AUTOLIV INC quarterly report, Q3 FY2010

Autoliv, Inc. — Form 10-Q Summary

Period: Quarter and nine months ended September 30, 2010. Autoliv supplies automotive safety products, including airbags, seatbelts, safety electronics and steering wheels. Financial amounts are in U.S. dollars; millions unless stated otherwise.

Key financial results

• Sales rose 31% in Q3 and 53% year to date. Organic sales increased 23% and 40%, respectively; acquisitions contributed to growth, while currency effects reduced Q3 sales slightly.
• Q3 sales grew across airbags and seatbelts, with particularly strong organic growth in North America and Japan. Nine-month organic growth exceeded vehicle production growth in most regions.
• Management attributed improved profitability primarily to higher sales, favorable product mix and restructuring savings. Higher raw-material costs reduced Q3 gross profit by $11 million; higher RD&E spending partly offset the operating improvement.
• For nine months, operating income improved by $667 million year over year. The 2009 comparison included $62 million of restructuring charges, versus $19 million in 2010. Nine-month 2010 results also included $12.1 million of debt-extinguishment loss related to equity-unit exchanges.

Cash flow, balance sheet and capital

• Nine-month operating cash flow was $598.1 million, compared with $248.4 million a year earlier. Investing cash use was $215.6 million, including $145.8 million of capital expenditures and $73.5 million for acquisitions and other items. Financing cash use was $381.7 million. Cash increased $14.5 million to $487.2 million.
• Management reported Q3 operating cash flow of $198 million, a quarterly record, compared with $130 million in Q3 2009.
• At September 30, cash was $487.2 million; current assets were $2,671.5 million and current liabilities $1,911.4 million. Short-term debt was $156.2 million and long-term debt $680.0 million.
• Net debt, a company-defined non-GAAP measure, was $337.8 million, down from $662.1 million at year-end 2009 and $878.1 million a year earlier. Net debt to capitalization was 11%. The company reported a 0.3x leverage ratio and 11.9x interest coverage ratio, versus policy limits of significantly below 3.0x and significantly above 2.75x, respectively.
• Operating working capital was $467 million, or 6.7% of trailing 12-month sales, below the company’s 10% policy ceiling. Receivables days rose to 74 from 70 at the prior quarter-end; inventory days rose to 33 from 30.
• The board-declared Q3 dividend was $0.35 per share; $0.30 per share was paid. A $0.35 quarterly dividend was announced for Q4, a 17% increase. No shares were repurchased in Q3; repurchases remained suspended to preserve cash and potential flexibility.

Outlook, commentary and notable items

• Management expected Q4 organic sales growth of nearly 12%, acquisitions to add 8%, currency to add 1% if exchange rates held, and a 6% negative production-day effect; consolidated sales were forecast to rise approximately 15% year over year.
• For full-year 2010, management projected consolidated sales growth of approximately 40%, organic growth of at least 30%, and an operating margin of approximately 12%. Q4 operating margin was also expected to be approximately 12%; the Q4 effective tax rate was projected near 30%.
• Forecasts cited by management implied flat global vehicle production in Q4 year over year, including an 8% decline in West Europe. Results remain exposed to vehicle-production schedules, customer mix, currencies, raw-material and energy costs, pricing, competition, and execution of restructuring.
• Autoliv completed acquisitions of Delphi occupant-protection operations in Korea and China and acquired Delphi’s Pyrotechnic Safety Switch business. Management said the completed OPS acquisitions added approximately $550 million of annualized sales. The Korea/China purchase-price allocation remained preliminary.
• Product-related reserves were $36.7 million at quarter-end; provisions and payments in 2010 mainly related to recalls. Management considered reserves and insurance adequate based on current estimates, but noted actual claims and costs could differ and coverage may not cover every future loss.
• Contingencies include French litigation concerning the 1992 sale of a subsidiary, a claim by former employees of the closed Normandy plant seeking approximately €10.5–€11.5 million, a SEVA patent/confidential-information action alleging €22 million of injury, and a Takata-Petri claim seeking €18.5 million concerning allegedly defective inflators. The company disputed or intended to contest these claims; outcomes are uncertain.
• The IRS Appeals Office indicated it had concluded that transfer-pricing adjustments proposed for 2003–2005 should be withdrawn, but further reviews remained pending. The company said audits could reduce unrecognized tax benefits by up to $22 million in future periods, subject to satisfactory outcomes.
• A newly highlighted risk is supply-chain disruption under just-in-time production, potentially causing Autoliv or customers to halt production and generating recovery, replacement, freight or customer claims. Management reported no material change in contractual obligations or market-risk disclosures, and no material off-balance-sheet arrangements.

Important facts for investors to verify

1. Whether Q4 and full-year sales and margin projections were achieved, particularly given the expected European production decline and negative production-day effect.
2. How much of reported growth and future performance derives from organic demand versus acquisitions, currency movements and vehicle mix.
3. Whether operating cash generation, working capital and debt reduction remain sustainable as production conditions change.
4. Developments in recall reserves, product-liability and intellectual-property claims, the French employment claim, and tax-audit reviews.
5. The potential dilution and settlement terms of remaining equity units, and the effect of the announced dividend on capital allocation.