Autoliv, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The unaudited interim financial statements are prepared under U.S. GAAP. Autoliv supplies automotive passive- and active-safety systems. Effective January 1, 2015, it reorganized reporting into Passive Safety and Electronics; comparative segment data was recast.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $2,174.1 million | $2,295.8 million | Down 5.3% reported; organic sales increased 3.9%, while currency translation reduced sales by about $210 million. |
| Gross profit / margin | $423.3 million / 19.5% | $445.3 million / 19.4% | Gross profit down 4.9%; margin up 0.1 percentage point. |
| Operating income / margin | $80.0 million / 3.7% | $191.7 million / 8.4% | Down 58.3%; primarily affected by antitrust settlement costs and capacity-alignment costs. |
| Net income attributable to controlling interest | $35.7 million | $130.3 million | Down 72.6%. |
| Diluted EPS | $0.40 | $1.38 | Down 71.0%. |
| Effective tax rate | 44.6% | 28.9% | Higher due in part to prior-year audit adjustments and an unfavorable tax-mix effect from settlements. |
| Operating cash flow | $84.2 million | $185.3 million | Lower, primarily reflecting antitrust settlement payments. |
| Capital expenditures | $134.8 million | $93.3 million | Higher investment; operating cash flow less cash used in investing was negative $47.0 million. |
Balance sheet, liquidity and capital
- Cash and equivalents were $1,364.1 million at March 31, 2015, down from $1,529.0 million at year-end 2014. The quarterly cash decrease was $164.9 million, including a $32.0 million unfavorable currency effect.
- Total debt was $1,635.3 million; net debt, as defined by the company and adjusted for debt-related derivatives, was $264.0 million, compared with $61.8 million at December 31, 2014. Leverage ratio was 0.5x, within the stated 0.5x–1.5x long-term target range.
- Current assets were $4,017.4 million and current liabilities were $2,256.2 million. Operating working capital was $572.3 million, or 6.3% of sales; the company’s target is not to exceed 10% of trailing 12-month sales.
- Autoliv repurchased 925,166 shares for approximately $104.3 million and paid $47.8 million in dividends. The quarterly dividend declared for Q2 was $0.56 per share.
Material changes and operating trends
- Organic sales grew 3.9% overall despite lower reported sales from foreign-exchange translation. Europe grew organically 8.5%; the Americas 3.0%; Asia was approximately flat. Active Safety sales grew organically 31.4%; Passive Safety Electronics declined 2.6% organically.
- Operating income included approximately $77 million of expense from additional antitrust settlements and $35 million of capacity-alignment costs. Together these reduced operating margin by 5.2 percentage points, versus 0.2 point in Q1 2014.
- Passive Safety segment sales were $1,830.4 million, with a 3.5% operating margin; Electronics sales were $351.2 million, with a 2.5% operating margin. Both reported segment margins were lower year over year.
- Equity declined to $3,225.6 million from $3,442.1 million at year-end, reflecting currency translation losses, share repurchases and dividends, partly offset by net income and stock incentives. Other comprehensive loss was $109.3 million, principally from currency translation.
Outlook, risks and unusual items
- For Q2 2015, management expected organic sales growth of about 6%, with currency translation expected to reduce reported sales by more than 10%; adjusted operating margin, excluding capacity-alignment and antitrust costs, was expected to be about 9%.
- For full-year 2015, management indicated organic sales growth above 6%, reported sales down about 2% due to currency effects, and adjusted operating margin of about 9.5%, excluding those costs. The company expected operational cash flow of about $0.8 billion, excluding Q1 antitrust settlements and other discrete items, and capital expenditures of 5%–6% of sales.
- Capacity-alignment costs were expected to be at least $60 million for 2015. The company was preparing capacity for up to 25 million replacement airbag inflators for 2015–2016, but said agreed 2016 delivery volumes were below prior expectations and final volumes remained uncertain.
- Antitrust matters remain significant. The company recorded about $77 million of Q1 expense for additional settlements totaling $81 million. It reported that the European Commission investigation remained unresolved and that a material adverse impact on operating results and cash flows was probable when the matter is resolved or becomes estimable; no provision had been recorded. The company also reported Canadian antitrust claims for which losses were considered probable but not estimable, and no provision was recorded.
- Other legal and regulatory uncertainties include a Brazilian tax assessment of approximately $17.3 million, which the company disputes, and a Turkish customs investigation for which the financial impact could not be estimated; no provision was recorded for the Turkish matter. Product warranty and recall exposure is ongoing; product-related liabilities were $47.2 million at quarter-end.
- Management highlighted volatile currencies, regional vehicle-production trends, customer and product mix, competition, component supply, and product liability and recall risks. Approximately 75% of sales were denominated in currencies other than the U.S. dollar; the company does not hedge translation exposure and said currency volatility increased uncertainty.
Important facts for investors to verify
- Whether organic growth and the anticipated improvement in China’s customer mix materialize, and how currency movements affect reported sales and margins.
- The final costs and cash payments for antitrust matters, especially the unresolved European Commission and Canadian proceedings, and whether further provisions are required.
- Execution and total cost of the European capacity-alignment program, alongside the company’s adjusted-margin outlook.
- Replacement-inflator customer delivery volumes, particularly for 2016, and the related capacity and capital-spending requirements.
- Cash conversion, receivables trends, capital expenditures and leverage following settlement payments, dividends and share repurchases.
- Developments in the Brazilian tax assessment, Turkish customs investigation, and warranty, recall or product-liability claims.