Profit Down 24% at Subaru Parent Fuji Heavy Industries

By Markets Fool.com

Subaru's sales growth continues to outpace the overall market'sas buyers flock to crossovers like the Crosstrek. Image source: Fuji Heavy Industries.

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Fuji Heavy Industries (NASDAQOTH: FUJHY), the corporate parent of Japanese automaker Subaru, reported earnings for the quarter ended June 30 on Aug. 3. Here's what investors need to know.

The key numbers

Like many Japanese companies, Fuji Heavy begins its fiscal year on April 1. The quarter that ended on June 30 was the first quarter of its 2017 fiscal year. All financial numbers are in billions of yen.

Metric Q1 FY2017 (ended June 30, 2016) Q1 FY2016 (ended June 30, 2015) Change
Revenue 769.4 ($7.5 billion) 765.3 0.5%
Units sold 245,000 225,000 8.9%
Operating income 101.5 ($990 million) 134.2 (24.3%)
Operating profit margin 13.2% 17.5% (4.3 points)
Net income 78.9 ($769M) 84.2 (6.3%)
JPY/USD 111 yen = $1 120 yen = $1 (9 yen)
JPY/EUR 124 yen = 1 euro 132 yen = 1 euro (8 yen)

Fuji Heavy used the exchange rates shown in the chart for accounting purposes.As of August 3, 1 U.S. dollar = about 101 Japanese yen. Data source: Fuji Heavy Industries.

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What happened at Fuji Heavy Industries during the quarter

Global demand for Subaru's vehicles continued to be very strong during the quarter. But the operating profit generated by a nearly 9% rise in global sales was more than offset by unfavorable exchange-rate shifts and costs related to the global recalls of airbag inflators made by supplier Takata.

Subaru's sales in its home market of Japan rose 11.3% to about 31,000 units, led by strong demand for the Forester crossover and the small Impreza sedan. Sales outside of Japan grew 8.5% to about 214,000 vehicles.

Despite a strong global increase, Subaru's sales growth was held back somewhat by the slowing U.S. market during the quarter. The U.S. is far and away Subaru's largest single market, accounting for about 60% of its global sales, and Subaru's sales gains have outpaced the overall market's growth for several quarters. But the market's growth is now slowing: Subaru's U.S. sales grew just 4.2% during the quarter, paced by strong gains for the Outback (up 12%) and Crosstrek (up 8.5%) crossovers.

That 9% rise in global sales drove just a small (0.5%) increase in revenue after the currencies were translated into yen. The dollars that Subaru earned in the U.S. were worth just 111 yen on average during the quarter, down from 120 yen a year ago. That and other unfavorable exchange-rate shifts cost Fuji Heavy 29.2 billion yen ($289 million) in operating income during the quarter.

Profit was also hurt by rising costs. Research and development spending rose 27.6% from the year-ago quarter, to 23.6 billion yen ($233 million), as Subaru ramped up its investments in advanced technologies. Selling, general, and administrative expenses (SG&A) rose 39.2 billion yen ($388 million) from a year ago, mostly on costs related to the airbag-inflator recalls.

These increases in spending were offset by about 10.5 billion yen ($104 million) in cost reductions during the quarter, the company said.

Looking ahead: Full-year guidance revised

Fuji Heavy revised its guidance for the full fiscal year, raising its revenue expectations while lowering its profit guidance. It now expects revenue of 3.19 trillion yen (up from a prior forecast of 3.17 trillion yen), operating income of 400 billion yen (down from 420 billion yen), and net income of 285 billion yen (down from 293 billion yen).

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