Company Quick10K Filing
Quick10K
American Honda Finance
10-Q 2019-06-30 Quarter: 2019-06-30
10-K 2019-03-31 Annual: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-K 2018-03-31 Annual: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-03-31 Annual: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-03-31 Annual: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-K 2015-03-31 Annual: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-K 2014-03-31 Annual: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-08-08 Other Events, Exhibits
8-K 2019-03-12 Other Events
8-K 2019-03-01 Other Events
8-K 2018-03-23 Other Events
8-K 2018-03-02 Other Events
8-K 2018-02-09 Code of Ethics
BROG Black Ridge Oil & Gas 4,894
SCPL SciPlay 217
STXS Stereotaxis 166
NTVA Nexien BioPharma 98
RDGL Vivos 55
RSPI RespireRx Pharmaceuticals 5
JANL Janel 4
HRST Harvest Oil Gas 0
MORF Morphic Holding 0
SFR Steadfast Income REIT 0
AHFC 2019-06-30
Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ahfc-ex311q12019.htm
EX-31.2 ahfc-ex312q12019.htm
EX-32.1 ahfc-ex321q12019.htm
EX-32.2 ahfc-ex322q12019.htm

American Honda Finance Earnings 2019-06-30

AHFC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ahfc-63019q110q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of exchange on which registered
1.300% Medium-Term Notes, Series A
Due March 21, 2022
N/A
New York Stock Exchange
2.625% Medium-Term Notes, Series A
Due October 14, 2022
N/A
New York Stock Exchange
1.375% Medium-Term Notes, Series A
Due November 10, 2022
N/A
New York Stock Exchange
0.550% Medium-Term Notes, Series A
Due March 17, 2023
N/A
New York Stock Exchange
0.750% Medium-Term Notes, Series A
Due January 17, 2024
N/A
New York Stock Exchange
0.350% Medium-Term Notes, Series A
Due August 26, 2022
N/A
New York Stock Exchange

 
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.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
☐ 
 
Accelerated filer
☐  
 
 
 
 
 
Non-accelerated filer
☒  
 
Smaller reporting company
☐  
 
 
 
 
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ☐  Yes    ☒  No
As of July 31, 2019, 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 June 30, 2019
Table of Contents
 
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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, both domestically and internationally, including changes in international trade policy;
fluctuations in interest rates and currency exchange rates;
the failure of our customers, dealers or counterparties 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 the 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 fiscal year ended March 31, 2019 filed with the Securities and Exchange Commission on June 21, 2019. Readers of this Quarterly Report should review the information contained in that report, and in any subsequent reports that we file with the Securities and Exchange Commission as such risks and uncertainties may be amended, supplemented or superseded from time to time. 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)

 
 
June 30, 2019
 
March 31, 2019
Assets
 
 
 
 
Cash and cash equivalents
 
$
783

 
$
795

Finance receivables, net
 
40,609

 
40,424

Investment in operating leases, net
 
32,958

 
32,606

Due from Parent and affiliated companies
 
121

 
162

Income taxes receivable
 
258

 
228

Vehicles held for disposition
 
213

 
252

Other assets
 
1,212

 
1,117

Derivative instruments
 
463

 
380

Total assets
 
$
76,617

 
$
75,964

Liabilities and Equity
 
 
 
 
Debt
 
$
49,767

 
$
49,754

Due to Parent and affiliated companies
 
121

 
106

Accrued interest expense
 
218

 
150

Income taxes payable
 
189

 
152

Deferred income taxes
 
6,489

 
6,399

Other liabilities
 
1,617

 
1,567

Derivative instruments
 
611

 
568

Total liabilities
 
59,012

 
58,696

Commitments and contingencies (Note 8)
 

 

Shareholder’s equity:
 
 
 
 
Common stock, $100 par value. Authorized 15,000,000 shares; issued and outstanding
     13,660,000 shares as of June 30, 2019 and March 31, 2019
 
1,366

 
1,366

Retained earnings
 
15,360

 
15,088

Accumulated other comprehensive loss
 
(98
)
 
(118
)
Total shareholder’s equity
 
16,628

 
16,336

Noncontrolling interest in subsidiary
 
977

 
932

Total equity
 
17,605

 
17,268

Total liabilities and equity
 
$
76,617

 
$
75,964

 
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.
 
 
 
June 30, 2019
 
March 31, 2019
Finance receivables, net
 
$
9,298

 
$
9,073

Vehicles held for disposition
 
3

 
3

Other assets
 
631

 
597

Total assets
 
$
9,932

 
$
9,673

Secured debt
 
$
9,003

 
$
8,790

Accrued interest expense
 
8

 
8

Total liabilities
 
$
9,011

 
$
8,798


 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 June 30,
 
 
2019
 
2018
Revenues:
 
 
 
 
Retail
 
433

 
376

Dealer
 
65

 
55

Operating leases
 
1,895

 
1,769

Total revenues
 
2,393

 
2,200

Leased vehicle expenses
 
1,392

 
1,328

Interest expense
 
322

 
274

Net revenues
 
679

 
598

Other income
 
20

 
15

Total net revenues
 
699

 
613

Expenses:
 
 
 
 
General and administrative expenses
 
121

 
110

Provision for credit losses
 
48

 
44

Early termination loss on operating leases
 
24

 
17

Loss on derivative instruments
 
31

 
263

(Gain)/Loss on foreign currency revaluation of debt
 
38

 
(247
)
Total expenses
 
262

 
187

Income before income taxes
 
437

 
426

Income tax expense
 
138

 
116

Net income
 
299

 
310

Less: Net income attributable to noncontrolling interest
 
27

 
26

Net income attributable to
American Honda Finance Corporation
 
$
272

 
$
284

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(U.S. dollars in millions)
 
 
 
Three months ended June 30,
 
 
2019
 
2018
Net income
 
$
299

 
$
310

Other comprehensive income:
 
 
 
 
Foreign currency translation adjustment
 
38

 
(33
)
Comprehensive income
 
337

 
277

Less: Comprehensive income attributable to noncontrolling interest
 
45

 
10

Comprehensive income attributable to
American Honda Finance Corporation
 
$
292

 
$
267

  
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)
 
