Autoliv, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Autoliv develops and supplies automotive safety products, including airbags, seatbelts, safety electronics, radar, and vision systems.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $2,295.8 million | $2,135.0 million | +7.5% reported; +7.9% organic |
| Gross profit / margin | $445.3 million / 19.4% | $414.3 million / 19.4% | Profit +7.5%; margin unchanged |
| Operating income / margin | $191.7 million / 8.4% | $182.4 million / 8.5% | Income +5.1%; margin down 0.1 percentage point |
| Income before taxes | $184.3 million | $170.1 million | +8.3% |
| Net income attributable to controlling interest | $130.3 million | $123.5 million | +5.5% |
| Diluted EPS | $1.38 | $1.29 | +7.0% |
| Operating cash flow | $185.3 million | $140.8 million | +$44.5 million |
| Capital expenditures | $93.3 million | $88.0 million | +$5.3 million |
Operating cash flow less net cash used in investing activities was $91.2 million, versus $54.7 million a year earlier. Management said the strong quarterly operating cash flow partly reflected timing effects. Cash and cash equivalents were $1,096.8 million at March 31, 2014.
Total debt was $638.3 million and net cash, as defined by the company’s non-GAAP measure, was $470.2 million at quarter-end. Current assets were $3,800.9 million and current liabilities were $2,555.7 million. Total equity was approximately $4.0 billion. The company paid a $0.52-per-share dividend and repurchased $94.3 million of shares during the quarter.
Business trends and comparison
- Global light-vehicle production was estimated to have increased 5.3% year over year. Autoliv reported organic sales growth across all regions; strongest regional growth was in Japan (+19.8%) and China (+13.9%).
- Active Safety organic sales rose 68.2%; management said this was the fourth consecutive quarter of growth above 50%. Airbag Products grew 7.8%, while Seatbelt Products grew 2.5%.
- Sales growth lifted gross profit, but gross margin was flat. Capacity ramp-ups and unfavorable currency effects offset benefits from higher sales and slightly lower raw-material costs. R&D expense increased 10.1% to $142.2 million, partly reflecting capacity alignment costs.
- The effective tax rate rose to 28.9% from 26.5%, principally due to geographic earnings mix. Lower average share count following repurchases also supported EPS growth.
Outlook, risks, and unusual items
- Q2 2014 outlook: Organic sales growth of around 5%; currency impact expected to add around 1%, for consolidated sales growth of around 6%. Operating margin expected to be around 9%, excluding capacity alignment and antitrust investigation costs.
- Full-year 2014 outlook: Organic sales growth above 5%, consolidated sales growth above 6% including an expected 1% currency benefit, and operating margin around 9%, excluding capacity alignment and antitrust costs. Capacity alignment costs expected to total $20–$40 million. Expected effective tax rate is around 29%, excluding discrete items. Operational cash flow expected to be at least $700 million, excluding potential discrete-item costs; capital spending expected at 4.5%–5.0% of sales.
- Restructuring reserves were $93.7 million at March 31, mainly for employee-related actions, particularly in Europe. Management did not expect the program to materially harm liquidity.
- Ongoing antitrust investigations and related litigation are significant contingencies. Autoliv previously pleaded guilty to two U.S. antitrust counts involving a Japanese subsidiary and paid a $14.5 million fine. The European Commission investigation remained pending; management considered a material adverse impact on operating results and cash flows probable when resolved or estimable. The company recorded no provision for that matter or the other unresolved antitrust investigations and class actions because the financial impact could not be estimated. Management said losses in the civil antitrust cases were probable.
- Product-related liabilities rose to $40.8 million from $36.4 million at the start of the quarter; Q1 provisions mainly related to warranty issues. The company noted possible future warranty, recall, product-liability, and intellectual-property claims and said insurance may not cover every possible claim.
- Subsequent financing: On April 23, 2014, after quarter-end, Autoliv issued $1.25 billion of long-term notes at an average interest rate of 3.84%, with maturities ranging from five to 15 years. The filing also disclosed a change in board leadership after quarter-end: the chairman resigned and the CEO became interim chairman.
Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Progress and total costs of the European Commission and other antitrust investigations, including any eventual provision or settlement impact.
- Whether full-year organic sales and operating-margin guidance is achieved, particularly as Active Safety growth is expected to moderate after unusually strong recent quarters.
- Cash conversion and working-capital trends, given management’s warning that Q1 operating cash flow benefited partly from timing.
- Use of proceeds and resulting debt, interest expense, and liquidity effects of the $1.25 billion post-quarter debt issuance.
- Adequacy of product-related reserves and insurance coverage as warranty, recall, and liability claims develop.