Autoliv, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Autoliv supplies automotive passive- and active-safety systems through its Passive Safety and Electronics segments. Amounts are U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $2,812.8 million | $2,608.1 million | +7.8%; organic growth 0.1% |
| Gross profit / margin | $579.2 million / 20.6% | $542.5 million / 20.8% | Profit +6.8%; margin -0.2 percentage points |
| Operating income / margin | $225.4 million / 8.0% | $217.6 million / 8.3% | Income +3.6%; margin -0.3 points |
| Income before taxes | $196.9 million | $194.4 million | +1.3% |
| Net income | $122.4 million | $142.1 million | -13.9% |
| Net income attributable to controlling interest | $126.7 million | $143.9 million | -12.0% |
| Diluted earnings per share | $1.45 | $1.62 | -10.5% |
| Operating cash flow | $15.6 million | $149.2 million | Down $133.6 million |
| Capital expenditures | $141.0 million | $129.5 million | Up $11.5 million |
Reported sales growth was largely currency-driven: favorable translation contributed 7.7 percentage points, while organic growth was 0.1%. The filing attributes the modest organic increase chiefly to India, Thailand, South America and Japan, substantially offset by North America and South Korea. Currency translation also increased operating expenses and affected margins.
Gross margin was pressured by unfavorable currency effects, costs supporting near-term growth and raw-material prices, partly offset by improved operational performance. Research, development and engineering expense rose 10.9% to $213.7 million as the company invested in technology, skills and capacity. Other income (expense), net moved from $9.9 million of income to $5.2 million of expense, primarily reflecting segment-separation costs. Q1 2017 amortization included a $12 million impairment charge on a customer contract, making the year-over-year reduction in amortization less indicative of ongoing cost trends.
Segments and material changes
- Passive Safety: Sales were $2,237.9 million, up 9.7% reported and 1.4% organically. Operating income was $225.3 million; margin was 10.1%, versus 10.0%. Airbag sales declined 1.0% organically, while seatbelt sales grew 6.4%.
- Electronics: Sales were $593.6 million, up 1.8% reported but down 4.1% organically, as Active Safety growth was outweighed by declines in restraint control and brake systems. Operating income was $30.2 million versus $13.6 million; margin rose to 5.1% from 2.3%. The improvement reflected lower amortization, including the prior-year impairment comparison, and release of a $14 million M/A-COM earn-out liability.
- Autoliv reported a $12.7 million loss from equity-method investments, including approximately $14 million of its share of Zenuity’s loss. It contributed SEK 600 million (approximately $71 million) to the 50%-owned joint venture in Q1; its investment was approximately $159 million at quarter-end.
- The effective tax rate rose to 37.8% from 26.9%. The company cited pre-spin advisory costs that were not fully deductible, new U.S. tax-law provisions (GILTI and BEAT), losses without tax benefits, and unfavorable discrete tax items.
Cash, debt and liquidity
Cash and cash equivalents were $793.9 million at March 31, 2018, down from $959.5 million at December 31, 2017. Net cash decreased $165.6 million during the quarter. Operating cash flow was seasonally low and affected by unfavorable timing and geographic effects in working capital. Investing cash outflow was $212.2 million, including $141.0 million of property, plant and equipment spending and approximately $72.9 million for acquisitions and affiliate contributions, mainly Zenuity. Financing provided $17.9 million, including a $65.4 million increase in short-term debt; dividends paid were $52.4 million.
Total debt was $1,409.2 million, comprising $84.0 million short-term and $1,325.2 million long-term debt. Management’s non-GAAP net debt measure was $614.4 million, up from $379.4 million at year-end. The leverage ratio under company policy was 0.7, within its stated long-term target range of 0.5 to 1.5. Current assets were $4,341.9 million and current liabilities $2,809.5 million. Operating working capital was $875.5 million, up from $661.4 million at year-end; management cited currency, inventory buildup for launches, and timing and geographic effects. Receivables outstanding were 78 days, versus 75 days a year earlier.
Outlook, risks and unusual items
- Guidance: No Q2 guidance or full-year Autoliv group indication was provided, pending the planned Electronics spin-off. For full-year 2018, Passive Safety organic sales growth was expected to exceed 10%, with currency adding about 4% for approximately 14% reported sales growth; underlying profitability was expected to increase versus 2017. Electronics organic sales were expected to decline about 3%, with currency adding about 3% and consolidated sales virtually unchanged; underlying profitability was expected to decrease.
- Spin-off: Trading in Veoneer was expected to begin early in Q3 2018. The operational separation took effect April 1, and Veoneer filed its Form 10 registration statement on April 26. Veoneer’s initial capitalization was expected to provide up to $1.2 billion of cash liquidity, including existing cash, primarily through debt financing. On April 27, S&P affirmed Autoliv’s A- rating but changed the outlook from stable to negative.
- Antitrust: The company said the continuing, more significant portion of the European Commission investigation was not estimable and that resolution was likely to materially adversely affect operating results and cash flows in the period when resolved or estimable. A separate EC fine of EUR 8.1 million was paid in Q1. The South African settlement of approximately $11 million was also paid in February.
- Product and legal contingencies: The Toyota side-curtain-airbag recall covers approximately 1.4 million vehicles; root-cause analysis continued. If Autoliv must indemnify Toyota, the company estimated its loss net of expected insurance recoveries would be below $20 million, but noted the ultimate cost could differ materially. Product-related liabilities were $103.5 million at quarter-end, down from $117.7 million a year earlier. The filing also describes a Brazilian tax matter and a Turkish customs investigation; no provision was recorded for the Turkish investigation.
- Other: Western European restructuring initiatives were expected to continue through 2018–2021; the remaining restructuring liability was $41.1 million. The company stated that Q1 operating cash flow was expected to be seasonally low and that, excluding separation effects, full-year operating cash flow was expected to be at the same level as 2017. Management cited strong Passive Safety order intake and Active Safety momentum, including a milestone ADAS award from Geely.
Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Track whether Passive Safety achieves its above-10% organic growth outlook and whether launch costs, raw materials and currency continue to affect margins.
- Assess Electronics’ organic-sales decline and the quality and repeatability of its reported operating-income improvement, including the effect of the one-time earn-out release.
- Monitor working-capital conversion and cash generation, especially receivables, launch-related inventory, capital spending and Zenuity funding.
- Follow Veoneer separation timing, financing and capitalization, including implications for Autoliv’s debt, liquidity and credit outlook.
- Monitor the continuing EC antitrust investigation, Toyota recall exposure and insurance recoveries, and the status of the Brazilian and Turkish matters.
- Reconcile the elevated tax rate and any further accounting adjustments related to the U.S. tax law with reported earnings.