A Rising Yen Crushes Profits at Subaru-Maker Fuji Heavy Industries

Fuji Heavy Industries, Ltd.(NASDAQOTH: FUJHY), maker of Subaru cars, reported its earnings for the quarter ended December 31 on February 8. Here's what investors need to know.

Fuji Heavy Industries earnings: The raw numbers

Like many Japanese companies, FHI's fiscal year ends on March 31. The quarter that ended on December 31 was the third quarter of FHI's fiscal 2017. All financial numbers are shown in billions of yen.

Metric Q3 FY 2017 Q3 FY 2016 Change
Revenue 850.2 817.2 4%
Vehicles sold (thousands) 274 240 14.2%
Operating profit 98.2 150.6 (34.8)%
Operating profit margin 11.6% 18.4% 6.8 ppts
Net income 43.7 144.6 (69.8)%
Yen per U.S. dollar, average during period 106 122 16 fewer yen
Yen per euro, average during period 118 135 17 fewer yen

Data source: Fuji Heavy Industries, Ltd.

FHI's quarter in a nutshell

Despite year-over-year gains in sales and revenue, FHI's operating profit fell 35% to 98.2 billion yen ($864.7 million) on higher incentives, the yen's appreciation versus the dollar and euro, and a big charge related to the ongoing Takata airbag recalls.

What happened at Subaru last quarter

FHI has posted three straight years of record earnings, powered by strong sales of Subarus in the United States and a weak yen that made the dollars earned in the U.S. worth more in yen terms.

Sales in the U.S., which is far and away Subaru's most important market, are still very strong, up 12% in the quarter to about 174,400 vehicles. But the stronger yen ate into yen-denominated profits. A year ago, a dollar earned inthe U.S. was worth 122 yen -- but in the most recentquarter, that dollar was worth just 106 yen on average.

The all-new 2017 Subaru Impreza went into production at FHI's Indiana factory during the quarter. Image source: Fuji Heavy Industries, Ltd.

Subaru's profits were also squeezed by rising incentives in the U.S. The U.S. new-car market is probably at or past its cyclical peak. As is typical at this stage of the cycle, automakers are increasing their incentives in an effort to find growth.

That's especially true for sedan models, which have suffered as buyers have migrated toward the new generation of crossover SUVs. Subaru is arguably the company that invented the crossover, and its sales have boomed in recent years. U.S. sales of the Outback, the archetypalfamily-sized crossover, were up 20% last year, but its more sedan-like models have still suffered. U.S. sales of Subaru's compact Impreza sedan were down over 17% last year.

Subaru has traditionally not needed big incentives to keep sales going, but even it has had to respond: Its incentives in the U.S. rose to a high (for Subaru, anyway) $1,700 per vehicle in the third quarter. That plus the stronger yen put a big dent in FHI's margins.

About that recall: Takata airbags strike again

FHI took a $118.2 million charge under "warranty costs" related to the Takata airbag-inflator recalls in the qurater.Like many automakers, Subaru is still working through the massive number of defective airbag inflators made by Takata, which was once a giant auto-industry supplier. You can learn more here,but briefly: Tens of millions of vehicles have been recalled across the industry, and many automakers have taken charges to replace the defective inflators over the last several quarters.

Note: FHI will soon have a more familiar corporate name

Years ago, FHI was primarily a defense contractor focused on aircraft and aerospace components. Those businesses still exist, but they account for only about 5% of the company's revenue; the remainder is Subaru, and it's Subaru that drives FHI's performance. That reality will soon be reflected in the company's name: After April 1, FHI will be known as "Subaru Corporation."

Outlook: FHI boosted its full-year guidance

FHI had previously cut its guidance for the fiscal year that will end on March 31. But it revised its expectations back up a bit in its most recent report.

All financial numbers are shown in billions of yen.

Metric Latest FY2017 Forecast Prior Forecast
Revenue 3,310 3,180
Operating income 410 373
Net income 290 278
Yen per dollar 108 104
Yen per euro 119 115

Data source: Fuji Heavy Industries, Ltd.

FHI also slightly increased its full-year expectation for Subaru vehicle sales to 1.07 million (from 1.06 million), on stronger-than-expected U.S. sales.

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