Autoliv, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020, compared with Q1 2019. Autoliv supplies automotive safety products, including airbags and seatbelts, and reports one operating segment. Amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $1,845.8 million | $2,174.0 million; down 15.1% reported and 13.0% organically |
| Gross profit / margin | $331.0 million / 17.9% | $378.8 million / 17.4% |
| Operating income / margin | $134.3 million / 7.3% | $173.2 million / 8.0% |
| Adjusted operating margin | 7.4% | 7.7% |
| Net income | $74.9 million | $111.5 million; down 32.8% |
| Diluted EPS | $0.86 | $1.27 |
| Cash from operating activities | $155.8 million | $153.7 million |
| Capital expenditures, net | $88.2 million cash outflow | $108.0 million cash outflow |
| Cash from operations less investing cash used | $68 million, as reported by management | $46 million |
| Cash and cash equivalents | $907.2 million at March 31 | $444.7 million at December 31, 2019 |
| Total debt / net debt | $2,528.2 million / $1,629.5 million | Net debt was $1,649.8 million at December 31, 2019 |
| Leverage ratio | 1.7x | 1.7x at December 31, 2019; 1.6x a year earlier |
Operating margin and earnings declined as lower sales outweighed cost reductions. Gross margin improved year over year, supported by workforce and other cost actions, lower raw-material costs, favorable currency effects, and the absence of prior-year costs related to social unrest in Mexico. The effective tax rate rose to 32.7% from 27.4%, primarily due to unfavorable country mix.
Material changes and management commentary
- Global light vehicle production fell 24.4% year over year. Autoliv’s organic sales decline of 13% outperformed that decline by about 11 percentage points. China sales were especially weak: down 36.9% organically.
- Q1 results reflected COVID-19-related customer shutdowns in China, followed by closures in Europe and North America late in the quarter. Management said the operating environment had become more challenging after quarter-end as closures spread to most operations.
- Management withdrew its full-year 2020 indications on April 2, 2020, citing limited visibility. It said a potential Q2 global vehicle-production decline of 45%, based on an IHS outlook dated April 16, could materially affect sales and would likely have a greater impact on profitability and cash flow than Q1. This was an external outlook, not company guidance.
- Management described China production as having recovered to normal levels by the filing date, while restarts in Europe and North America remained uncertain and potentially volatile.
- To protect liquidity, Autoliv reduced or suspended noncritical spending and investment, adjusted production and work hours, accelerated savings, furloughed personnel, and tightened working-capital controls. Executives and non-employee directors also agreed to 20% compensation reductions for Q2.
Guidance, contingencies and unusual items
- On April 2, 2020, Autoliv canceled its declared second-quarter dividend and suspended future dividends, subject to quarterly Board review. The cancellation released approximately $54 million of accrued dividends back to equity.
- Autoliv drew $500 million on its revolving credit facility by March 31 and drew the remaining $600 million on April 2. Management reported approximately $1.5 billion of cash after the April draw. Debt maturities were approximately $318 million in 2020 and $275 million in 2021.
- The employee restructuring reserve was $52.1 million at March 31; about $48 million related to a structural-efficiency program expected to conclude in Q2 2020.
- Product-related liabilities were $53.5 million at March 31, down from $72.1 million at year-end, largely reflecting cash payments. Autoliv said the ultimate costs could differ materially from recorded estimates.
- For the Toyota recall involving approximately 1.4 million vehicles, the company accrued an immaterial amount for replacement-part costs and continued to expect its net loss, after insurance recoveries, to be below $20 million. The ultimate cost remains uncertain.
- Autoliv identified COVID-19 as a material risk to production, customer demand, supply chains, restart execution, results and financial condition. Other risks include product liability, warranty and recall claims, litigation, and possible further industry disruption. Management said other pending legal matters were not expected to materially harm the company’s financial position, except for antitrust proceedings.
Important facts for investors to verify
- How vehicle production, customer demand and Autoliv’s regional sales developed after Q1, particularly the timing and scale of plant restarts.
- Whether cost reductions, working-capital actions and the revolving-credit draw are sufficient to sustain liquidity through the downturn; monitor debt, maturities and leverage.
- Subsequent operating cash flow, capital spending and the company’s ability to convert earnings into cash.
- Any changes to the company’s withdrawn 2020 outlook and to its dividend suspension.
- Developments in the Toyota recall, product-related reserves and other warranty, recall or litigation exposures.