Autoliv, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Autoliv develops and supplies automotive safety systems, including airbags, seatbelts, safety electronics, radar and vision systems. This unaudited filing covers the three and nine months ended September 30, 2013; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,119.0 | $1,947.1 | $6,451.5 | $6,214.8 |
| Gross profit / margin | $404.9 / 19.1% | $387.6 / 19.9% | $1,249.7 / 19.4% | $1,250.8 / 20.1% |
| Operating income / margin | $182.3 / 8.6% | $187.4 / 9.6% | $558.7 / 8.7% | $531.1 / 8.5% |
| Net income attributable to controlling interest | $123.9 | $117.5 | $386.1 | $344.4 |
| Diluted earnings per share | $1.29 | $1.23 | $4.02 | $3.63 |
- Sales: Q3 reported sales rose 8.8%; organic growth was 8.7%, with negligible overall currency impact. Nine-month sales rose 3.8%; organic growth was 4.4%, partly offset by currency and a prior-year divestiture.
- Profitability: Q3 gross margin fell 0.8 percentage points and operating margin fell 1.0 point year over year. Management cited European operational inefficiencies, adverse currency effects and higher R&D expense. Nine-month operating income increased despite a lower gross margin.
- Cash flow: Nine-month operating cash flow was $538.7, versus $447.3. Cash from operations less investing outflows was $270, versus $189. Capital expenditures were $271.2; depreciation and amortization were $210.6.
- Liquidity and debt: Cash and equivalents were $1,134.7 at September 30, up from $977.7 at year-end 2012. Total debt was $639.9, versus $632.7 at year-end; reported net cash, including debt-related derivatives, was $508.3, versus $360.8. Operating working capital was $670.3, or 7.9% of sales.
- Returns and other metrics: The declared dividend was $0.50 per share for Q3. The company reported 45,475 employees with continuous employment agreements and total headcount, including temporary personnel, of 55,511.
Material changes and management commentary
- Q3 sales growth was led by China and active safety. Active safety sales grew about 69% reported (67% organic); China sales increased about 21% reported (17% organic). Japan reported sales declined about 14%, largely because of currency, while organic sales there grew 7%.
- Q3 operating income declined from the prior-year quarter even as sales increased. R&D expense rose by more than $23, and management also cited European inefficiencies and currencies. Q3 costs for antitrust matters and capacity alignment were $3; excluding these, operating margin was 8.8%.
- For the first nine months, operating income rose $27.6 and controlling-interest net income rose $41.7. The effective tax rate declined to 27.8% from 30.7%; lower interest expense also supported earnings. EPS benefited from lower antitrust and capacity-alignment costs, lower taxes and lower interest, partly offset by weaker underlying operating profit and more shares outstanding.
- Management described growth as strong but identified pressure from the European footprint transition, Brazil supply-chain challenges, currency and Active Safety investment. More than 1,800 headcount additions during Q3 were in low-cost countries.
Outlook, risks and contingencies
- Q4 2013 outlook: Sales growth around 9% year over year and organic growth above 9%; operating margin around 9%, excluding antitrust and capacity-alignment costs. Management expected operational inefficiencies, adverse currencies and higher R&D costs to offset some sales-growth benefits.
- Full-year 2013 outlook: Organic sales growth above 5% and reported sales growth around 5%; operating margin around 9%, excluding specified costs; effective tax rate around 28%, excluding discrete items; operating cash flow approximately $0.7 billion; capital expenditures around 4.5% of sales. Expected capacity-alignment costs were revised to $20–$40 from $25–$50.
- Management expected strong growth to continue into Q4, supported by China, Active Safety and vehicle launches/ramp-ups. It targeted a long-term 8%–9% margin for Active Safety within two to three years. Operational and investment-related margin pressure was expected to continue into 2014.
- Antitrust: Autoliv paid a $14.5 fine after a 2012 U.S. DOJ guilty plea concerning two antitrust violations. European Commission and South Korean investigations remained unresolved; the company had recorded no loss provision for them and stated that the European matter could materially affect results and cash flows when resolved or estimable. U.S. and Canadian civil antitrust class actions and a U.S. securities class action were also pending; outcomes and amounts were not estimable.
- Product and restructuring exposures: Product-related reserves were $37.8 at September 30; nine-month reserve additions mainly related to recalls. Restructuring reserves were $68.9, primarily employee-related reductions in Europe. Management said restructuring was not expected to materially adversely affect liquidity and believed product reserves and insurance were adequate, while noting claims could exceed estimates or coverage.
- Other disclosed risks include vehicle-production changes, customer and supplier dependence, pricing pressure, currencies, raw-material costs, pension funding, litigation, recalls and warranty claims. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Q4 and full-year sales, margin, tax, cash-flow and capital-spending outlooks were achieved, and how subsequent guidance changed.
- Whether European operational issues, Brazil supply constraints and currency effects continued to weigh on margins, and whether Active Safety growth converted into improved profitability.
- Developments, potential penalties and financial-statement effects from the European and Korean investigations and the pending antitrust and securities litigation; no provision was recorded for specified unresolved matters.
- Changes in product-related reserves, recall and warranty claims, restructuring spending, and the adequacy of insurance coverage.
- Cash conversion and working-capital trends, alongside the increase in short-term debt and scheduled debt maturities.