 
 
Total
 
Retained
earnings
 
Accumulated
other
comprehensive
loss
 
Common
stock
 
Noncontrolling
interest
Balance at March 31, 2018
 
$
16,596

 
$
14,449

 
$
(85
)
 
$
1,366

 
$
866

Net income
 
310

 
284

 

 

 
26

Other comprehensive loss
 
(33
)
 

 
(17
)
 

 
(16
)
Balance at June 30, 2018
 
$
16,873

 
$
14,733

 
$
(102
)
 
$
1,366

 
$
876

 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
 
$
17,268

 
$
15,088

 
$
(118
)
 
$
1,366

 
$
932

Net income
 
299

 
272

 

 

 
27

Other comprehensive income
 
38

 

 
20

 

 
18

Balance at June 30, 2019
 
$
17,605

 
$
15,360

 
$
(98
)
 
$
1,366

 
$
977

 
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)
 
 
 
Three months ended June 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
299

 
$
310

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Debt and derivative instrument valuation adjustments
 
56

 
22

Provision for credit losses
 
48

 
44

Early termination loss on operating leases
 
24

 
17

Depreciation on leased vehicles
 
1,406

 
1,375

Accretion of unearned subsidy income
 
(429
)
 
(390
)
Amortization of deferred dealer participation and other deferred costs
 
88

 
82

Gain on disposition of leased vehicles
 
(43
)
 
(47
)
Deferred income taxes
 
84

 
54

Changes in operating assets and liabilities:
 
 
 
 
Income taxes receivable/payable
 
8

 
42

Other assets
 
(10
)
 
(17
)
Accrued interest/discounts on debt
 
19

 
29

Other liabilities
 
(4
)
 
36

Due to/from Parent and affiliated companies
 
58

 
(35
)
Net cash provided by operating activities
 
1,604

 
1,522

Cash flows from investing activities:
 
 
 
 
Finance receivables acquired
 
(4,489
)
 
(4,731
)
Principal collected on finance receivables
 
4,230

 
3,991

Net change in wholesale loans
 
113

 
16

Purchase of operating lease vehicles
 
(4,634
)
 
(4,214
)
Disposal of operating lease vehicles
 
3,067

 
2,524

Cash received for unearned subsidy income
 
306

 
509

Other investing activities, net
 
(1
)
 
(1
)
Net cash used in investing activities
 
(1,408
)
 
(1,906
)
 
Statement continues on the next page.

4




AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. dollars in millions)
 
 
 
Three months ended June 30,
Cash flows from financing activities:
 
2019
 
2018
Proceeds from issuance of commercial paper
 
$
8,148

 
$
6,816

Paydown of commercial paper
 
(9,683
)
 
(6,620
)
Proceeds from issuance of short-term debt
 
300

 
600

Paydown of short-term debt
 
(1,100
)
 

Proceeds from issuance of related party debt
 
746

 
1,006

Paydown of related party debt
 
(746
)
 
(1,161
)
Proceeds from issuance of medium term notes and other debt
 
2,119

 
387

Paydown of medium term notes and other debt
 
(151
)
 
(335
)
Proceeds from issuance of secured debt
 
1,496

 
989

Paydown of secured debt
 
(1,305
)
 
(1,288
)
Net cash provided by/(used in) financing activities
 
(176
)
 
394

Effect of exchange rate changes on cash and cash equivalents
 
1

 
(5
)
Net increase in cash and cash equivalents
 
21

 
5

Cash and cash equivalents and restricted cash at beginning of period
 
1,383

 
1,226

Cash and cash equivalents and restricted cash at end of period
 
$
1,404

 
$
1,231

Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
245

 
$
198

Income taxes paid
 
$
14

 
$
14

 
The following table provides a reconciliation of cash and cash equivalents and restricted cash from the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows.
 
 
June 30,
 
 
2019
 
2018
Cash and cash equivalents
 
$
783

 
$
744

Restricted cash included in other assets (1)
 
621

 
487

Total
 
$
1,404

 
$
1,231

---------------------------------------------------------
(1)
Restricted cash balances relate primarily to securitization arrangements (Note 9).

See accompanying notes to consolidated financial statements


5



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




(1) Summary of Business and Significant Accounting Policies

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).

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, 2019 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on June 21, 2019. All significant intercompany balances and transactions have been eliminated upon consolidation.
Certain reclassifications have been made to prior period financial statements and notes to conform to the current period presentation.

Recently Adopted Accounting Standards
Effective April 1, 2019, the Company adopted Accounting Standard Update (ASU) 2016-02, Leases (Topic 842), and the related amendments using the modified retrospective approach. Prior period comparative information has not been restated and will continue to be reported under previous accounting policies. The Company also elected the package of practical expedients which allows the Company to not reassess prior conclusions about lease identification, classification, and initial direct costs. The adoption of the new lease standard did not have a cumulative-effect adjustment to the opening balance of retained earnings.
Upon adoption, the Company recognized right-of-use assets of $56 million, lease liabilities of $62 million, and a reduction in other liabilities of $6 million for accrued rent and unamortized tenant improvement allowances for existing operating leases as a lessee. The new lease standard is not expected to have a significant impact on the Company’s net income on an ongoing basis.
Lessor accounting remains largely unchanged except for limited amendments impacting the Company’s income statement classification of the following: (i) the Company has elected to record the general allowance for uncollectible operating lease receivables through a reduction to revenue rather than a provision for credit loss, (ii) lessor costs, such as property taxes, paid directly to third parties and reimbursed by lessee which were presented net are now recognized gross as revenue and expense, and (iii) the amortization of initial direct costs which was previously recognized as a reduction of lease revenue is now presented as an expense. The Company has elected to exclude from lease revenue and expenses, sales taxes and other similar taxes collected from lessees on behalf of governmental agencies, which is consistent with previous accounting policies.
Effective April 1, 2019, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The adoption of this standard did not impact the Company’s consolidated financial statements since there were no designated hedge accounting relationships.


