Business context and reporting period
Autoliv, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company supplies automotive safety products, principally airbags and seatbelts, and reports one operating segment. The former Electronics business, Veoneer, was spun off in June 2018 and is presented as discontinued operations; Autoliv retained certain pre-spin-off product, warranty and recall responsibilities.
Financial performance and position
Amounts are in U.S. dollars; financial results below are for continuing operations unless noted.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,027.7 million | $2,033.0 million | $6,356.4 million | $6,485.4 million |
| Gross margin | 18.7% | 19.0% | 18.2% | 19.8% |
| Operating income / margin | $153.8 million / 7.6% | $192.5 million / 9.5% | $496.5 million / 7.8% | $665.0 million / 10.3% |
| Net income from continuing operations | $86.0 million | $118.0 million | $306.9 million | $470.3 million |
| Diluted continuing-operations EPS | $0.98 | $1.34 | $3.50 | $5.37 |
| Adjusted operating margin | 9.0% | 9.5% | 8.4% | 10.3% |
| Adjusted diluted EPS | $1.30 | $1.35 | $3.87 | $5.40 |
- Q3 organic sales grew 1.2%, while reported sales declined 0.3%; currency reduced reported growth by 1.5 percentage points. Nine-month organic sales grew 1.5%, despite reported sales declining 2.0%.
- Nine-month operating cash flow was $328.4 million, versus $301.2 million in 2018. Investing cash outflow was $358.1 million, including $360.0 million of capital expenditures. Operating cash flow less capital expenditures was approximately negative $31.6 million.
- Cash and equivalents were $334.4 million at September 30, 2019, down from $615.8 million at December 31, 2018. Total debt was $2,105.0 million and net debt was $1,781.3 million; the reported leverage ratio was 1.8x.
- Current assets were $2,908.8 million and current liabilities were $2,304.8 million. Autoliv paid a $203 million European Commission antitrust fine in the second quarter; management’s operating-cash-flow outlook excludes this payment.
- Quarterly declared and paid dividend was $0.62 per share. Nine-month dividends paid totaled $162.7 million.
Material changes versus prior comparable periods
- Q3 operating income fell 20.1% and continuing-operations net income fell 27.1% year over year. The gross margin decreased 0.3 percentage points. Management attributed pressure to lower global vehicle production, weaker production-asset utilization and raw-material costs; indirect-workforce restructuring costs also reduced reported operating income.
- Q3 adjusted operating income declined 5.7%, less than the decline in reported operating income, and adjusted EPS declined 3.7% to $1.30.
- For the first nine months, reported operating income declined 25.3% and continuing-operations net income declined 34.7%. Management cited lower vehicle production, raw-material headwinds, Mexico labor-conflict costs and elevated launch costs. The 2018 comparison also included favorable discrete tax items that did not recur to the same extent.
- Regional performance diverged: Q3 organic growth was strongest in China (+11.2%) and the Americas (+4.8%); Europe declined 6.7%. In the first nine months, the Americas grew 9.6% organically, while Europe declined 6.0%.
- Cash-flow comparisons require care: 2018 cash flows include the former Electronics business before the spin-off, while 2019 does not. The 2019 operating cash flow also reflects the $203 million antitrust payment.
Outlook, management commentary and risks
- For full-year 2019, management assumed global light-vehicle production would decline 6–7% and indicated reported sales growth of around negative 2%, organic sales growth of around 1%, and adjusted operating margin of around 9%. Other indications: tax rate around 28%, operating cash flow of $700–800 million excluding the EC payment and unusual items, capital expenditures as a percentage of sales around the 2018 level, and year-end leverage around 1.7x.
- Management said automotive-market uncertainty remained high, no near-term vehicle-production turnaround was expected, and cost-reduction actions would continue. The indirect-labor reduction program was expected to affect the cost base meaningfully from Q4 2019 and conclude in Q2 2020.
- Restructuring provisions were $41.4 million for the first nine months, principally for a global indirect-labor reduction program. The ending restructuring reserve was $50.8 million.
- The company paid the EC’s €179 million (approximately $203 million) antitrust fine in June 2019. Civil antitrust litigation remains, and management noted that other jurisdictions could initiate investigations.
- Autoliv continued cooperating with Toyota on a recall involving approximately 1.4 million vehicles with a specified side-curtain airbag. The root-cause analysis was ongoing; if Autoliv must indemnify Toyota, the company estimated its loss net of expected insurance recoveries at less than $20 million, while warning the ultimate cost could differ materially.
- Product liability, warranty and recall claims, supplier and customer conditions, vehicle-production declines, raw-material costs, currency movements, labor issues, litigation and regulatory investigations remain risks. S&P downgraded Autoliv from A- to BBB+ with a negative outlook on September 27, 2019. The interim CFO had announced an intention to resign by March 18, 2020; the search for a permanent CFO was continuing.
Important facts for investors to verify
- Whether full-year vehicle-production, organic-growth and adjusted-margin assumptions were achieved, and how reported results reconcile to management’s non-GAAP measures.
- Cash generation after capital expenditures and the effects of restructuring payments, the EC fine and working-capital movements.
- Debt maturities, refinancing and leverage, particularly following the credit-rating downgrade.
- Ultimate Autoliv exposure, insurance recoveries and reserve adequacy for the Toyota recall, other product claims and antitrust matters.
- Execution and realized savings from the indirect-workforce reduction program, alongside any effects on production, quality or customer business.
- Comparability of 2018 results and cash flows with 2019 following the Veoneer spin-off.