Autoliv, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; amounts in U.S. dollars unless stated otherwise. Autoliv supplies automotive safety systems, including airbags and seatbelts. Results reflect a sharp recovery in vehicle production, strong organic growth, restructuring savings, and acquisitions.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $1,801.5m | $1,193.4m | $3,522.3m | $2,120.1m |
| Gross profit / margin | $412.0m / 22.9% | $186.4m / 15.6% | $795.5m / 22.6% | $266.7m / 12.6% |
| Operating income (loss) / margin | $229.1m / 12.7% | ($12.3m) / (1.0%) | $424.5m / 12.1% | ($101.0m) / (4.8%) |
| Net income (loss) attributable to controlling interest | $146.5m | ($20.7m) | $273.0m | ($84.1m) |
| Diluted EPS | $1.60 | ($0.24) | $2.99 | ($1.08) |
Q2 reported sales rose 51%, including 40% organic growth; acquisitions contributed 12% and currency movements reduced sales by 1%. For the first half, sales rose 66%, including 51% organic growth, a 9% acquisition contribution, a 2% currency benefit, and a 4% production-day effect. Airbag product sales grew faster than seatbelt sales in both periods. Management said Q2 gross profit and margin, operating income and margin, pre-tax income, net income, and EPS were company records.
Q2 gross margin improvement reflected higher sales, a more favorable product mix, restructuring and sourcing savings; it included a one-time $4m subcontracting revenue item. Q2 operating income improved by $241m year over year, partly offset by higher R&D and SG&A. The quarter included approximately $12m of equity-unit debt-extinguishment expense. Six-month interest expense was $27.8m versus $36.0m a year earlier; income taxes were $109.5m versus a $46.8m benefit in 2009. The six-month effective tax rate was 28.5%.
Cash flow, balance sheet, and capital
- Six-month operating cash flow was $399.8m, versus $118.5m in 2009. Investing cash outflow was $151.2m, including $86.2m of capital expenditures and $68.2m for acquisitions and other items. Financing cash outflow was $237.7m. Cash declined $13.3m to $459.4m.
- At June 30, total debt was $878.4m ($169.6m short-term and $708.8m long-term), down from $1,139.3m at December 31, 2009. Net debt, the company’s non-GAAP measure, was $416.8m, down from $662.1m at year-end. Net debt to capitalization was 14%; the company reported a 0.5x leverage ratio and 9.0x interest coverage ratio.
- Current assets were $2,455.5m and current liabilities $1,793.7m. Operating working capital, a non-GAAP measure, was $405m versus $447m at June 30, 2009. Receivables were $1,358.9m, up from $1,053.1m at year-end; days sales outstanding were 70 and days inventory outstanding 30 at quarter-end.
- Equity was $2,621.5m, compared with $2,436.0m at year-end. Foreign-currency translation reduced first-half comprehensive income by $73.5m. No cash dividends were paid in the first half; a $0.30-per-share quarterly dividend was declared for Q3, payable September 2, 2010.
Material developments, outlook, and risks
- Autoliv acquired Delphi occupant-protection operations in Korea and China for $71m, with results included from April 1; the purchase-price allocation remained preliminary. It also acquired the remaining 49% of Estonia’s AS Norma for $50m and other businesses/interests. The filing cites $137m of acquisition payments in the first half.
- Autoliv exchanged approximately 36% of its equity units, issuing about 3.06m treasury shares and paying approximately $8m cash. The transactions reduced net debt by $54m and increased equity by $57m; management expected $16m of interest savings through April 2012. Approximately 4.3m equity units remained outstanding.
- Management forecast Q3 organic sales growth of at least 20%, consolidated sales growth close to 25%, and operating margin of at least 10%. For full-year 2010, it indicated sales growth close to 35% and operating margin above 11%, based on then-current production assumptions. It expected a roughly 30% effective tax rate for the rest of the year. These are forward-looking estimates, not guarantees.
- Key risks include volatile vehicle production and customer schedules, competition and pricing, raw-material and energy costs, currency movements, customer or supplier distress, supply-chain interruptions, and product liability, warranty, recall, intellectual-property, and litigation exposure. The filing specifically highlights the vulnerability of just-in-time supply chains, including possible transport disruption.
- Contingencies include a French litigation matter with a claimed €40m (about $50m); an expert assessed alleged losses at up to €10m (about $13m), but Autoliv said the ultimate impact could not be meaningfully estimated. SEVA separately alleged injury of €22m (about $28m) in a patent/confidential-information dispute; Autoliv said it had found no basis for the claims. The company also reported IRS and other tax audits; up to $22m of unrecognized tax benefits could decrease if certain audits conclude satisfactorily.
- Restructuring reserves were $71.4m at June 30, mainly employee-related; Q2 activity included European headcount reductions and $0.7m of asset impairment charges in Japan and Australia. Management said it did not expect restructuring to adversely affect liquidity. No material change in contractual obligations or market-risk disclosures was reported.
Important facts for investors to verify
- Whether the strong production recovery, organic growth, favorable product mix, and restructuring savings persisted after Q2; compare actual results with the stated 2010 outlook.
- Cash conversion and working-capital trends, especially the increase in receivables, and whether acquisition spending or restructuring payments materially changed liquidity and net debt.
- Integration and contribution from acquired operations, the final purchase-price allocation, and the remaining dilution and obligations associated with equity units.
- Developments in product-related reserves and claims, the French and SEVA proceedings, and the outcome of tax audits and related unrecognized tax benefits.
- Whether supply-chain disruption, foreign exchange, customer production schedules, or vehicle-market conditions affected operations or invalidated management’s assumptions.