6



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company is currently assessing the impact of this standard on the consolidated financial statements. In general, the allowance for credit losses is expected to increase when changing from an incurred loss to expected loss methodology. The models and methodologies that are currently used in estimating the allowance for credit losses are being evaluated to identify the changes necessary to meet the requirements of the new standard. The Company plans to adopt the new standard and the related amendments effective April 1, 2020.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments modify the disclosure requirements on fair value measurements in Topic 820, based on FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. Certain disclosure requirements were removed, modified and added in Topic 820. The Company is currently assessing the impact of this standard on the consolidated financial statements. The Company plans to adopt the new guidance effective April 1, 2020.
 

7



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(2) Finance Receivables
Finance receivables consisted of the following:
 
 
 
June 30, 2019
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Finance receivables
 
$
35,686

 
$
5,713

 
$
41,399

Allowance for credit losses
 
(193
)
 
(11
)
 
(204
)
Deferred dealer participation and other deferred costs
 
443

 

 
443

Unearned subsidy income
 
(1,029
)
 

 
(1,029
)
Finance receivables, net
 
$
34,907

 
$
5,702

 
$
40,609

 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Finance receivables
 
$
35,457

 
$
5,835

 
$
41,292

Allowance for credit losses
 
(193
)
 
(8
)
 
(201
)
Deferred dealer participation and other deferred costs
 
431

 

 
431

Unearned subsidy income
 
(1,098
)
 

 
(1,098
)
Finance receivables, net
 
$
34,597

 
$
5,827

 
$
40,424

 
Finance receivables include retail loans with a principal balance of $9.6 billion and $9.4 billion as of June 30, 2019 and March 31, 2019, respectively, which have been transferred to securitization trusts and are 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.
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 on consumer finance receivables can be affected by general economic conditions. Adverse changes such as a rise in unemployment 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, the value of collateral securing the financings, and economic and market factors that could affect the creditworthiness of dealers. Exposure to credit risk is managed through regular monitoring and adjusting of underwriting 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 segment are collectively evaluated for impairment. Delinquencies and losses are monitored on an ongoing basis and the 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, collateral types, and loan terms. Market and economic factors such as used vehicle prices, unemployment, and consumer debt service burdens are also incorporated into these models.

8



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


Dealer loans are individually evaluated for impairment when specifically identified as impaired. Dealer loans are considered impaired when it is probable that the Company will be unable to collect the 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, ability to perform under the terms of the loan agreements, and collateral values as applicable. 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 months ended June 30, 2019 and 2018.
The Company generally does not grant concessions on consumer finance receivables that are considered 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 months ended June 30, 2019 and 2018. The Company does allow payment deferrals on consumer finance receivables. However, these payment deferrals are not considered troubled debt restructurings since the deferrals are deemed insignificant and interest continues to accrue during the deferral period.

9



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 months ended June 30, 2019
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Beginning balance, April 1, 2019
 
$
193

 
$
8

 
$
201

Provision
 
37

 
11

 
48

Charge-offs
 
(64
)
 
(8
)
 
(72
)
Recoveries
 
27

 

 
27

Effect of translation adjustment
 

 

 

Ending balance, June 30, 2019
 
$
193

 
$
11

 
$
204

 
 
 
 
 
 
 
Allowance for credit losses – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$
11

 
$
11

Collectively evaluated for impairment
 
193

 

 
193

Finance receivables – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$
94

 
$
94

Collectively evaluated for impairment
 
35,100

 
5,619

 
40,719

 
 
 
 
 
 
 
 
 
Three months ended June 30, 2018
 
 
Retail
 
Dealer
 
Total
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Beginning balance, April 1, 2018
 
$
179

 
$

 
$
179

Provision
 
35

 
(1
)
 
34

Charge-offs
 
(55
)
 

 
(55
)
Recoveries
 
24

 
1

 
25

Effect of translation adjustment
 

 

 

Ending balance, June 30, 2018
 
$
183

 
$

 
$
183

 
 
 
 
 
 
 
Allowance for credit losses – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$

 
$

Collectively evaluated for impairment
 
183

 

 
183

Finance receivables – ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$
121

 
$
121

Collectively evaluated for impairment
 
$
33,188

 
$
5,348

 
$
38,536

 



10



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


Delinquencies
The following is an aging analysis of past due finance receivables:
 
 
 
30 – 59 days
past due
 
60 – 89 days
past due
 
90 days
or greater
past due
 
Total
past due
 
Current or
less than 30
days past due
 
Total
finance
receivables
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
New auto
 
$
222

 
$
57

 
$
13

 
$
292

 
$
28,462

 
$
28,754

Used and certified auto
 
82

 
20

 
4

 
106

 
4,971

 
5,077

Motorcycle and other
 
13

 
4

 
2

 
19

 
1,250

 
1,269

Total retail
 
317

 
81

 
19

 
417

 
34,683

 
35,100

Dealer loans:
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale flooring
 
1

 
1

 
4

 
6

 
4,571

 
4,577

Commercial loans
 

 

 
35

 
35

 
1,101

 
1,136

Total dealer loans
 
1

 
1

 
39

 
41

 
5,672

 
5,713

Total finance receivables
 
$
318

 
$
82

 
$
58

 
$
458

 
$
40,355

 
$
40,813

 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Retail loans:
 
 
 
 
 
 
 
 
 
 
 
 
New auto
 
$
214

 
$
41

 
$
10

 
$
265

 
$
28,521

 
$
28,786

Used and certified auto
 
70

 
14

 
4

 
88

 
4,712

 
4,800

Motorcycle and other
 
12

 
3

 
2

 
17

 
1,187

 
1,204

Total retail
 
296

 
58

 
16

 
370

 
34,420

 
34,790

Dealer loans:
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale flooring
 
1

 

 
17

 
18

 
4,668

 
4,686

Commercial loans
 
51

 

 
17

 
68

 
1,081

 
1,149

Total dealer loans
 
52

 

