on finance receivables, which requires significant judgment and assumptions that are inherently uncertain. The allowance is based on management’s evaluation of many factors, including the Company’s historical credit loss experience, the value of the underlying collateral, delinquency trends, and economic conditions.

Consumer finance receivables in the retail loan and direct financing lease portfolio segments are collectively evaluated for impairment. Delinquencies and losses are monitored on an ongoing basis and this historical experience provides the primary basis for estimating the allowance. Management utilizes various methodologies when estimating the allowance for credit losses including models which incorporate vintage loss and delinquency migration analysis. These models take into consideration attributes of the portfolio including loan-to-value ratios, internal and external credit scores, and collateral types. Market and economic factors such as used vehicle prices, unemployment rates, and consumer debt service burdens are also incorporated into these models.

Dealer loans are individually evaluated for impairment when specifically identified as impaired. Dealer loans are considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the terms of the contract. The Company’s determination of whether dealer loans are impaired is based on evaluations of dealership payment history, financial condition, and ability to perform under the terms of the loan agreements. Dealer loans that have not been specifically identified as impaired are collectively evaluated for impairment.

There were no modifications to dealer loans that constituted troubled debt restructurings during the three and nine months ended December 31, 2015 and 2014.

The Company generally does not grant concessions on consumer finance receivables that are considered to be troubled debt restructurings other than modifications of retail loans in reorganization proceedings pursuant to the U.S. Bankruptcy Code. Retail loans modified under bankruptcy protection were not material to the Company’s consolidated financial statements during the three and nine months ended December 31, 2015 and 2014. The Company does allow payment deferrals on consumer finance receivables. However, these payment deferrals are not considered to be troubled debt restructurings since the deferrals are deemed to be insignificant and interest continues to accrue during the deferral period.

7


AMERICAN HONDA FINANCE CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

The following is a summary of the activity in the allowance for credit losses of finance receivables:

 

 

Three and nine months ended December 31, 2015

 

 

Lease

 

 

Retail

 

 

Dealer

 

 

Total

 

 

(U.S. dollars in millions)

 

Beginning balance, October 1, 2015

$

2

 

 

$

91

 

 

$

-

 

 

$

93

 

Provision

 

1

 

 

 

37

 

 

 

-

 

 

 

38

 

Charge-offs

 

(1

)

 

 

(54

)

 

 

-

 

 

 

(55

)

Recoveries

 

-

 

 

 

18

 

 

 

-

 

 

 

18

 

Effect of translation adjustment

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

Ending balance, December 31, 2015

$

2

 

 

$

91

 

 

$

-

 

 

$

93

 

Beginning balance, April 1, 2015

$

2

 

 

$

84

 

 

$

-

 

 

$

86

 

Provision

 

2

 

 

 

94

 

 

 

(1

)

 

 

95

 

Charge-offs

 

(3

)

 

 

(139

)

 

 

-

 

 

 

(142

)

Recoveries

 

1

 

 

 

53

 

 

 

1

 

 

 

55

 

Effect of translation adjustment

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

Ending balance, December 31, 2015

$

2

 

 

$

91

 

 

$

-

 

 

$

93

 

Allowance for credit losses – ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Collectively evaluated for impairment

 

2

 

 

 

91

 

 

 

-

 

 

 

93

 

Finance receivables – ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

-

 

 

$

-

 

 

$

1

 

 

$

1

 

Collectively evaluated for impairment

 

1,048

 

 

 

30,629

 

 

 

4,151

 

 

 

35,828

 

 

 

Three and nine months ended December 31, 2014

 

 

Lease

 

 

Retail

 

 

Dealer

 

 

Total

 

 

(U.S. dollars in millions)

 

Beginning balance, October 1, 2014

$

3

 

 

$

91

 

 

$

-

 

 

$

94

 

Provision

 

1

 

 

 

28

 

 

 

-

 

 

 

29

 

Charge-offs

 

(2

)

 

 

(55

)

 

 

-

 

 

 

(57

)

Recoveries

 

1

 

 

 

23

 

 

 

-

 

 

 

24

 

Effect of translation adjustment

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

Ending balance, December 31, 2014

$

3

 

 

$

86

 

 

$

-

 

 

$

89

 

Beginning balance, April 1, 2014

$

4

 

 

$

95

 

 

$

1

 

 

$

100

 

Provision

 

2

 

 

 

69

 

 

 

-

 

 

 

71

 

Charge-offs

 

(4

)

 

 

(139

)

 

 

(1

)

 

 

(144

)

Recoveries

 

1

 

 

 

62

 

 

 

-

 

 

 

63

 

Effect of translation adjustment

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

Ending balance, December 31, 2014

$

3

 

 

$

86

 

 

$

-