Honda, Rocked By Takata Scandal, Hopes Worst Is Over.
Financial Hit Will Endanger Honda’s Innovation Programme.
Honda Motor’s finances are being undermined by repercussions of the Takata Corp air bag recall, and although Moody’s of Japan reaffirmed the company’s credit rating, it warned investors that Honda ’s outlook had deteriorated from stable to negative.
Honda’s cash flow will come under pressure.
“(This) will restrict Honda’s ability to fund new investments, which may in turn disadvantage the company, given that the rapid evolution of the auto industry requires constant innovation to stay competitive,” Moody’s said in a report.
Earlier, Honda reported a loss of $848 million in the fourth quarter ending in March, compared with a profit of $737 million in the same period of 2015. For the year, Honda’s profit fell more than 30 per cent to $310 million. It expects a net profit of $350 million in the current financial year ending next March
“It’s true that (air bag recall costs) have wiped out our profits, Kohei Takeuchi told the Wall Street Journal.
Takata air bags are believed to have caused premature explosions linked to at least 11 deaths and more than 100 injuries around the world. The U.S. National Highway Traffic Safety Administration ordered auto manufacturers to recall 40 million more Takata airbags, in addition to the 30 million already recalled.
Most global manufacturers have also hit by Takata recalls. Daimler, in its latest financial report, took a financial hit because of Takata.
Moody’s, in its report on Honda, said the company’s profitability will recover by the third quarter of this financial year because most of the expenses were taken in the previous year’s third quarter. But cash payments for repair costs, which occur as Honda owners bring vehicles for repair, will weigh on cash flow.
Negative cash flow
“Moody’s expects that free cash flow, after dividends, could become negative and trend at that level during the next two to three fiscal years, leading to elevated levels of total debt – relative to historical levels – for Honda’s automotive business,” it said.
“Moody’s does not expect that Honda will inject money into Takata despite their long history of co-developing airbags and its position as Takata’s six-largest shareholder with a 1.2 per cent holding. However, if Honda takes on additional expenses to support Takata or bears substantial payments for recall-related lawsuits or penalties, it would reflect negatively on its ratings,” Moody’s said.