Autoliv, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Autoliv supplies automotive safety systems, including airbags, seatbelts and active safety products.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,947.1 | $2,017.6 | $6,214.8 | $6,187.7 |
| Gross profit / margin | $387.6 / 19.9% | $411.2 / 20.4% | $1,250.8 / 20.1% | $1,298.8 / 21.0% |
| Operating income / margin | $187.4 / 9.6% | $204.9 / 10.2% | $531.1 / 8.5% | $665.1 / 10.7% |
| Net income attributable to controlling interest | $117.5 | $138.4 | $344.4 | $464.9 |
| Diluted EPS | $1.23 | $1.48 | $3.63 | $4.95 |
| Operating cash flow | $131 for the quarter | $192 for the quarter | $447.3 | $465.1 |
Q3 reported sales fell 3.5%, while organic sales rose 2%; currency translation reduced sales by $103.2 million and a small divestiture reduced them by $8.2 million. Nine-month reported sales were essentially flat, with organic growth of 4.8% offset by currency and divestiture effects.
Q3 operating income declined $17.5 million. Lower gross profit was partly offset by reduced R&D and SG&A costs. For the first nine months, operating income fell $134.0 million, reflecting weaker gross margin, $67 million of higher capacity-alignment and antitrust-related costs, and higher net R&D expense. Nine-month net income also reflected a higher effective tax rate: 30.7%, versus 24.3% a year earlier. Q3’s rate was 32.6%, including a 4.1 percentage-point increase from discrete items, principally French tax-law changes.
Liquidity, cash flow and debt
- At September 30, cash and equivalents were $908.2 million; current assets were $3,302.3 million and current liabilities $1,972.0 million.
- Total debt was $655.5 million ($158.1 million short-term and $497.4 million long-term). The company reported net cash of $264.8 million after cash and debt-related derivatives, compared with net cash of $92.0 million at year-end 2011.
- Nine-month operating cash flow of $447.3 million less investing cash outflow of $257.8 million generated $189 million. Capital expenditures, net, were $261 million; depreciation and amortization were $204 million.
- Cash increased $169.0 million during the first nine months. Financing included $106.3 million of proceeds from settlement of the equity-unit purchase contracts and $129.9 million of dividends paid.
- Operating working capital was $632.5 million, up from $514.2 million at December 31, 2011. Receivables outstanding were 73 days; inventory outstanding was 32 days.
Material changes and operating drivers
- Q3 global light-vehicle production increased an estimated 2%, but fell 6% in Europe; North America grew 14%. A strike in South Korea and weaker Chinese demand for Japanese vehicles also affected results.
- Q3 organic sales rose 13% in the Americas and 12% in China, but declined 7% in Europe, 4% in Japan and 6% in the Rest of Asia. Active-safety sales increased 43% as reported and 47% organically.
- Management cited currency headwinds, a plant fire, uneven capacity utilization, overtime in stronger-demand markets, and higher depreciation and start-up costs. New capacity, especially in China and Eastern Europe, was not yet fully utilized.
- The company issued approximately 5.8 million shares in April to settle the equity units, contributing to higher weighted-average shares and lower EPS.
Outlook, risks and unusual items
- For Q4, management expected organic sales growth of 0%–2%, with currency and a small divestiture expected to reduce sales by about 1%; consolidated sales were expected to be virtually flat year over year. Expected operating margin was around 9%, excluding capacity-alignment and antitrust-related costs.
- For full-year 2012, management expected approximately 4% organic sales growth, flat reported sales, and operating margin above 9.5% excluding those costs. Capacity-alignment costs were expected at the high end of the previously stated $60–$80 million range. Capital expenditures were expected to be about 4.5% of sales; operating cash flow about $0.7 billion; and the effective tax rate, excluding discrete items, around 28%.
- Management said guidance was more uncertain than usual because of European market conditions, vehicle-maker shutdown timing, and slower-than-expected growth in China.
- Autoliv paid a $14.5 million DOJ antitrust fine in July under a plea agreement concerning two violations involving a Japanese subsidiary. The separate European Commission investigation remained unresolved; management said a material adverse impact on operating results and cash flows was probable when resolved or estimable, but the amount and timing could not be estimated. No provision was recorded for the EC matter, the Canadian inquiry or anticipated Japanese inquiry.
- Ten U.S. purported antitrust class actions were pending; the company denied the allegations and had not recorded a loss provision. Other disclosed matters include French litigation related to a plant closure and disputed claims concerning a former supplier. Product-related reserves were $31.3 million at quarter-end.
- Q3 restructuring charges included $9.8 million of employee-related provisions, mainly for European headcount reductions. Management said restructuring programs were expected to be financed from operating cash or existing credit facilities without a material adverse liquidity impact.
- Autoliv announced a $33 million China plant investment to expand propellant capacity and a 20% expansion of its Shanghai technical-center floor space. The quarterly dividend was raised to $0.50 per share.
Important facts for investors to verify
- Developments, potential financial exposure and timing of the EC antitrust investigation, related inquiries and class-action litigation.
- Whether Q4 and full-year sales and margin expectations are achieved, particularly given European vehicle production and China demand.
- Actual capacity-alignment costs versus the $60–$80 million estimate, and the pace at which new manufacturing capacity is utilized.
- Cash conversion, working-capital trends, capital spending and the sustainability of the company’s net-cash position and dividend.
- Changes in warranty, recall and product-liability exposure, including adequacy of reserves and insurance.
- Tax-rate developments and currency effects; the filing identifies both as meaningful contributors to period-to-period earnings changes.