Autoliv, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Autoliv supplies automotive safety products, including airbags and seatbelts. Following the June 2018 spin-off, Veoneer is presented as discontinued operations; Autoliv retained certain legacy Electronics product, warranty, and recall obligations.
Financial results
- Q2 revenue: $2.155 billion, down 2.6% year over year. Organic sales grew 1.5%, while currency reduced reported sales by 4.1%. Organic growth outperformed global light vehicle production, which fell 7.6%, by 9.1 percentage points.
- Q2 product and regional trends: Airbag and other sales were nearly flat as reported, with 3.5% organic growth; seatbelt sales declined 7.1% as reported, including a 2.2% organic decline. Americas organic sales grew 11.5%; Europe fell 6.5%, China fell 2.6%, and Japan fell 1.4%.
- Q2 earnings and margins: Gross profit was $399.7 million and gross margin was 18.6%, down 1.3 percentage points. Operating income was $169.5 million, down 26%; operating margin was 7.9%, down 2.5 points. Adjusted operating margin was 8.5%. Continuing-operations net income was $109.4 million; diluted EPS was $1.25, versus $2.20 a year earlier. Adjusted diluted EPS was $1.38, down 37.8%.
- First-half results: Revenue was $4.329 billion, down 2.8% reported but up 1.6% organically. Gross margin was 18.0% versus 20.2%; operating income was $342.7 million versus $472.5 million. Continuing-operations net income was $220.9 million versus $352.3 million; diluted EPS was $2.52 versus $4.02.
- Cash flow and investment: First-half operating cash flow was $133.1 million, compared with $63.0 million in 2018. Capital expenditures were $236.8 million, down from $306.4 million. Cash declined to $406.4 million from $615.8 million at year-end 2018. Dividends paid were $108.5 million.
- Debt and liquidity: June 30 short- and long-term debt totaled $2.217 billion; net debt was $1.811 billion, versus $1.619 billion at year-end 2018. The leverage ratio was 1.8x, above the stated long-term target range of 0.5x–1.5x. The company refinanced some short-term obligations with a SEK 1.2 billion three-year loan and a EUR 100 million bond due December 2020.
- Balance sheet: Current assets were $3.052 billion and current liabilities were $2.418 billion. Adoption of the lease standard added $165.0 million of operating lease right-of-use assets and $165.5 million of current and non-current lease liabilities at June 30.
Changes, outlook, and management commentary
- Profitability weakened amid lower vehicle production, reduced factory utilization, high raw-material costs, elevated launch costs, and first-half costs associated with a labor conflict in Mexico. Q2 other income/expense also included accruals for workforce reductions and lower government income in China.
- Management said it saw no near-term signs of a turnaround in vehicle demand and lowered its full-year 2019 outlook. The outlook assumed global light vehicle production would decline 4%–6%.
- 2019 outlook: Organic sales growth of 1%–3%; consolidated sales growth of negative 1% to positive 1%; adjusted operating margin of 9%–9.5%; tax rate around 28%; operating cash flow of $700–$800 million excluding the EC antitrust payment and other unusual items; capital expenditures, net, below 2018 as a percentage of sales; and year-end leverage within 0.5x–1.5x. R&D expense, net, was expected to be lower than in 2018.
- Cost actions included a Q2 workforce reduction of about 1,200, mainly temporary direct manufacturing workers, a planned reduction of indirect headcount by approximately 5%, and evaluation of further restructuring. Q2 capacity-alignment charges were $13.2 million. Western European restructuring programs had a $40.3 million total reserve, including about $27 million remaining for programs with aggregate expected costs of approximately $110 million.
Risks, contingencies, and unusual items
- The European Commission imposed a €179 million (approximately $203 million) antitrust fine in March 2019; Autoliv paid it in June. The payment contributed to the higher leverage ratio. The company also faces antitrust civil litigation and notes that further investigations or proceedings could arise.
- For the Toyota side-curtain-airbag recall involving approximately 1.4 million vehicles, the root-cause analysis remained ongoing. Autoliv considered a loss reasonably possible and estimated its net loss, after expected insurance recoveries, at less than $20 million if it is required to indemnify Toyota; ultimate costs could differ materially.
- Product warranty, recall, and liability reserves were $55.9 million at June 30, including approximately $9 million of indemnification liabilities to Veoneer. Management believed reserves were adequate, but actual costs may differ and insurance may not cover all losses.
- Q2 diluted EPS was affected by lower operating income, unusual tax items, and capacity-alignment and antitrust costs. The Q2 effective tax rate was 27.4%, versus 8.1% in 2018, when reversals of deferred-tax valuation allowances associated with the Veoneer spin-off benefited results.
- Key risks include further vehicle-production weakness, raw-material cost pressure, customer and supplier dependence, currency movements, product claims and recalls, regulatory changes, and execution of restructuring and cost-reduction plans. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Track vehicle-production trends, organic growth versus production, and progress toward the reduced full-year sales and margin outlook.
- Assess whether cost reductions and lower launch costs can offset weak utilization and raw-material pressures without compromising quality.
- Monitor cash generation, capital spending, debt maturities, and leverage against the 0.5x–1.5x year-end target.
- Verify the final financial and insurance exposure from the Toyota recall and any subsequent product claims.
- Review antitrust and restructuring cash costs, including the impact of the paid EC fine and remaining Western European obligations.