 
34

 
86

 
5,749

 
5,835

Total finance receivables
 
$
348

 
$
58

 
$
50

 
$
456

 
$
40,169

 
$
40,625

 
Credit Quality Indicators
Retail Loan Segment
The Company utilizes proprietary credit scoring systems to evaluate the credit risk of applicants for retail loans. These systems assign internal credit scores based on various factors including the applicant’s credit bureau information and contract terms. The internal credit score provides the primary basis for credit decisions when acquiring retail loan contracts. Internal credit scores are determined only at the time of origination and are not reassessed during the life of the contract.
Subsequent to origination, collection experience provides an indication of the credit quality of consumer finance receivables. The likelihood of accounts charging off is significantly higher once an account becomes 60 days delinquent. Accounts that are current or less than 60 days past due are considered to be performing. Accounts that are 60 days or more past due are considered to be nonperforming. The table below presents the Company’s portfolio of retail loans by this credit quality indicator:
 

11



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


 
 
Retail
new auto
loans
 
Retail
used and
certified auto
loans
 
Retail
motorcycle
and other
loans
 
Total consumer
finance
receivables
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
June 30, 2019
 
 
 
 
 
 
 
 
Performing
 
$
28,684

 
$
5,053

 
$
1,263

 
$
35,000

Nonperforming
 
70

 
24

 
6

 
100

Total
 
$
28,754

 
$
5,077

 
$
1,269

 
$
35,100

 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
 
Performing
 
$
28,735

 
$
4,782

 
$
1,199

 
$
34,716

Nonperforming
 
51

 
18

 
5

 
74

Total
 
$
28,786

 
$
4,800

 
$
1,204

 
$
34,790

 
Dealer Loan Portfolio Segment
The Company utilizes an internal risk rating system to evaluate dealer credit risk. Dealerships are assigned an internal risk rating based on an assessment of their financial condition and other factors. Factors including liquidity, financial strength, management effectiveness, and operating efficiency are evaluated when assessing their financial condition. Financing limits and interest rates are based upon these risk ratings. Monitoring activities including financial reviews and inventory inspections are performed more frequently for dealerships with weaker risk ratings. The financial conditions of dealerships are reviewed and their risk ratings are updated at least annually.
The Company’s outstanding portfolio of dealer loans has been divided into two groups in the tables below. Group A includes the loans of dealerships with the strongest internal risk rating. Group B includes the loans of all remaining dealers.
 
 
 
June 30, 2019
 
March 31, 2019
 
 
Wholesale
flooring
 
Commercial
loans
 
Total
 
Wholesale
flooring
 
Commercial
loans
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Group A
 
$
3,065

 
$
830

 
$
3,895

 
$
3,121

 
$
823

 
$
3,944

Group B
 
1,512

 
306

 
1,818

 
1,565

 
326

 
1,891

Total
 
$
4,577

 
$
1,136

 
$
5,713

 
$
4,686

 
$
1,149

 
$
5,835




12



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(3) Investment in Operating Leases
Investment in operating leases consisted of the following:
 
 
 
June 30, 2019
 
March 31, 2019
 
 
 
 
 
 
 
(U.S. dollars in millions)
Operating lease vehicles
 
$
42,511

 
$
42,427

Accumulated depreciation
 
(8,038
)
 
(8,262
)
Deferred dealer participation and initial direct costs
 
124

 
119

Unearned subsidy income
 
(1,523
)
 
(1,563
)
Estimated early termination losses
 
(116
)
 
(115
)
Investment in operating leases, net
 
$
32,958

 
$
32,606

 
Operating lease revenue consisted of the following:
 
 
Three months ended June 30,
 
 
2019
 
2018
 
 
 
 
 
 
 
(U.S. dollars in millions)
Lease payments
 
$
1,637

 
$
1,567

Subsidy income and dealer rate participation, net (1)
 
246

 
202

Reimbursed lessor costs (2)
 
12

 

Total operating lease revenue, net
 
$
1,895

 
$
1,769

(1)
Includes amortization of initial direct costs during the three months ended June 30, 2018.
(2)
Reimbursed lessor costs were presented net during the three months ended June 30, 2018.

Leased vehicle expenses consisted of the following:
 
 
Three months ended June 30,
 
 
2019
 
2018
 
 
 
 
 
 
 
(U.S. dollars in millions)
Depreciation expense
 
$
1,406

 
$
1,375

Initial direct costs and other lessor costs (1)
 
29

 

Gain on disposition of leased vehicles (2)
 
(43
)
 
(47
)
Total leased vehicle expenses, net
 
$
1,392

 
$
1,328

(1)
Amortization of initial direct costs were presented as a reduction to lease revenue and reimbursed lessor costs were presented net during the three months ended June 30, 2018.
(2)
Included in the gain or loss on disposition of lease vehicles are end of term charges of $28 million and $21 million for the three months ended June 30, 2019 and 2018, respectively.

Contractual operating lease payments due as of June 30, 2019 are summarized below. Based on the Company's experience, it is expected that a portion of the Company's operating leases will terminate prior to the scheduled lease term. The summary below should not be regarded as a forecast of future cash collections.
Twelve month periods ending June 30,
 
(U.S. dollars in millions)

 
 
 
2020
 
$
5,646

2021
 
3,862

2022
 
1,609

2023
 
276

2024
 
57

Total
 
$
11,450



13



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


The Company recognized $24 million and $17 million of early termination losses due to lessee defaults during the three months ended June 30, 2019 and 2018, respectively. Actual net losses realized for the three months ended June 30, 2019 and 2018 totaled $24 million and $15 million, respectively.

The general allowance for uncollectible operating lease receivables was recorded through a reduction to revenue of $6 million during the three months ended June 30, 2019 and a provision for credit losses of $10 million during the three months ended June 30, 2018.
No impairment losses due to declines in estimated residual values were recognized during both the three months ended June 30, 2019 and 2018.

