Autoliv, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Autoliv supplies automotive safety systems, including airbags and seatbelts, and reports one operating segment. Amounts are in U.S. dollars unless otherwise stated.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $2,081 million | $2,022 million | $4,206 million | $4,265 million |
| Gross margin | 15.7% | 19.0% | 14.6% | 19.8% |
| Operating income / margin | $124 million / 6.0% | $164 million / 8.1% | $258 million / 6.1% | $401 million / 9.4% |
| Adjusted operating income / margin | $124 million / 6.0% | $166 million / 8.2% | $192 million / 4.6% | $403 million / 9.4% |
| Net income attributable to controlling interest | $79 million | $104 million | $162 million | $261 million |
| Diluted EPS / adjusted diluted EPS | $0.91 / $0.90 | $1.19 / $1.20 | $1.85 / $1.36 | $2.98 / $2.99 |
- Q2 reported sales increased 2.9%; organic sales grew 8.0%, about 7 percentage points ahead of global light vehicle production growth of approximately 1%. Price increases and new product launches drove outperformance. Americas sales were particularly strong; China and Japan sales declined.
- Q2 gross profit fell $58 million year over year, primarily from higher raw-material costs, partly offset by customer price increases. Management said raw-material cost increases represented almost 6 percentage points of operating-margin headwind in the quarter.
- First-half reported sales declined 1.4%, while organic sales increased 3.2%; currency reduced reported sales by 4.6%. First-half adjusted operating income excludes the $80 million Japan property-sale gain and capacity-alignment items.
- Other income included a $21 million patent-litigation settlement gain in Q2. First-half other income also included the $80 million Japan property-sale gain and approximately $10 million of capacity-alignment provisions.
Cash flow, liquidity and capital
- Q2 operating cash flow was negative $51 million and free cash flow was negative $190 million, primarily reflecting working-capital timing and volatility. Management expected most working-capital effects to reverse in the second half.
- For the first half, operating cash flow was $19 million versus $249 million a year earlier; free cash flow was negative $137 million versus positive $60 million. Net capital expenditure was $156 million.
- At June 30, cash was $327 million, total debt was $1,619 million and net debt was $1,318 million. Net debt was $266 million above December 31, 2021. The leverage ratio was 1.7x, above the company’s 0.5x–1.5x target range; its long-term target is 1.0x.
- Current assets were $3,285 million and current liabilities $3,061 million. The company reported total liquidity of approximately $1.4 billion including committed, unused loan facilities. It refinanced its existing $1.1 billion revolving credit facility in May.
- The company paid a $0.64-per-share dividend in Q2 and repurchased 0.30 million shares at an average price of $73.68. It stated it remained committed to share repurchases over time despite leverage being above target.
Outlook, risks and unusual items
- Updated 2022 indications: organic sales growth of approximately 13%–16%; negative foreign-exchange impact on reported sales of approximately 5%; adjusted operating margin of approximately 6.0%–7.0%; tax rate around 30%; operating cash flow of $750–$850 million; and net capital expenditure around 5.5% of sales. Assumptions include global vehicle-production growth of 2%–5% and targeted customer cost recovery.
- Management cited ongoing semiconductor and supply-chain constraints, China lockdowns, volatile customer production schedules, inflation and higher raw-material, transportation and energy costs. It described customer price-recovery discussions as progressing, while continuing cost controls, hiring restrictions, capacity alignments and footprint optimization.
- Management maintained confidence in its medium-term adjusted operating-margin target of 12%. It also warned that semiconductor shortages, inflation, customer pricing negotiations, the Ukraine conflict and further China lockdowns could adversely affect results.
- In the Andrews product-liability case, a court awarded $13.5 million in compensatory damages and $100 million in punitive damages; the company is challenging the verdict and intends to appeal if necessary. It accrued $14 million, the low end of a stated probable-loss range of $14 million–$114 million. Insurance recovery, particularly for punitive damages, is uncertain.
- A separate potential Volvo/ZF inflator-recall exposure was described as reasonably possible, estimated at $0–$43 million, with no accrual recorded. The company reported $145 million in product-related liabilities and $149 million in related insurance receivables at quarter-end; the unannounced recall’s liability exceeded its related insurance receivable by $26 million.
- First-half comprehensive income was affected by $104 million of net-of-tax currency-translation losses. Management reported no material change in market-risk disclosures and said disclosure controls were effective.
Key facts for investors to verify
- Whether customer pricing recoveries will offset raw-material and other cost inflation, and whether the stated 2022 margin and cash-flow indications remain achievable.
- Working-capital recovery and the trajectory of operating and free cash flow after the first-half deterioration.
- Leverage relative to the company’s target range, refinancing terms and the balance between dividends, repurchases and debt reduction.
- Developments in the Andrews litigation, the scope of insurance coverage, and the ultimate cost of the identified recall matters.
- How vehicle-production levels, semiconductor availability, China conditions and foreign-exchange movements affect sales and margins.