Autoliv, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Autoliv supplies automotive safety products, principally airbags and seatbelts. Following the June 2018 spin-off of Veoneer, the results below are continuing operations unless noted; 2018 comparisons have been restated for the spin-off.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $2,174.0 million | $2,240.9 million | Down 3.0% reported; organic sales up 1.8% |
| Gross profit / margin | $378.8 million / 17.4% | $460.3 million / 20.5% | Margin down 3.1 percentage points |
| Operating income / margin | $173.2 million / 8.0% | $243.4 million / 10.9% | Income down 28.8% |
| Adjusted operating income / margin | $166.4 million / 7.7% | $244.5 million / 10.9% | Non-GAAP; excludes specified capacity alignment and antitrust items |
| Net income from continuing operations | $111.5 million | $159.1 million | Down 29.9% |
| Diluted EPS from continuing operations | $1.27 | $1.82 | Down 30.2% |
| Effective tax rate | 27.4% | 30.5% | Down 3.1 percentage points |
Organic sales growth exceeded global light vehicle production (LVP), which fell approximately 6.8%, by 8.6 percentage points. Americas sales grew organically 12.7%; Europe declined 4.9% and China 4.0%. Airbags and other products grew organically 4.9%, while seatbelts declined 3.8%. Currency effects reduced reported sales by 4.8%.
Gross margin was pressured by lower factory utilization amid the LVP downturn, more than $20 million of temporary costs from a labor conflict in Mexico, raw-material headwinds, and elevated launch costs. New launches supported sales but initially carried lower margins. Management said the Mexico issue appeared resolved and production was returning to normal.
Cash flow, balance sheet and liquidity
- Operating cash flow was $153.7 million; capital expenditures were $108.4 million. Investing cash outflow was $108.0 million, and financing cash outflow was $227.3 million, including $173.1 million of net short-term debt repayment and $54.3 million of dividends paid.
- Cash and equivalents were $436.6 million at quarter-end, down from $615.8 million at December 31, 2018. Q1 2018 operating cash flow was $15.6 million, but prior-year cash flows include discontinued operations, so comparison is not fully like-for-like.
- Total debt was $2,035.7 million and net debt was $1,607.2 million, versus net debt of $1,618.8 million at year-end 2018 and $574.9 million in Q1 2018. The year-over-year increase primarily reflects the capital contribution to Veoneer around the spin-off.
- Leverage ratio was 1.6x, compared with 1.5x at year-end 2018; the stated long-term target is 0.5x–1.5x. Operating working capital was $633.2 million, or 7.4% of trailing sales, versus 9.2% a year earlier.
- Current assets were $3,111.1 million and current liabilities $2,738.5 million. Adoption of the new lease standard added $155.4 million of operating lease assets and liabilities at January 1, 2019; at March 31, operating lease liabilities totaled $147.5 million.
Material changes and unusual items
- The European Commission completed its occupant-safety-systems antitrust investigation in March and imposed a €179 million (approximately $203 million) fine, payable within 90 days. Autoliv had accrued €184 million (approximately $210 million) in Q4 2018; the lower final fine contributed to $6.0 million of other income in Q1, with the related adjustment excluded from adjusted operating income.
- Product-related liabilities were $60.5 million, down from $80.5 million a year earlier. This includes approximately $14 million of liabilities to indemnify Veoneer for certain legacy electronics recalls.
- For the Toyota side-curtain-airbag recall involving approximately 1.4 million vehicles, Autoliv considers a loss reasonably possible. If responsible for indemnification, it estimates its loss net of expected insurance recoveries at less than $20 million; ultimate costs remain uncertain.
- The prior-year quarter included a $36.7 million after-tax discontinued-operations loss associated with Veoneer. Q1 2019 had no discontinued-operations result.
Outlook and risks
Management reiterated its 2019 indications: organic sales growth around 5%, consolidated sales growth around 3%, adjusted operating margin around 10.5%, tax rate around 28% excluding unusual items, operating cash flow higher than 2018, and capital expenditures as a percentage of sales lower than 2018. Year-end leverage was expected to be well within 0.5x–1.5x. The company cited cost reductions, including a hiring freeze, as responses to market and cost pressures. It expected launch-related costs to take a few more quarters to normalize.
Key risks include further LVP weakness and production volatility, customer pricing and competition, raw-material costs, foreign exchange, supply or labor disruptions, product liability and recalls, antitrust and other litigation, and the adequacy of insurance and reserves. Autoliv said other legal matters were not expected to materially affect its financial position, while noting outcomes cannot be assured. Management reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the 2019 sales, margin and cash-flow outlook remains achievable given the LVP downturn, launch costs and raw-material pressures.
- Cash payment and final accounting treatment of the EC fine, and any developments in related antitrust civil litigation.
- Actual Autoliv responsibility, repair costs and insurance or supplier recoveries for the Toyota recall and other product claims.
- Progress in reducing launch costs and restoring Mexico production, and any continuing effects on customer deliveries.
- Debt, cash flow and leverage trends, including the path back within the stated leverage target.