Autoliv, Inc. — Q3 2020 Form 10-Q
Business context and period: For the quarter and nine months ended September 30, 2020. Autoliv supplies automotive safety products, including airbags and seatbelts, and reports one operating segment. Results reflect the COVID-19-related downturn and subsequent recovery in vehicle production.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2,037.2 million | $2,027.7 million | $4,930.6 million | $6,356.4 million |
| Operating income / margin | $174.5 million / 8.6% | $153.8 million / 7.6% | $75.3 million / 1.5% | $496.5 million / 7.8% |
| Adjusted operating income / margin | $205.6 million / 10.1% | $182.5 million / 9.0% | $170.2 million / 3.5% | $532.1 million / 8.4% |
| Net income (loss) | $98.8 million | $86.0 million | $(0.6) million | $306.9 million |
| Diluted EPS | $1.12 | $0.98 | $(0.02) | $3.50 |
| Adjusted diluted EPS | $1.48 | $1.30 | $0.95 | $3.87 |
| Operating cash flow | $352 million | $195 million | $380 million | $328.4 million |
| Free cash flow | $276 million | $73 million | $152 million | $(30) million |
Q3 reported sales rose 0.5%; organic sales increased 0.4%, outperforming global light vehicle production by 4.7 percentage points. Gross margin was 19.6%, up 0.9 percentage points year over year. For the first nine months, organic sales fell 20.5%; gross margin declined 3.1 points to 15.1%.
Q3 performance improved as production recovered, productivity and cost actions took effect, and working capital and spending were managed tightly. Adjusted measures exclude capacity-alignment and antitrust-related costs, and, where applicable, 2019 segment-separation costs; they are non-U.S. GAAP measures.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $1,476.5 million; total debt was $3,032.6 million and net debt was $1,573.1 million, down $208 million year over year.
- Current assets were $4,036.5 million and current liabilities were $3,221.3 million. The company reported liquidity of approximately $2.0 billion, including committed unused facilities.
- Leverage ratio was 2.4x, versus 1.8x a year earlier and 2.9x at June 30, 2020; the company’s long-term target is approximately 1x, within a 0.5x–1.5x range.
- Capital expenditures, net, were $231.5 million for the first nine months, down 36% year over year. On October 2, 2020, Autoliv repaid the $600 million revolving-credit-facility borrowing classified as short-term debt at quarter-end.
Changes, outlook and material items
- The nine-month sales decline and weaker operating results reflect the pandemic-driven contraction and volatile restart in vehicle production. Global light vehicle production fell 23.9% over the period; Autoliv’s organic sales decline was 20.5%.
- Q3 organic sales grew 10.4% in China and 1.2% in the Americas, but declined 4.8% in Europe and 11.8% in Japan. Management reported that sales outperformed production in all major regions.
- For full-year 2020, management indicated net sales growth of around negative 14.5%, organic sales growth of around negative 13%, and adjusted operating margin of around 6%. It also indicated a tax rate around 40%, operating cash flow below 2019, capital expenditures as a percentage of sales below 2019, and year-end leverage above its target range. These are forward-looking, non-U.S. GAAP indications and depend on uncertain market conditions.
- Restructuring charges were primarily for efficiency and footprint programs. The restructuring reserve was $122.9 million at September 30; approximately $60 million related to a 2020 efficiency program expected to conclude in 2021, and approximately $29 million to European footprint optimization expected to conclude in 2023.
- The nine-month effective tax rate was 104.4%, reflecting low pretax income, losses without tax benefits, country mix and discrete tax items. The Q3 rate was 33.5%.
- The board suspended the quarterly dividend in April 2020; no Q3 dividend was declared or paid. Management said future dividends are subject to quarterly board review and there is no assurance of resumption.
- Product-related liabilities were $57.6 million at quarter-end. Regarding the Toyota side-curtain-airbag recall, the company reported an immaterial accrual and expected its net loss, after insurance, to be below $20 million, while noting actual costs could differ materially.
- Management cited continuing COVID-19 uncertainty, demand and production volatility, supply-chain disruption, customer and supplier financial risk, cost and restructuring execution, competition, foreign exchange, trade policy, and product liability, warranty, and recall exposure. It reported no material changes to other market-risk disclosures and no reportable subsequent events.
Important facts for investors to verify
- Whether vehicle production and customer demand recover as assumed in the full-year indications, particularly given the risk of renewed COVID-19 disruption.
- Progress toward restructuring savings, the timing and cash costs of the programs, and whether adjusted margins translate into sustained GAAP profitability.
- Debt maturities, post-quarter repayment of the $600 million facility borrowing, available liquidity, and leverage relative to the stated target.
- Actual cash generation and capital spending compared with management’s full-year indications, and the sustainability of working-capital improvements.
- Developments in the Toyota recall, other product claims, and the adequacy of reserves and insurance recoveries.
- The drivers and durability of the unusually high nine-month effective tax rate and the impact of future tax assessments or changes.