Autoliv, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited and presented in U.S. dollars; amounts below are in millions unless noted.
Business context
Autoliv develops and supplies automotive safety products, reporting in Passive Safety (airbags, seatbelts and steering wheels) and Electronics (safety electronics, active safety and brake control). It acquired a 51% controlling interest in Autoliv-Nissin Brake Systems (ANBS) on March 31, 2016 for approximately $263 million; ANBS results are consolidated from that date.
Financial performance and liquidity
- Q3 revenue: $2,461, up 12.7% year over year; organic growth was 6.1%. Growth was strongest in China and Europe. Currency effects were negligible; acquisitions contributed 6.6 percentage points to reported growth.
- Q3 profitability: Gross profit was $495, with a 20.1% gross margin, unchanged year over year. Operating income rose 21% to $191; operating margin improved to 7.8% from 7.2%. Net income was $135.5; income attributable to controlling interest was $137.8. Diluted EPS was $1.56 versus $1.12.
- Nine-month results: Revenue was $7,470, up 12.3%, including 9.5% organic growth. Operating income increased 36% to $609, and operating margin rose to 8.2% from 6.7%. Net income was $417; controlling-interest net income was $419.4. Diluted EPS was $4.74 versus $3.07.
- Cash flow and investment: Nine-month operating cash flow was $574, versus $429 in 2015. Capital expenditures were $344, and net cash used in investing activities was $567, including $227 for acquisitions and divestitures. Cash declined $151 during the period to $1,183.
- Debt and liquidity: At September 30, total debt was $1,545 and net debt was $360, compared with $202 at December 31, 2015. The company reported a 0.5x leverage ratio and a long-term target of approximately 1x (range 0.5x–1.5x). It refinanced its $1.1 billion revolving credit facility with a five-year facility and extension options.
- Other metrics: Cash dividends declared were $0.58 per share in Q3. The effective tax rate was 26.8% in Q3 and 27.5% for nine months, versus 34.7% and 33.9%, respectively, in 2015.
Material changes versus comparable periods
- Reported growth reflects ANBS and other acquisition contributions as well as organic expansion; nine-month organic growth was 9.5%, while acquisitions added 4.6 percentage points and currency reduced growth by 1.8 points.
- Q3 operating margin improved partly because capacity-alignment costs were much lower than in 2015. Q3 2016 included $3 of capacity-alignment costs and $5 of antitrust costs; the prior-year quarter included $42 of capacity-alignment costs.
- Research, development and engineering expense increased 27% in Q3 and 26% year to date, reflecting investment for growth. Electronics segment margin fell to 0.9% in Q3 from 2.9%, primarily due to ANBS formation costs; Passive Safety margin rose to 10.0% from 8.1%.
- ANBS contributed $278 of sales from acquisition through September 30 and recorded a $3 controlling-interest net loss. Its acquisition increased goodwill and non-controlling interest; purchase accounting valuations remained preliminary.
Outlook, commentary and risks
- Management said Q3 performance was slightly better than expected, citing strong growth in Europe and China and higher-than-expected operating margin. It noted a slowdown in U.S. vehicle sales and that China growth partly depends on continuing government incentives.
- For Q4, Autoliv expected flat organic sales year over year, with M&A adding about 6% and currency reducing growth by less than 1%, implying reported growth above 5%. The quarter had about three fewer working days, reducing year-over-year organic growth by roughly 5 percentage points. Adjusted operating margin was expected above 9%.
- For full-year 2016, management expected organic sales growth of about 7%, reported growth above 10%, adjusted operating margin above 8.5%, an approximately 28% tax rate excluding discrete items, and operating cash flow above $0.8 billion excluding discrete items. Guidance included $20–$30 of expected ANBS integration and purchase-accounting costs. Capital expenditures were expected at 5%–6% of sales.
- Management remained confident in surpassing its $12 billion end-of-decade corporate sales target, but said the Active Safety end-of-decade sales target was now expected about one year later than previously communicated because some business starts were delayed or opportunities did not materialize. A historically high Passive Safety order intake is expected to support growth from 2018 onward.
- Toyota recall: Autoliv was cooperating with Toyota on a recall of approximately 1.4 million vehicles involving side-curtain airbags. Root-cause analysis was ongoing. If Autoliv were liable, it estimated its net loss after expected insurance recoveries would be below $20, but the ultimate cost could differ materially.
- Legal and other contingencies: Antitrust investigations and litigation remained pending. The company stated it could not estimate the potential impact of the European Commission investigation and considered a material adverse effect on results and cash flows probable when resolved or estimable. Other antitrust matters had accrued amounts described as not material. A Brazilian tax assessment and a Turkish customs investigation also remained unresolved.
- Other risks include product warranty, recall and liability claims, customer order suspensions, foreign-exchange exposure, vehicle-production changes, raw-material costs, regulatory changes and litigation. Management considered established product-liability reserves adequate; product-related liabilities totaled $65.3 at quarter-end.
- Autoliv and Volvo Cars signed a letter of intent for a jointly owned autonomous-driving software company, subject to definitive documentation. The company reported no material change in internal financial controls and no reportable subsequent event through the filing.
Important facts for investors to verify
- Whether reported growth and margins persist after separating organic performance from acquisitions, currency, capacity costs and ANBS integration or purchase-accounting costs.
- ANBS’s final purchase-price allocation, operating contribution and integration progress.
- The Toyota recall’s final scope, allocation of responsibility, repair costs, supplier recoveries and insurance coverage.
- Developments and potential financial exposure in the EC and other antitrust matters, plus the Brazilian tax assessment and Turkish customs investigation.
- Delivery volumes, economics and customer commitments for replacement inflators; management expected up to 30 million deliveries during 2015–2018 but said final volumes were not yet determinable.
- Execution of Q4 and full-year guidance, including cash generation, capital spending, tax rate and the delayed Active Safety target; guidance is on a non-U.S. GAAP basis and was not reconciled to GAAP.