14



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(4) Debt
The Company issues debt in various currencies with both floating and fixed interest rates. Outstanding debt net of discounts and fees, weighted average contractual interest rates and range of contractual interest rates were as follows:
 

 
 
 
 
 
Weighted average
contractual interest rate
 
Contractual
interest rate ranges

 
June 30, 2019
 
March 31, 2019
 
June 30, 2019
 
March 31, 2019
 
June 30, 2019

March 31, 2019

 
 
 
 
 
 
 
 
 



 
 
(U.S. dollars in millions)
 
 
 
 
 
 

 
Unsecured debt:
 
 
 
 
 
 
 
 
 
 

 
Commercial paper
 
$
4,234

 
$
5,755

 
2.45
%
 
2.60
%
 
1.78 - 2.67%

1.79 - 2.71%
Related party debt
 
764

 
749

 
2.01
%
 
2.18
%
 
1.97 - 2.02%

2.02 - 2.31%
Bank loans
 
4,983

 
4,962

 
3.00
%
 
3.16
%
 
2.29 - 3.32%

2.35 - 3.50%
Private MTN program
 
999

 
999

 
3.84
%
 
3.84
%
 
3.80 - 3.88%

3.80 - 3.88%
Public MTN program
 
25,092

 
24,117

 
2.31
%
 
2.35
%
 
0.35 - 3.63%

0.35 - 3.63%
Euro MTN programme
 
881

 
868

 
1.89
%
 
1.89
%
 
1.88 - 2.23%

1.88 - 2.23%
Other debt
 
3,811

 
3,514

 
2.48
%
 
2.50
%
 
1.63 - 3.44%

1.63 - 3.44%
Total unsecured debt
 
40,764

 
40,964

 
 
 
 
 



Secured debt
 
9,003

 
8,790

 
2.49
%
 
2.42
%
 
1.16 - 3.30%

1.16 - 3.30%
Total debt
 
$
49,767

 
$
49,754

 
 
 
 
 



 
As of June 30, 2019, the outstanding principal balance of long-term debt with floating interest rates totaled $11.8 billion, long-term debt with fixed interest rates totaled $32.2 billion, and short-term debt totaled $5.8 billion. As of March 31, 2019, the outstanding principal balance of long-term debt with floating interest rates totaled $12.5 billion, long-term debt with fixed interest rates totaled $29.2 billion, and short-term debt totaled $8.1 billion.
Commercial Paper
As of June 30, 2019 and March 31, 2019, the Company had commercial paper programs that provide the Company with available funds of up to $8.5 billion, at prevailing market interest rates for terms up to one year. The commercial paper programs are supported by the Keep Well Agreements with HMC described in Note 6.
Outstanding commercial paper averaged $5.9 billion and $5.4 billion during the three months ended June 30, 2019 and 2018, respectively. The maximum balance outstanding at any month-end during the three months ended June 30, 2019 and 2018 was $6.2 billion and $5.7 billion, respectively.
Related Party Debt
HCFI issues fixed rate short-term notes to HCI to help fund HCFI’s general corporate operations. HCFI incurred interest expense on these notes totaling $4 million for both the three months ended June 30, 2019 and 2018.
Bank Loans
Outstanding bank loans at June 30, 2019 were either short-term or long-term, with floating interest rates, and denominated in U.S. dollars or Canadian dollars. Outstanding bank loans have prepayment options. No outstanding bank loans as of June 30, 2019 were supported by the Keep Well Agreements with HMC described in Note 6. Outstanding bank loans contain certain covenants, including limitations on liens, mergers, consolidations and asset sales.
Medium Term Note (MTN) Programs
Private MTN Program
AHFC no longer issues MTNs under its Rule 144A Private MTN Program. Notes outstanding under the Private MTN Program as of June 30, 2019 were long-term, with fixed interest rates, and denominated in U.S. dollars. Notes under this program were issued pursuant to the terms of an issuing and paying agency agreement which contains certain covenants, including negative pledge provisions.

15



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


Public MTN Program
In August 2016, AHFC filed a registration statement with the SEC under which it may issue from time to time up to $30 billion aggregate principal amount of Public MTNs. The aggregate principal amount of MTNs offered under this program may be increased from time to time. Notes outstanding under this program as of June 30, 2019 were either long-term or short-term, with either fixed or floating interest rates, and denominated in U.S. dollars, Euro or Sterling. Notes under this program are issued pursuant to an indenture which contains certain covenants, including negative pledge provisions and limitations on mergers, consolidations and asset sales.
Euro MTN Programme
The Euro MTN Programme was retired in August 2014. Notes under this program that are currently listed on the Luxembourg Stock Exchange will remain listed through their maturities. Notes outstanding under this program as of June 30, 2019 were long-term with fixed interest rates. Notes under this program were issued pursuant to the terms of an agency agreement which contains certain covenants, including negative pledge provisions.
The MTN programs are supported by the Keep Well Agreement with HMC described in Note 6.
Other Debt
The outstanding balances as of June 30, 2019 consisted of private placement debt issued by HCFI which are long-term, with either fixed or floating interest rates, and denominated in Canadian dollars. Private placement debt is supported by the Keep Well Agreement with HMC described in Note 6. The notes are issued pursuant to the terms of an indenture which contains certain covenants, including negative pledge provisions.
Secured Debt
The Company issues notes through financing transactions that are secured by assets held by issuing securitization trusts. Notes outstanding as of June 30, 2019 were long-term and short-term with either fixed or floating interest rates, and denominated in U.S. dollars or Canadian dollars. Repayment of the notes is dependent on the performance of the underlying receivables. Refer to Note 9 for additional information on the Company’s secured financing transactions.
Credit Agreements
Syndicated Bank Credit Facilities
AHFC maintains a $7.0 billion syndicated bank credit facility that includes a $3.5 billion 364-day credit agreement, which expires on February 28, 2020, a $2.1 billion credit agreement, which expires on March 3, 2021, and a $1.4 billion credit agreement, which expires on March 3, 2023. As of June 30, 2019, no amounts were drawn upon under the AHFC credit agreements. AHFC intends to renew or replace these credit agreements prior to or on their respective expiration dates.
HCFI maintains a $1.2 billion syndicated bank credit facility which provides that HCFI may borrow up to $611 million on a one-year and up to $611 million on a five-year revolving basis. The one-year tranche of the credit agreement expires on March 25, 2020 and the five-year tranche of the credit agreement expires on March 25, 2024. As of June 30, 2019, no amounts were drawn upon under the HCFI credit agreement. HCFI intends to renew or replace the credit agreement prior to or on the expiration date of each respective tranche.
The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales. Loans, if any, under the credit agreements will be supported by the Keep Well Agreement described in Note 6.
Other Credit Agreements
AHFC maintains other committed lines of credit that allow the Company access to an additional $1.0 billion in unsecured funding with two banks. The credit agreements contain customary covenants, including limitations on liens, mergers, consolidations and asset sales. As of June 30, 2019, no amounts were drawn upon under these agreements. These agreements expire in September 2019. The Company intends to renew or replace these credit agreements prior to or on their respective expiration dates. 

