Autoliv, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2015; comparisons are with the third quarter and first nine months of 2014, unless otherwise stated. Autoliv supplies automotive passive-safety products, including airbags and seatbelts, and electronics including active-safety systems. Since January 2015, it reports two segments: Passive Safety and Electronics. Financial amounts are in U.S. dollars; millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $2,184.5 | $2,208.0 | $6,650.1 | $6,886.8 |
| Gross profit / margin | $440.1 / 20.1% | $426.4 / 19.3% | $1,323.4 / 19.9% | $1,335.9 / 19.4% |
| Operating income / margin | $157.8 / 7.2% | $174.8 / 7.9% | $446.5 / 6.7% | $505.9 / 7.3% |
| Net income attributable to controlling interest | $98.9 | $106.5 | $271.3 | $319.6 |
| Diluted EPS | $1.12 | $1.16 | $3.07 | $3.43 |
| Operating cash flow | $191 million | $212 million | $429.2 | $483.4 |
- Q3 organic sales grew 8.4%, despite reported sales falling 1.1%; currency translation reduced sales by $220 million and the MACOM acquisition added $10.6 million. Nine-month organic growth was 6.1%, while reported sales declined 3.4%, including a $667.1 million currency impact.
- Q3 operating income fell 9.7%. Management attributed the decline principally to $42 million of capacity-alignment costs, which reduced operating margin by 1.9 percentage points. Gross margin improved on organic growth, favorable mix, currency effects and raw-material savings.
- Nine-month operating income declined 11.7% and net income attributable to controlling interest fell 15.1%. Management cited capacity-alignment costs and antitrust-related settlement costs among the main operating-margin pressures.
- Active Safety sales grew organically 36.0% in Q3 and 31.1% for the first nine months. For Q3, Passive Safety segment sales were $1,797.2 million, with an 8.1% segment operating margin; Electronics sales were $397.1 million, with a 2.9% margin. Electronics’ nine-month margin was 2.9%, versus 4.7% a year earlier, reflecting higher R&D costs at comparable exchange rates and negative currency effects.
- Effective tax rate was 34.7% for Q3 and 33.9% year to date, versus 31.9% and 30.8%, respectively, in 2014. Management cited an unfavorable mix of earnings and tax rates across jurisdictions.
Cash, debt and liquidity
- Cash and equivalents were $1,181.1 million at September 30, down from $1,529.0 million at year-end 2014. Total debt was $1,553.0 million; net debt, the company’s non-GAAP measure, was $364.9 million, up from $61.8 million at year-end.
- Leverage ratio was 0.6x, compared with 0.3x at year-end; the company’s long-term target is around 1.0x, within a 0.5x–1.5x range. Current assets were $3,813.2 million and current liabilities $2,112.0 million.
- Nine-month investing cash outflow was $471.9 million, including $347.7 million of capital expenditures and $138.2 million for acquisitions and other net investing activity. Operating cash flow less investing cash flow was negative $43 million. Cash dividends paid were $146.4 million and share repurchases were $104.4 million.
- Management expected full-year 2015 operational cash flow of about $0.8 billion, excluding antitrust matters and other discrete items. Capital expenditures were expected at 5%–6% of sales.
Material changes, outlook and notable items
- Q3 organic growth was strongest in Europe (11.0%), the Americas (9.0%) and Rest of Asia (12.5%); China organic sales declined 3.5%. Management noted weaker-than-expected vehicle production in China and volatile volumes, and said it was adjusting capacity while building engineering capability there.
- For Q4 2015, management expected organic sales growth of about 9%, currency headwinds of more than 6%, reported sales growth above 3%, and adjusted operating margin of about 10.5%. Full-year expectations were about 7% organic sales growth, reported sales down about 2%, and adjusted operating margin around 9.5%. Adjusted margins exclude capacity-alignment and antitrust-related costs.
- Capacity-alignment costs were expected to exceed $90 million for 2015. The projected full-year tax rate, excluding discrete items, was about 32%. Replacement-inflator deliveries could reach up to 20 million units, mainly in 2015 and 2016, but management said final volumes remained uncertain.
- Autoliv completed its acquisition of MACOM’s automotive business on August 17 for consideration with a reported fair value of $138.5 million, including contingent and deferred consideration. The acquired business contributed $10.6 million in sales and $0.3 million in operating income through September 30; purchase accounting included a $1.7 million inventory step-up charge. Goodwill and intangible valuations were preliminary.
- Autoliv signed a conditional agreement to form a brake-control joint venture with Nissin Kogyo, with Autoliv expected to own 51% and control it upon closing. The filing reported no subsequent events through the report date.
Risks, contingencies and unusual items
- Antitrust investigations and litigation remain significant uncertainties. Autoliv had agreed to $65 million of U.S. class-action settlements (the direct-purchaser settlement was reduced to about $35.5 million after opt-outs) and entered additional agreements totaling $81 million in March 2015 for certain global or non-U.S. claims. The company also disclosed pending investigations and cases in Europe, South Africa, Brazil, the United States and Canada. It considered material adverse effects probable when the European Commission investigation is resolved or becomes estimable; several outcomes and losses could not be estimated.
- Autoliv accrued amounts described as not material for a Brazilian tax assessment and a Brazilian antitrust investigation. It made no provision for the Turkish customs investigation or certain antitrust proceedings because it could not estimate the loss or range.
- Product-related reserves were $63.6 million at September 30, up from $51.3 million at year-end 2014. The company warned that recalls, warranty, product-liability or intellectual-property claims could exceed reserves or insurance and affect customer orders.
- Currency risk is substantial: approximately 75% of sales are denominated in currencies other than the U.S. dollar, and currency translation reduced Q3 sales by $220 million. The company does not hedge translation exposure and does not hedge net transaction flows generally.
- Other risks include vehicle-production volatility, customer and supplier concentration, pricing pressure, component shortages, restructuring execution, pension costs, tax matters and litigation. Management stated that disclosure controls were effective and that no material change in internal control occurred during the quarter.
Key facts for investors to verify
- Whether Q4 and full-year organic-sales and adjusted-margin guidance was achieved, and how much reported performance differed due to currency translation.
- Actual capacity-alignment and antitrust costs versus the 2015 expectations, and any change in the status, accruals or estimated exposure for outstanding proceedings.
- Replacement-inflator delivery volumes, associated revenue and margins, and whether the stated potential volume of up to 20 million units changed.
- Cash generation, capital spending, net debt and leverage after acquisition, settlement, dividend and repurchase outflows.
- Completion and financial effects of the proposed Nissin Kogyo joint venture, and final purchase accounting for the MACOM acquisition.
- Whether China market conditions, foreign-exchange movements and Electronics segment margins improved or deteriorated.