AUTOLIV INC quarterly report, Q3 FY2018

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Autoliv, Inc. — Q3 2018 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2018. Unaudited U.S. GAAP results. Unless noted, amounts are in U.S. dollars. Comparisons reflect continuing operations following the June 29, 2018 spin-off of the Electronics business, Veoneer; cash flows include both continuing and discontinued operations.

Business context and performance

Autoliv now reports one operating segment: Passive Safety, principally airbags and seatbelts. Management reported robust launch-driven growth, especially in North America, against uneven vehicle production and a challenging operating environment in Europe and China.

  • Q3 sales: $2,033.0 million, up 4.1% reported and 6.4% organically; currency translation reduced reported growth by 2.3 percentage points. Americas organic sales grew 21.8%; Europe declined 3.6%.
  • Nine-month sales: $6,485.4 million, up 8.5% reported and 5.0% organically; currency contributed 3.5 percentage points.
  • Q3 earnings: Operating income was $192.5 million, versus $167.2 million; continuing-operations income attributable to controlling interest was $117.5 million, versus $105.7 million. Diluted continuing-operations EPS was $1.34, versus $1.21.
  • Nine-month earnings: Operating income was $665.0 million, versus $609.3 million. Continuing-operations income attributable to controlling interest was $468.9 million, versus $389.3 million; diluted continuing-operations EPS was $5.37, versus $4.43.
  • Consolidated net income: $118.0 million in Q3, versus $88.2 million. For nine months, net income was $274.5 million, versus $358.6 million, reflecting a $195.8 million discontinued-operations loss in 2018; the comparable 2017 discontinued-operations loss was $32.0 million.

Financial condition and cash flow

  • Margins: Q3 gross margin was 19.0%, down from 20.2%; operating margin was 9.5%, up from 8.6%. For nine months, gross margin was 19.8%, down from 20.7%, and operating margin was 10.3%, up from 10.2%.
  • Cash flow: Operating cash flow was $238 million in Q3, compared with $218 million in Q3 2017. Nine-month operating cash flow was $301.2 million, versus $546.5 million. Nine-month capital expenditures were $425.2 million; cash flow after investing activities was negative $193 million.
  • Liquidity and debt at September 30: Cash and equivalents were $533.7 million; current assets were $3,348.1 million and current liabilities $2,683.8 million. Total short- and long-term debt was $2,250.5 million. Management’s non-GAAP net debt measure was $1,724.4 million, up from $368.4 million at year-end 2017.
  • Leverage: The non-GAAP leverage ratio was 1.6x, compared with 0.5x at year-end 2017 and above the company’s stated long-term target range of 0.5x–1.5x. Debt increased largely to fund Veoneer’s pre-spin-off capitalization.
  • Other capital items: Nine-month dividends paid were $160.7 million. Autoliv issued EUR 500 million of five-year notes with a 0.75% coupon; short-term debt included $349.9 million of commercial paper.

Material changes and unusual items

  • The Veoneer spin-off materially changed the company’s size, segment reporting, equity and comparability. Autoliv distributed approximately $2.1 billion of net assets, including approximately $1 billion of cash; it retained no equity interest in Veoneer.
  • Q3 gross margin pressure reflected launch-related costs, raw-material pricing and currency effects. Research, development and engineering expense also rose as a share of sales, associated with the volume of product launches.
  • Spin-off separation costs totaled $79.4 million, including $70.9 million incurred in the first nine months of 2018 and reported in other income (expense), net. Q3 other income was $1.1 million versus expense of $35.1 million a year earlier; management cited lower capacity-alignment and antitrust-related costs as contributors to improved operating income.
  • The nine-month effective tax rate was 23.0%, versus 29.2%, helped by a 5.3 percentage-point favorable impact from discrete items, principally reversal of deferred-tax valuation allowances. The Q3 rate was 31.1%, versus 29.5%.
  • Product-related liabilities for continuing operations were $82.1 million at quarter-end. Autoliv also recorded approximately $23 million of indemnification liabilities for certain pre-April 2018 Electronics product warranty, recall and product liabilities.

Outlook, risks and contingencies

  • Revised 2018 outlook: Management indicated approximately 6% organic sales growth and approximately 2% positive currency impact, for about 8% reported sales growth. Adjusted operating margin guidance was revised to approximately 10.5%, from prior guidance of approximately 8% organic growth and adjusted operating margin above 11%.
  • Management expected a full-year continuing-operations tax rate of approximately 28%, excluding discrete items; operating cash flow on a similar level to 2017; and net capital expenditures of 5%–6% of sales. Guidance is non-GAAP and was not reconciled to GAAP because certain costs could not be reasonably predicted.
  • Management cited continued uncertainty in light-vehicle production, particularly in China and Europe, uneven utilization of production and logistics assets, and elevated launch costs. It expected gradual improvement in operating leverage over time.
  • Antitrust: A continuing, significant European Commission investigation remained unresolved. The company said it could not estimate the financial impact, but believed operating results and cash flows could be materially adversely affected when the matter is resolved or becomes estimable. A discrete EC fine of EUR 8.1 million was paid in Q1 2018.
  • Product risks: The Toyota side-curtain-airbag recall involved approximately 1.4 million vehicles. Autoliv considered a loss reasonably possible and estimated its net loss, if responsible for indemnifying Toyota, at less than $20 million after expected insurance recoveries; ultimate costs could differ materially.
  • Other risks include product warranty, recall and liability claims, customer production changes, foreign-exchange exposure, raw-material costs and indemnification obligations to or from Veoneer. Management stated that disclosure controls were effective and that it had no material off-balance-sheet arrangements.

Important facts for investors to verify

  • Track whether revised 2018 organic growth and adjusted-margin guidance is achieved, and compare with the prior guidance that was replaced.
  • Assess the durability and profitability of launch-driven growth, including North American performance and weak European sales and gross margins.
  • Review operating cash conversion, working-capital needs and capital spending; nine-month operating cash flow declined substantially year over year.
  • Monitor debt, liquidity and leverage after the Veoneer distribution, including the 1.6x leverage ratio versus the stated target range.
  • Follow developments in the continuing EC antitrust investigation, the Toyota recall, product reserves and Autoliv’s retained Veoneer-related indemnification obligations.
  • Account for the spin-off and discontinued-operations presentation when comparing historical results; cash-flow statements remain consolidated across continuing and discontinued operations.