16



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(5) Derivative Instruments
The notional balances and fair values of the Company’s derivatives are presented below. The derivative instruments are presented on a gross basis in the Company’s consolidated balance sheets. Refer to Note 13 regarding the valuation of derivative instruments.
 
 
 
June 30, 2019
 
March 31, 2019
 
 
Notional
balances
 
Assets
 
Liabilities
 
Notional
balances
 
Assets
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(U.S. dollars in millions)
Interest rate swaps
 
$
61,704

 
$
342

 
$
389

 
$
58,132

 
$
308

 
$
307

Cross currency swaps
 
5,002

 
121

 
222

 
5,002

 
72

 
261

Gross derivative assets/liabilities
 
 
 
463

 
611

 
 
 
380

 
568

Counterparty netting adjustment
     and collateral
 
 
 
(383
)
 
(390
)
 
 
 
(313
)
 
(318
)
Net derivative assets/liabilities
 
 
 
$
80

 
$
221

 
 
 
$
67

 
$
250

 
The income statement impact of derivative instruments is presented below. There were no derivative instruments designated as part of a hedge accounting relationship during the periods presented.
 
 
 
Three months ended June 30,
 
 
2019
 
2018
 
 
 
 
 
 
 
(U.S. dollars in millions)
Interest rate swaps
 
$
(76
)
 
$
12

Cross currency swaps
 
45

 
(275
)
Total gain/(loss) on derivative instruments
 
$
(31
)
 
$
(263
)
 
The fair value of derivative instruments is subject to the fluctuations in market interest rates and foreign currency exchange rates. Since the Company has elected not to apply hedge accounting, the volatility in the changes in fair value of these derivative instruments is recognized in earnings. All settlements of derivative instruments are presented within cash flows from operating activities in the consolidated statements of cash flows.
These derivative instruments also contain an element of credit risk in the event the counterparties are unable to meet the terms of the agreements. However, the Company minimizes the risk exposure by limiting the counterparties to major financial institutions that meet established credit guidelines. In the event of default, all counterparties are subject to legally enforceable master netting agreements. In Canada, HCFI is a party to credit support agreements that require posting of cash collateral to mitigate counterparty credit risk on derivative positions.

17



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(6) Transactions Involving Related Parties
The following tables summarize the income statement and balance sheet impact of transactions with the Parent and affiliated companies:
 
 
 
Three months ended June 30,
Income Statement
 
2019
 
2018
 
 
 
 
 
 
 
(U.S. dollars in millions)
Revenue:
 
 
 
 
Subsidy income
 
$
427

 
$
387

Interest expense:
 
 
 
 
Related party debt
 
4

 
4

Other income, net:
 
 
 
 
VSC administration fees
 
27

 
27

Support Service Fee
 
(9
)
 
(9
)
General and administrative expenses:
 
 
 
 
Support Compensation Agreement fees
 
17

 
6

Benefit plan expenses
 
2

 
3

Shared services
 
16

 
15


Balance Sheet
 
June 30, 2019
 
March 31, 2019
 
 
 
 
 
 
 
(U.S. dollars in millions)
Assets:
 
 
 
 
Finance receivables, net:
 
 
 
 
Unearned subsidy income
 
$
(1,020
)
 
$
(1,091
)
Investment in operating leases, net:
 
 
 
 
Unearned subsidy income
 
(1,519
)
 
(1,559
)
Due from Parent and affiliated companies
 
121

 
162

Liabilities:
 
 
 
 
Debt:
 
 
 
 
Related party debt
 
$
764

 
$
749

Due to Parent and affiliated companies
 
121

 
106

Accrued interest expense:
 
 
 
 
Related party debt
 
2

 
3

Other liabilities:
 
 
 
 
VSC unearned administrative fees
 
382

 
387

Accrued benefit expenses
 
67

 
65

 
Support Agreements
HMC and AHFC are parties to a Keep Well Agreement, effective as of September 9, 2005. This Keep Well Agreement provides that HMC will (1) maintain (directly or indirectly) at least 80% ownership in AHFC’s voting stock and not pledge (directly or indirectly), or in any way encumber or otherwise dispose of, any such stock of AHFC that it is required to hold (or permit any of HMC’s subsidiaries to do so), (2) cause AHFC to have a positive consolidated tangible net worth with tangible net worth defined as (a) stockholder’s equity less (b) any intangible assets, determined on a consolidated basis in accordance with GAAP, and (3) ensure that AHFC has sufficient liquidity to meet its payment obligations for debt HMC has confirmed in writing is covered by this Keep Well Agreement, in accordance with its terms, or where necessary make available to AHFC, or HMC shall procure for AHFC, sufficient funds to enable AHFC to meet such obligations in accordance with such terms. This Keep Well Agreement is not a guarantee by HMC.

