Autoliv, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Autoliv supplies automotive passive-safety products and electronics, including airbags, seatbelts, restraint controls, active-safety systems and brake systems. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $2,544.9m | $2,578.5m | $5,153.0m | $5,008.5m |
| Gross profit / margin | $535.5m / 21.0% | $526.5m / 20.4% | $1,078.0m / 20.9% | $1,027.5m / 20.5% |
| Operating income / margin | $216.4m / 8.5% | $212.7m / 8.2% | $434.0m / 8.4% | $417.9m / 8.3% |
| Net income attributable to controlling interest | $129.8m | $148.4m | $273.7m | $281.6m |
| Diluted EPS | $1.47 | $1.68 | $3.10 | $3.19 |
| Operating cash flow | $179m | $103m | $328.6m | $303.1m |
Q2 reported sales fell 1.3%; organic sales grew 0.2%, while currency translation reduced sales by 1.5%. First-half reported sales rose 2.9%, reflecting 2.3% organic growth, 2.4% acquisition effects and a 1.8% currency headwind. Q2 income before tax was $190.2m versus $200.4m; the effective tax rate rose to 32.6% from 25.9%. First-half income before tax was $384.6m versus $390.7m, with a 29.7% effective tax rate versus 27.8%.
Q2 operating margin improved 0.3 percentage point, primarily on stronger operating performance, favorable currency and lower capacity-alignment and antitrust costs; higher R&D investment partly offset gains. R&D expense increased 10.8% to $195.5m for the quarter and 15.8% to $388.2m for the half. First-half results also benefited from higher sales and operational improvements, but net income and EPS declined as taxes and non-operating items weighed on results.
Segments and notable changes
- Passive Safety: Q2 sales were $1,983.4m, down 0.6% reported but up 0.8% organically; operating margin was 10.5% versus 10.4%. First-half sales were $4,023.6m and operating margin was 10.3% versus 10.0%.
- Electronics: Q2 sales were $578.9m, down 3.2% reported and 1.2% organically; operating margin fell to 1.9% from 2.5%, mainly due to increased R&D investment. First-half reported sales rose 10.2% to $1,162.2m, including ANBS acquisition effects; organic growth was 0.6%, and operating margin declined to 2.1% from 2.5%.
- Regional Q2 organic growth was strongest in Japan (+10.8%) and Asia overall (+5.6%); the Americas declined 5.3%, including a North American decline exceeding 6%. Management cited softer China and North America vehicle production and sales.
- Autoliv and Volvo Cars formed the 50/50 Zenuity autonomous-driving joint venture in April. Autoliv contributed SEK 1bn in cash plus assets and workforce; its Q2 share of Zenuity’s loss was approximately $8m.
Cash flow, liquidity and capital
- For the first half, operating cash flow was $328.6m; investing cash flow was negative $371.3m, including $270.6m of capital expenditures and $111.5m for acquisitions/investments. Operating cash flow less investing cash flow was negative $43m.
- Cash and equivalents were $922.5m at June 30, down from $1,226.7m at year-end 2016. Current assets were $4,047.5m and current liabilities $2,622.6m.
- Total debt was $1,512.2m; management’s non-GAAP net debt was $586.7m, up from $313.3m at year-end, mainly due to share repurchases and the Zenuity investment. Leverage ratio was 0.7x, within the company’s 0.5x–1.5x target range.
- Autoliv repurchased 1.44m shares for $157m during Q2, its first repurchases under the program since 2015. It paid $104.2m in dividends during the first half and declared a quarterly dividend of $0.60 per share.
- First-half capital expenditures were $270.6m, compared with depreciation and amortization of $214.4m. The company expects full-year capital spending of 5%–6% of sales.
Outlook, risks and unusual items
- For Q3 2017, management expected organic and reported sales growth of 0%–2%, with adjusted operating margin of 7.5%–8.0%.
- Full-year 2017 adjusted operating margin guidance remained around 8.5%, excluding capacity-alignment and antitrust costs. Full-year organic sales growth guidance was reduced to around 2% from around 4%; currency and M&A were expected to add about 1%, for consolidated sales growth around 3%.
- Management expected full-year tax rate of about 30%, excluding discrete items, and operational cash flow above $0.8bn, excluding antitrust and other discrete items. Net R&D investment was expected to exceed 7% of sales.
- Management highlighted high vehicle inventories, slower sales momentum and continued uncertainty in China and North America, alongside upcoming vehicle launches and elevated investment needs. It said launches were on track and continued to report strong Passive Safety order intake; larger targeted Active Safety orders were expected later in 2017.
- Product-related liabilities were $112.4m at June 30, versus $68.3m a year earlier; the filing says much of the increase relates to recall matters and is covered by insurance. For the Toyota recall of approximately 1.4m vehicles, the root-cause analysis remained ongoing. If Autoliv must indemnify Toyota, management estimated its net loss after expected insurance recoveries at less than $20m, but noted the ultimate cost could differ materially.
- The European Commission antitrust investigation remained pending. Autoliv had not accrued a loss because the impact could not be estimated, but management concluded resolution was probable to materially adversely affect operating results and cash flows in the period resolved or when estimable. Other antitrust matters and tax investigations also remained outstanding; management could not estimate some outcomes.
- Other items included a $12m Q1 impairment of an M/A-COM customer contract, largely offset by a reduction in contingent consideration; Q2 discrete tax items primarily reflected valuation allowances on deferred tax assets. Management reported no material change in risk factors, no material off-balance-sheet arrangements, and no reportable subsequent events.
Most important facts for investors to verify
- Whether the reduced full-year organic sales outlook and Q3 sales and margin expectations were achieved, particularly amid softer North American and Chinese markets.
- Whether higher R&D and capacity spending converts into new orders, successful launches and improved Electronics profitability.
- Actual cash generation and capital needs, including the effects of buybacks, dividends, Zenuity and planned capital expenditures on net debt and leverage.
- Developments in the Toyota recall, insurance recoveries and product-liability reserves, and the timing and potential financial impact of the EC and other antitrust proceedings.
- The realized tax rate and discrete tax adjustments, and whether Zenuity and other strategic investments deliver expected commercial benefits.