Autoliv, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results; dollars in millions except per-share data. Autoliv supplies passive and active automotive safety systems. The filing compares Q1 2016 with Q1 2015 unless otherwise stated.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $2,430.0 | $2,174.1 |
| Gross profit / gross margin | $501.0 / 20.6% | $423.3 / 19.5% |
| Operating income / operating margin | $205.2 / 8.4% | $80.0 / 3.7% |
| Net income attributable to controlling interest | $133.2 | $35.7 |
| Diluted EPS | $1.51 | $0.40 |
| Cash provided by operating activities | $200.5 | $84.2 |
| Capital expenditures | $91.8 | $134.8 |
Reported sales rose 11.8%; organic sales growth was 14.7%, excluding $80.2 of unfavorable currency effects and including $16.3 of acquisition effects. Three additional working days contributed about 5 percentage points to year-over-year organic growth. Operating cash flow less investing cash flow was negative $118.1, reflecting the ANBS acquisition and other investing activity.
Operating margin improved substantially, but comparison with Q1 2015 is affected by approximately $77 of antitrust settlement expense in that prior-year quarter. Q1 2016 operating results included $14 of capacity-alignment costs and about $3 of antitrust-related costs. Gross margin benefited from sales growth, favorable currency effects, product mix and raw-material savings; research, development and engineering spending increased to support active safety and airbag business activity.
Segments and business developments
- Passive Safety: Sales were $1,988.7, up 8.6% reported and 12.7% organically. Segment operating margin was 9.6%, compared with 3.5% in Q1 2015; the prior-year margin was affected by antitrust settlements.
- Electronics: Sales were $456.4, up 30.0% reported and 27.0% organically. Segment operating margin was 2.6%, versus 2.5%. Active Safety growth was particularly strong in North America and Europe.
- ANBS acquisition: On March 31, Autoliv acquired a 51% controlling interest in Autoliv-Nissin Brake Systems for approximately $264 cash; Nissin Kogyo retained 49%. ANBS adds brake-control and actuation products and is included in Electronics. No ANBS operating results were included in Q1 because the acquisition closed on the quarter’s final day. Purchase accounting remains preliminary.
Liquidity, debt and balance sheet
At March 31, 2016, cash and cash equivalents were $1,161.6, total debt was $1,528.2, and net debt was $361.9, up from $201.6 at December 31, 2015. The increase mainly reflected acquisition spending and dividends, partly offset by operating cash flow. Long-term debt was $1,499.4. Current assets were $4,060.1 and current liabilities were $2,416.5. Total equity was $3,865.2, including $265.0 of non-controlling interest, primarily associated with ANBS.
Operating working capital, a non-GAAP measure, was $562.5, compared with $569.7 at year-end; the company reported it at 6.0% of sales. The leverage ratio under the company’s policy was 0.5x, within its stated long-term target range of 0.5x–1.5x. The quarterly dividend declared was $0.58 per share; $0.56 per share was paid during Q1.
Outlook and management commentary
- Q2 2016: Organic sales growth expected around 10%; acquisitions expected to add about 6%, currency to reduce growth by about 1%, and reported sales growth expected around 15%. Adjusted operating margin, excluding capacity-alignment and antitrust costs, expected around 8.5%, including about $10 of ANBS integration and purchase-accounting costs.
- Full year 2016: Organic sales growth expected above 7%; acquisitions expected to add about 5% and currency to reduce growth by about 1%, for reported sales growth above 11%. Adjusted operating margin expected above 9%, excluding capacity-alignment and antitrust costs, and including $20–$30 of ANBS integration and purchase-accounting costs.
- Management expected a full-year tax rate of about 29%, excluding discrete items; operating cash flow around $0.8 billion, excluding discrete items; and capital expenditures of 5%–6% of sales.
- Autoliv expected deliveries of up to 30 million replacement inflators during 2015–2018 based on customer agreements and its expectations, while noting final volumes remained uncertain.
Risks, contingencies and unusual items
- Side-curtain airbag investigation: The company reported five confirmed incidents of partial inflation without a deployment signal and was investigating a possible sixth. No injuries were reported. A recall was considered reasonably possible; estimated loss was $10–$40 net of expected insurance recoveries, but actual costs could differ significantly.
- Antitrust: The European Commission investigation remained unresolved; management said a material adverse impact on operating results and cash flows was probable when the matter is resolved or becomes estimable, but no loss provision was recorded because the impact could not be estimated. Brazil and Canada matters had immaterial accruals. An April 2016 agreement to settle the U.S. truck-and-equipment-dealer class was subject to court approval.
- Product-related liabilities were $61.8 at quarter-end. Management considered established warranty reserves adequate, but warned that recall, product-liability, warranty and litigation outcomes may differ materially from estimates and insurance may not cover all losses.
- Restructuring reserves were $87.0 at quarter-end; Q1 provisions mainly related to headcount reductions in higher-cost countries in Europe and Asia. Management did not expect restructuring to materially impair liquidity.
- Other stated risks include vehicle-production changes, customer and supplier developments, currency and raw-material volatility, regulatory changes, litigation, and execution of acquisitions and cost-reduction programs.
Most important facts for investors to verify
- Whether organic growth and margins persist after accounting for the additional working days, replacement-inflator sales, and the prior-year antitrust settlement comparison.
- Progress toward Q2 and full-year guidance, including the excluded capacity-alignment and antitrust costs and planned ANBS integration expenses.
- Developments in the side-curtain airbag investigation, potential recall scope, responsibility allocation and insurance recovery.
- Outcomes and potential financial exposure from the European Commission, Brazilian, Canadian and other antitrust proceedings.
- ANBS integration, purchase-accounting effects, cash generation, capital spending and net-debt trajectory.