18



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


HMC and HCFI are parties to a Keep Well Agreement effective as of September 26, 2005. This Keep Well Agreement provides that HMC will (1) maintain (directly or indirectly) at least 80% ownership in HCFI’s voting stock and not pledge (directly or indirectly), or in any way encumber or otherwise dispose of, any such stock of HCFI that it is required to hold (or permit any of HMC’s subsidiaries to do so), (2) cause HCFI to have a positive consolidated tangible net worth with tangible net worth defined as (a) stockholder’s equity less (b) any intangible assets, determined on a consolidated basis in accordance with generally accepted accounting principles in Canada, and (3) ensure that HCFI has sufficient liquidity to meet its payment obligations for debt HMC has confirmed in writing is covered by this Keep Well Agreement, in accordance with its terms, or where necessary make available to HCFI, or HMC shall procure for HCFI, sufficient funds to enable HCFI to meet such obligations in accordance with such terms. This Keep Well Agreement is not a guarantee by HMC.
Debt programs supported by the Keep Well Agreements consist of the Company’s commercial paper programs, Private MTN Program, Public MTN Program, Euro MTN Programme, HCFI’s private placement debt and loans, if any, under AHFC's syndicated bank credit facilities. In connection with the above agreements, AHFC and HCFI have entered into separate Support Compensation Agreements, where each has agreed to pay HMC a quarterly fee based on the amount of outstanding debt that benefit from the Keep Well Agreements. Support Compensation Agreement fees are recognized in general and administrative expenses.
Incentive Financing Programs
The Company receives subsidy payments from AHM and HCI, which supplement the revenues on financing products offered under incentive programs. Subsidy payments received on retail loans and leases are deferred and recognized as revenue over the term of the related contracts. The unearned balance is recognized as reductions to the carrying value of finance receivables and investment in operating leases. Subsidy payments on dealer loans are received as earned.
Related Party Debt
HCFI issues short-term notes to HCI to fund HCFI’s general corporate operations. Interest rates are based on prevailing rates of debt with comparable terms. Refer to Note 4 for additional information.
Vehicle Service Contract (VSC) Administration
AHFC performs administrative services for VSCs issued by certain subsidiaries of AHM. AHFC’s performance obligations for the services are satisfied over the term of the underlying contracts and revenue is recognized proportionate to the anticipated amount of services to be performed. Contract terms range between 2 and 9 years with the majority of contracts having original terms between 4 and 8 years. The majority of the administrative service revenue is recognized during the latter years of the underlying contracts as this is the period in which the majority of VSC claims are processed. AHFC receives fees for performing the administrative services when the contracts are acquired.
Unearned VSC administration fees represents AHFC’s contract liabilities and are included in other liabilities (Note 11). VSC administration income is recognized in other income, net (Note 12). HCFI receives fees for marketing VSCs issued by HCI. These fees are also recognized in other income, net.
AHFC pays fees to AHM for services provided in support of AHFC’s performance of VSC administrative services. The support fees are recognized as an expense within other income, net (Note 12).
Shared Services
The Company shares certain common expenditures with AHM, HCI, and other related parties including information technology services and facilities. The allocated costs for shared services are included in general and administrative expenses.
Benefit Plans
The Company participates in various employee benefit plans that are sponsored by AHM and HCI. The allocated benefit plan expenses are included in general and administrative expenses.
Income taxes
The Company’s U.S. income taxes are recognized on a modified separate return basis pursuant to an intercompany income tax allocation agreement with AHM. Income tax related items are not included in the tables above. Refer to Note 7 for additional information.

19



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


Other
AHM periodically sponsors programs that allow lessees to terminate their lease contracts prior to the contractual maturity date. AHM compensates the Company for rental payments that were waived under these programs. During the three months ended June 30, 2019 and 2018, the Company recognized $3 million and $6 million, respectively, under these programs which were reflected as proceeds on the disposition of the returned lease vehicles.
The majority of the amounts due from the Parent and affiliated companies at June 30, 2019 and March 31, 2019 related to incentive financing program subsidies. The majority of the amounts due to the Parent and affiliated companies at June 30, 2019 and March 31, 2019 related to wholesale flooring payable to the Parent. These receivable and payable accounts are non-interest-bearing and short-term in nature and are expected to be settled in the normal course of business.
In August 2019, AHFC declared a cash dividend of $292 million to its parent, AHM.


(7) Income Taxes
The Company's effective tax rate was 31.6% to 27.3%, for the three months ended June 30, 2019 and 2018, respectively. The difference in the effective tax rate for the three months ended June 30, 2019 was primarily due to an increase in uncertain tax positions and a reduction in tax credits, offset by overall lower state income taxes.
The Company does not provide for income taxes on its share of the undistributed earnings of HCFI which are intended to be indefinitely reinvested outside the United States. At June 30, 2019, $1.0 billion of accumulated undistributed earnings of HCFI were intended to be so reinvested. If the undistributed earnings as of June 30, 2019 were to be distributed, the tax liability associated with these indefinitely reinvested earnings would be $56 million.
During the period ended June 30, 2019, reflecting additional guidance issued by the IRS related to the Tax Cuts and Jobs Act (TCJA) enacted in December 2017, the Company re-measured unrecognized tax benefits attributable to positions previously claimed. The Company does not expect any material changes in the amounts of unrecognized tax benefits during the remainder of the fiscal year ending March 31, 2020.
As of June 30, 2019, the Company has open tax years either currently subject to examination or eligible for potential future examination by U.S. federal and state tax jurisdictions for returns filed for the taxable years ended March 31, 2008 through 2018, with the exception of one state which is subject to departmental review for returns filed for the taxable years ended March 31, 2001 through 2007. The Company’s Canadian subsidiary, HCFI, has open tax years either currently subject to examination or eligible for potential future examination for returns filed for the taxable years ended March 31, 2012 through 2018 federally, and returns filed for the taxable years ended March 31, 2009 through 2018 provincially. The Company believes appropriate provision has been made for all outstanding issues for all open years.

