Autoliv, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Unless stated otherwise, financial amounts are in U.S. dollars; dollar figures below are in millions. Autoliv supplies automotive passive- and active-safety systems through its Passive Safety and Electronics segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2,500.4 | $2,461.3 | $7,653.4 | $7,469.8 |
| Gross profit / margin | $504.3 / 20.2% | $495.3 / 20.1% | $1,582.3 / 20.7% | $1,522.8 / 20.4% |
| Operating income / margin | $158.7 / 6.3% | $191.1 / 7.8% | $592.7 / 7.7% | $609.0 / 8.2% |
| Net income | $88.2 | $135.5 | $358.6 | $417.4 |
| Net income attributable to controlling interest | $90.8 | $137.8 | $364.5 | $419.4 |
| Diluted earnings per share | $1.04 | $1.56 | $4.15 | $4.74 |
Q3 reported sales grew 1.6%; organic sales growth was 0.5%, with currency adding 1.1%. Nine-month sales grew 2.5%; organic growth was 1.7%, acquisition effects added 1.6%, and currency reduced growth by about 0.8%.
Cash flow: Nine-month operating cash flow was $546.5, versus $574.2 in 2016. Investing used $514.9, including $414.4 of capital expenditures; financing used $354.3, including $157.0 of share repurchases and $156.4 of dividends paid. Cash decreased $268.4 to $958.3. Management reported Q3 operating cash flow of $218, versus $271 a year earlier.
Liquidity and debt: At September 30, cash was $958.3, short-term debt $182.4, long-term debt $1,322.6, and net debt (company-defined non-U.S. GAAP measure) $545.1. The leverage ratio was 0.7x, within the company’s 0.5x–1.5x target range. Operating working capital was $734.2, or 7.2% of last-12-month sales; receivables were outstanding 77 days and inventory 34 days.
Material changes and operating drivers
- Q3 operating income fell 17% and net income attributable to controlling interest fell 34% year over year despite higher sales and a slightly improved gross margin. Higher R&D spending, capacity-alignment costs, antitrust accruals, Zenuity losses, less favorable currency effects, and a higher tax rate weighed on results.
- Q3 Passive Safety sales increased 2.8% reported and 1.3% organically; segment operating margin declined to 8.3% from 10.0%. Electronics sales declined 1.8% reported and 1.9% organically, while segment margin improved to 1.5% from 0.9%.
- For the first nine months, Passive Safety organic sales grew 2.3%, with a 9.6% segment margin versus 10.0%. Electronics reported sales rose 6.0%, primarily reflecting acquisitions; organic sales declined 0.3%, and the segment margin was 1.9%, unchanged.
- Q3 Americas organic sales fell 10.0%, including an 11.7% North America decline; Europe, China, and Rest of Asia grew. Lower inflator-replacement sales reduced Q3 organic growth by about 1 percentage point overall.
- R&D expense increased 10% in Q3 and 14% for the nine-month period. Capital expenditures were $414.4 for the nine months, up from $343.6 in 2016.
Outlook, strategy, and notable items
- Q4 2017 outlook: Organic sales expected to be virtually flat year over year; currency expected to add about 4%, for reported sales growth of about 4%. Adjusted operating margin, excluding capacity-alignment and antitrust costs, expected to exceed 9%.
- Full-year 2017 outlook: Adjusted operating margin remains around 8.5%, excluding capacity-alignment and antitrust costs. Organic sales growth indication was reduced to more than 1% from around 2%; currency and M&A together were expected to add about 1.5%, supporting reported sales growth of around 3%. Operational cash flow was expected to exceed $0.8 billion, excluding antitrust and other discrete items. Capital expenditures were projected at 5%–6% of sales and net R&D above 7% of sales. Tax rate, excluding discrete items, was expected around 30%.
- Management said Passive Safety was preparing for increased launches: about 340 launches planned for October 2017–March 2018, versus 285 in the comparable prior-year period. Launch ramp-up was expected to add more than 2 percentage points to Q4 Passive Safety organic growth, partly offset by unfavorable model mix and lower inflator-replacement sales.
- Autoliv began a strategic review intended to consider separating Passive Safety and Electronics into two publicly listed companies. The review was ongoing; there is no assurance it will result in a transaction. If approved, a separation was estimated to take about a year under most scenarios.
- Capital Markets Day targets for 2020 included Passive Safety sales above $10 billion and adjusted operating margin around 13%; Electronics sales around $3 billion, including more than $1 billion in Active Safety, with a stated adjusted margin target of 0%–5%.
- Autoliv’s 50%-owned Zenuity autonomous-driving software venture contributed losses of about $10 in Q3 and $18 for the nine months; the investment was about $112 at quarter-end.
- Antitrust matters included a $9.8 accrual for a discrete portion of the European Commission investigation and an additional approximately $5 accrual related to a proposed South Africa settlement of about $11. Management said the more significant continuing EC investigation could materially adversely affect operating results and cash flows when resolved or estimable; the total exposure was not estimable.
- The product-related liability reserve was $109.5, versus $65.3 a year earlier, mainly reflecting recall-related issues. For the Toyota recall of about 1.4 million vehicles, Autoliv said its loss, net of expected insurance recoveries, was estimated below $20 if it is required to indemnify Toyota; actual exposure could differ materially.
- Autoliv planned to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. It anticipated changed timing for certain customized production-part contracts and had not yet determined the quantitative impact.
Key investor verification points
- Track the strategic review’s outcome, structure, timing, execution costs, and any separation-related approvals.
- Monitor developments and potential financial exposure from the continuing European antitrust investigation and other antitrust matters.
- Verify the Toyota recall’s responsibility allocation, repair volume and costs, and actual insurance or supplier recoveries.
- Assess whether the 2017 sales, margin, cash-flow, capital-expenditure, and R&D outlook is achieved, particularly amid North American weakness and planned launch growth.
- Review the quantified impact of adopting revenue-recognition rules in 2018 and the ongoing losses and funding needs associated with Zenuity.
- Check working-capital trends and cash conversion as capital spending, dividends, and growth investments continue.