By Yoko Kubota 

TOKYO -- Honda Motor Co. swung to a loss in its latest quarter because of ballooning costs tied to recalls of Takata air bags, a problem dragging on auto-making profits world-wide.

Honda has been the hardest hit among car makers, but an executive said Friday that the company sees light at the end of the tunnel because it has set aside enough cash to cover replacements for air-bag inflaters tagged for recall over the next several years.

"It's true that [the air-bag recall costs] have wiped out our profits," Senior Managing Officer Kohei Takeuchi said, noting that Honda has provisioned Yen556 billion for the Takata recalls in the past two financial years, including Yen270 billion in its latest quarter.

The recall costs outweighed strong vehicle sales in the U.S. and China for Honda's March-ended fiscal fourth quarter.

Mr. Takeuchi said Honda's recall-related expenses are heading lower. The company expects to post a net profit of Yen390 billion in the financial year ending in March 2017.

For the latest quarter, Honda posted a loss of Yen93.4 billion ($856 million), compared with a profit of Yen81.9 billion in the year-earlier fiscal fourth quarter. The quarterly loss was its first in seven years, the auto maker said, though it changed its accounting method in that time span.

For the full year, Honda posted Yen344.5 billion in net profit, a 32% decline from a year earlier. Its full-year revenue rose 9.6% to Yen14.6 trillion.

Some air-bag inflaters made by Takata Corp. are prone to rupturing, which causes the air bags to explode and spray shrapnel, a problem linked to at least 11 deaths and more than 100 injuries world-wide. An inflater is a component in an air bag that contains propellant inside a metal casing. It releases air to inflate the bag in the event of a crash.

The funds Honda has set aside cover most of the costs to replace 21 million air-bag inflaters it plans to recall globally over the next few years, following an order by U.S. regulators, Mr. Takeuchi said. That number is in addition to 30 million inflaters the company has already recalled, he said.

Earlier this month, the U.S. National Highway Traffic Safety Administration ordered auto makers to recall up to an additional 40 million Takata inflaters in phases through December 2019.

One of the issues with those Takata inflaters, which use ammonium nitrate as propellant, is that they are vulnerable to absorbing moisture that could lead to ruptures. The inflaters covered by the latest safety action don't use a drying agent, or desiccant.

Other car makers have set aside funds to cover recall-related expenses.

Nissan Motor Co. recorded a Yen90.7 billion charge for its March-ended fiscal year related to the recall costs, while Mazda Motor Corp. took a Yen40.7 billion charge for the same period. Subaru maker Fuji Heavy Industries Ltd. expects to spend a total of around Yen90 billion over the next three financial years.

The car makers are covering these expenses themselves for now, pending an agreement with Takata on how to split the costs.

There is a risk that regulators could order further recalls. Unless Takata can dispel regulators' concerns about the possibility that inflaters with a drying agent could also be unsafe, the company will have to recall those devices by the end of 2019. Such an action could affect around 10 million inflaters in Honda vehicles, Mr. Takeuchi said. That is a significant number of devices, though fewer than the 51 million inflaters the company has committed to recalling.

While Honda expects profit growth this year, like other Japanese auto makers it faces a less favorable foreign-exchange environment. Since late 2012, a falling yen has buoyed exports and allowed companies to convert profits made overseas at a more advantageous rate. However, the yen has been strengthening, trading at around 109 to the dollar, compared with around 120 in early January.

For the current financial year, Honda expects foreign-exchange fluctuations to reduce profit by around Yen300 billion. Honda said it is assuming a yen exchange rate of 105 to the dollar for this financial year.

Write to Yoko Kubota at yoko.kubota@wsj.com

 

(END) Dow Jones Newswires

May 14, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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