20



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)




(8) Commitments and Contingencies
Operating Leases
The Company leases certain premises and equipment through operating leases. AHFC leases its premises and equipment from third parties and HCFI leases its premises from HCI. Many of the Company's leases contain renewal options, and generally have no residual value guarantees or material covenants. When it is reasonably certain that the Company will exercise the option to renew a lease, the Company will include the renewal option in the evaluation of the lease term. The Company has elected not to recognize right-of-use assets or lease liabilities for leases with a lease term of less than one year. As most of the Company's leases do not provide an implicit rate, the incremental borrowing rate is used in determining the present value of lease payments. The right-of-use assets in operating lease arrangements are reported in other assets on the Company's consolidated balance sheets.
Operating lease liabilities are reported in other liabilities on the Company's consolidated balance sheets. At June 30, 2019, maturities of operating lease liabilities were as follows:
Twelve month periods ending June 30,
 
(U.S. dollars in millions)

 
 
 
2020
 
$
10

2021
 
10

2022
 
9

2023
 
8

2024
 
8

Thereafter
 
23

Total undiscounted future lease obligations
 
68

Less: imputed interest
 
(8
)
Present value of lease liabilities
 
$
60


Rent expense under operating leases was $3 million for the three months ended June 30, 2019 and is included within general and administrative expenses.
As of June 30, 2019, the weighted average remaining lease term for operating leases was 7.5 years and the weighted average remaining discount rate for operating leases was 3.03%.
Revolving Lines of Credit to Dealerships
The Company extends commercial revolving lines of credit to dealerships to support their business activities including facilities refurbishment and general working capital requirements. The amounts borrowed are generally secured by the assets of the borrowing entity. The majority of the lines have annual renewal periods. The unused balance of commercial revolving lines of credit was $259 million as of June 30, 2019. The Company also has commitments to finance the construction of auto dealership facilities. The remaining unfunded balance for these construction loans was $11 million as of June 30, 2019.
Legal Proceedings and Regulatory Matters
The Company establishes accruals for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. When able, the Company will determine estimates of reasonably possible loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established.

21



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


The Company is involved, in the ordinary course of business, in various legal proceedings including claims of individual customers and purported class action lawsuits. Certain of these actions are similar to suits filed against other financial institutions and captive finance companies. Most of these proceedings concern customer allegations of wrongful repossession or defamation of credit. The Company is also subject to governmental reviews and inquiries from time to time. On July 15, 2019, the Company received a Civil Investigative Demand (CID) from the U.S. Department of Justice (DOJ) relating to termination of motor vehicle leases by servicemembers under the Servicemembers Civil Relief Act. The Company is cooperating with the DOJ and is responding to their information requests. Based on available information and established accruals, management does not believe it is reasonably possible that the results of these proceedings, in the aggregate, will have a material adverse effect on the Company’s consolidated financial statements.

(9) Securitizations and Variable Interest Entities (VIE)
The trusts utilized for on-balance sheet securitizations are VIEs, which are required to be consolidated by their primary beneficiary. The Company is considered to be the primary beneficiary of these trusts due to (i) the power to direct the activities of the trusts that most significantly impact the trusts’ economic performance through its role as servicer, and (ii) the obligation to absorb losses or the right to receive residual returns that could potentially be significant to the trusts through the subordinated certificates and residual interest retained. The debt securities issued by the trusts to third-party investors along with the assets of the trusts are included in the Company’s consolidated financial statements.
During the three months ended June 30, 2019 and 2018, the Company issued notes through asset-backed securitizations, which were accounted for as secured financing transactions totaling $1.5 billion and $1.0 billion, respectively. The notes were secured by receivables with an initial principal balance of $1.6 billion and $1.3 billion, respectively.
The table below presents the carrying amounts of assets and liabilities of consolidated securitization trusts as they are reported in the Company’s consolidated balance sheets. All amounts exclude intercompany balances, which have been eliminated upon consolidation. The assets of the trusts can only be used to settle the obligations of the trusts and investors in the notes issued by a trust only have recourse to the assets of such trust and do not have recourse to the assets of AHFC, HCFI, or its other subsidiaries or to other trusts.
 
 
 
June 30, 2019
 
March 31, 2019
 
 
 
 
 
 
 
(U.S. dollars in millions)
Assets:
 
 
 
 
Finance receivables
 
$
9,594

 
$
9,352

Unamortized costs and subsidy income, net
 
(282
)
 
(265
)
Allowance for credit losses
 
(14
)
 
(14
)
Finance receivables, net
 
9,298

 
9,073

Vehicles held for disposition
 
3

 
3

Restricted cash (1)
 
621

 
588

Accrued interest receivable (1)
 
10

 
9

Total assets
 
$
9,932

 
$
9,673

Liabilities:
 
 
 
 
Secured debt
 
$
9,016

 
$
8,803

Unamortized discounts and fees
 
(13
)
 
(13
)
Secured debt, net
 
9,003

 
8,790

Accrued interest expense
 
8

 
8

Total liabilities
 
$
9,011

 
$
8,798

 
(1)
Included with other assets in the Company’s consolidated balance sheets (Note 10).

In their role as servicers, AHFC and HCFI collect principal and interest payments on the underlying receivables on behalf of the securitization trusts. Cash collected during a calendar month is required to be remitted to the trusts in the following month. AHFC and HCFI are not restricted from using the cash collected for their general purposes prior to the remittance to the trusts. As of June 30, 2019 and March 31, 2019, AHFC and HCFI had combined cash collections of $425 million and $496 million, respectively, which were required to be remitted to the trusts.

22



AMERICAN HONDA FINANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)



(10) Other Assets
Other assets consisted of the following:
 
 
 
June 30, 2019
 
March 31, 2019
 
 
 
 
 
 
 
(U.S. dollars in millions)
Interest receivable and other assets
 
$
110

 
$
106

Other receivables
 
178

 
175

Deferred expense
 
117

 
115

Software, net of accumulated amortization of $157 and $154 as of June 30, 2019 and March 31, 2019, respectively
 
28

 
29

Property and equipment, net of accumulated depreciation of $22 and $21 as of June 30, 2019 and March 31, 2019, respectively
 
6

 
6

Restricted cash
 
621

 
588

Operating lease assets
 
54

 

Like-kind exchange assets
 
75

 
73

Other miscellaneous assets
 
23

 
25

Total
 
$
1,212

 
$
1,117

 
Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 5 years. General and administrative expenses include depreciation and amortization expense of $3 million for both the three months ended June 30, 2019 and 2018.

(11) Other Liabilities
Other liabilities consisted of the following:
 
 
 
June 30, 2019
 
March 31, 2019
 
 
 
 
 
 
 
(U.S. dollars in millions)
Dealer payables
 
$
195

 
$
241

Accounts payable and accrued expenses
 
408

 
399

Lease security deposits
 
88

 
85

VSC unearned administrative fees (Note 6)
 
382

 
387

Unearned income, operating leases
 
344