Autoliv, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; includes quarterly information for Q4. Unless stated otherwise, financial figures are U.S. dollars and refer to continuing operations. Autoliv supplies automotive passive-safety products, principally airbags, steering wheels and seatbelts. On June 29, 2018, it spun off its former Electronics segment as Veoneer; historical Veoneer results are reported as discontinued operations.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $8.678 billion | $8.137 billion |
| Organic sales growth | 4.8% | 2.2% |
| Gross profit / gross margin | $1.711 billion / 19.7% | $1.680 billion / 20.6% |
| Operating income / margin | $686 million / 7.9% | $860 million / 10.6% |
| Adjusted operating margin (non-GAAP) | 10.5% | 11.1% |
| Income from continuing operations attributable to controlling interest | $376 million | $586 million |
| Diluted EPS from continuing operations | $4.31 | $6.68 |
| Cash and cash equivalents at year-end | $616 million | $960 million |
| Total debt / net debt | $2.230 billion / $1.619 billion | $1.330 billion / $368 million |
| Operating cash flow (consolidated, including discontinued operations) | $591 million | $936 million |
| Capital expenditures, net (continuing operations) | $486 million | $464 million |
Sales rose 6.7% as reported, with positive currency translation contributing 1.9 percentage points. Organic growth was led by the Americas (13.3%) and Asia (4.7%); Europe declined 2.8% organically. Airbag and other product sales were $5.699 billion, while seatbelt sales were $2.980 billion.
At December 31, 2018, current assets were $3.285 billion and current liabilities $2.866 billion. The company had $1.1 billion of undrawn revolving credit facilities, extended to mature in July 2023, and an A- S&P credit rating. Leverage ratio was 1.5x, at the upper end of its stated 0.5x–1.5x target range. Pension liabilities were $198 million.
Q4 and changes versus the prior period
Q4 2018 sales were $2.193 billion, compared with $2.159 billion in Q4 2017. Q4 income from continuing operations before tax was $2 million, versus $241 million a year earlier; attributable continuing-operations net income was a loss of $93 million and diluted continuing-operations EPS was $(1.06), compared with $197 million and $2.26, respectively, in Q4 2017. The principal unusual item was a $210 million provision for the remaining European Commission antitrust investigation. Q4 GAAP operating margin was 1.0%; adjusted margin was 10.9%.
For the full year, operating income fell 20.2% and diluted continuing-operations EPS fell 35.5%. The $210 million antitrust accrual, lower gross margin, higher R&D expense and a higher effective tax rate were key factors. Gross margin declined 0.9 percentage points, reflecting launch-related costs, raw-material costs and currency effects. R&D expense increased to $413 million, or 4.8% of sales. Global light-vehicle production declined 1% in 2018 after eight years of growth.
Reported consolidated net income was $184 million, including a $194 million loss from discontinued operations. Net income attributable to controlling interest was $190 million, versus $427 million in 2017. Comparisons are affected by the Veoneer spin-off and should distinguish continuing from discontinued operations.
Outlook, management commentary and risks
Management indicated approximately 5% organic sales growth for 2019, with currency effects of about negative 1%, for reported sales growth of approximately 4%. The 2019 adjusted operating-margin indication was about 10.5%; tax rate excluding unusual items about 28%; and leverage expected to remain within the 0.5x–1.5x target range. Management expected 2019 operating cash flow to exceed approximately $810 million, the stated 2018 continuing-operations baseline, and capital expenditure and R&D ratios to be below 2018 levels. These are non-GAAP indications and are subject to uncertainty.
Management cited record order intake of $15.5 billion in estimated lifetime sales for 2018 and strong launches, but also elevated launch costs that prevented achievement of its annual productivity target. Principal risks include automotive production cyclicality, customer concentration and pricing pressure, raw-material and supply-chain disruption, product recalls and liability, foreign exchange, regulatory and trade changes, and ongoing antitrust and tax matters. The company accrued $210 million for the remaining EC matter, estimated at €184 million; the ultimate fine could differ. It is cooperating with Toyota on a recall of approximately 1.4 million vehicles involving side-curtain airbags and estimated its net loss, after expected insurance, at less than $20 million, while noting uncertainty in the final cost. Autoliv also retained certain pre-spin-off electronics warranty and recall obligations to Veoneer.
The Veoneer separation reduced Autoliv’s equity by approximately $2.123 billion and involved a $972 million cash capitalization before distribution. The filing reports $84.8 million of separation costs incurred, including $76.3 million in 2018. The company reported effective internal controls and received unqualified audit opinions on its financial statements and internal control over financial reporting.
Investor verification points
- Confirm the final amount, timing and tax treatment of the EC antitrust fine against the $210 million accrual; the filing says the fine was not tax deductible.
- Reconcile cash-flow disclosures: the filing reports consolidated operating cash flow of $591 million, but also states that an estimated $806 million was attributable to continuing operations, an apparent inconsistency. Verify the intended continuing-operations figure and its basis.
- Review debt maturities and refinancing needs: $621 million was classified as short-term at year-end, including commercial paper and debt due in 2019, alongside the undrawn $1.1 billion revolver.
- Track the Toyota recall’s scope, responsibility allocation and insurance recoveries, and the adequacy of product-liability reserves and coverage.
- Assess delivery of 2019 guidance against vehicle-production trends, launch costs, customer demand and currency movements; distinguish adjusted measures from GAAP results.
- Consider the reduced diversification after the Veoneer spin-off and Autoliv’s continuing indemnification and transition-service obligations.