Autoliv, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unless otherwise noted, dollar amounts are in millions. Autoliv supplies automotive safety systems and components, including airbags, seatbelts, safety electronics, radar and night-vision systems; it reported operations in 29 countries.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $2,017.6 | $1,740.9 | $6,187.7 | $5,263.2 |
| Gross profit | $411.2 | $373.8 | $1,298.8 | $1,169.3 |
| Operating income | $204.9 | $202.1 | $665.1 | $626.6 |
| Net income attributable to controlling interest | $138.4 | $140.1 | $464.9 | $413.1 |
| Diluted EPS | $1.48 | $1.51 | $4.95 | $4.50 |
| Gross margin | 20.4% | 21.5% | 21.0% | 22.2% |
| Operating margin | 10.2% | 11.6% | 10.7% | 11.9% |
Q3 sales grew 16% reported and 9.4% organically; currency added about 6%, while acquisitions and divestitures had little effect. For the first nine months, sales grew nearly 18% reported and more than 9% organically. Autoliv said organic growth exceeded global light-vehicle production growth in both periods, supported by new vehicle launches, product mix and demand for side airbags, seatbelts and safety electronics. Active-safety sales rose 78% in Q3 and 96% year to date.
Q3 gross profit increased, but margins contracted principally because of higher raw-material costs and unfavorable currency-revaluation effects. Operating expenses also rose: Q3 research and development and SG&A each increased by about $15 million year over year. Management cited $5 million of higher Q3 legal expenses related to antitrust investigations. Q3 net income and diluted EPS declined, partly reflecting a higher effective tax rate and less favorable discrete tax items. Nine-month net income and diluted EPS improved, helped by a lower effective tax rate, including a second-quarter tax-reserve release.
Cash flow, debt and liquidity
- Operating cash flow: $465.1 for the first nine months, versus $598.1 in 2010. Q3 operating cash flow was $192 million.
- Capital spending: $263.0 of capital expenditures in the nine-month cash-flow statement, versus $145.8 a year earlier. Management reported net capital expenditures of $257 million for the period and said investment supported capacity expansion in Asia and South America and active safety.
- Cash and debt: At September 30, cash was $630.7; short- and long-term debt totaled $702.0; reported net debt was $40.5, down from $127.1 at year-end 2010. Net debt to capitalization was 1%.
- Liquidity: Current assets were $2,943.3 and current liabilities $1,983.5. The company reported $1.9 billion in long-term committed debt and facilities, of which $1.4 billion was unused; a €225 million EIB facility was also unused at quarter-end. Autoliv reported no material off-balance-sheet arrangements.
- Dividends: $114.1 was paid during the first nine months. A $0.45-per-share quarterly dividend was declared for payment December 1, 2011.
Material changes and notable items
- Year-to-date operating cash flow was lower than in 2010, while capital expenditures were substantially higher.
- Q3 and nine-month gross and operating margins were below the comparable 2010 periods despite higher sales and operating income.
- Q3 net debt fell by $91 million to $40.5 million. Total equity was $3,302.1 at quarter-end; Q3 foreign-currency translation reduced comprehensive income by $60.7 million.
- The company released approximately $24 million of tax reserves in Q2 following closure of U.S. tax audits; the nine-month effective tax rate was 24.3%, versus 27.5% in 2010.
- Restructuring reserves were $36.7 million at September 30. Product-related liabilities were $32.8 million, compared with $36.7 million a year earlier.
Outlook, risks and contingencies
Management forecast Q4 organic and consolidated sales growth above 9%, versus expected global vehicle-production growth of nearly 4%, assuming prevailing exchange rates. It guided to a Q4 operating margin of 11%–11.5% and full-year margin around 11%, revising the outlook in light of Thailand flooding. The projected effective tax rate for the remainder of 2011 was around 28%, excluding discrete items. Management cautioned that macroeconomic uncertainty made vehicle-production forecasts unusually difficult.
- Thailand flooding: Supplier disruption had stopped some manufacturing lines, although Autoliv’s two Thai plants had not flooded. The company estimated at least $6 million of Q4 operating-income impact, but said the ultimate effect could not yet be assessed.
- Antitrust investigations: The U.S. Department of Justice and European Commission investigations remained ongoing. Autoliv could not estimate the amount or timing of any liability; it warned that results and cash flows could be materially affected when costs become estimable or investigations are resolved. Guidance excluded these effects.
- Other legal and product risks: A French former-employee action sought approximately €11 million (about $15 million); SEVA asserted patent-related claims and indicated possible damages of €22 million (about $30 million), for which Autoliv made no provision. The company also disclosed potential recall, warranty, product-liability and intellectual-property exposures; recorded estimates and insurance may not cover all outcomes.
- Supply-chain and Japan risks: The filing described continuing uncertainty from the 2011 Japan earthquake and warned that disruptions affecting suppliers, customers or logistics could interrupt production and deliveries.
- Equity units: Approximately 4.3 million units remained outstanding, with settlement scheduled for April 2012. Final issuance was estimated at 5.7–6.8 million shares, subject to the share price and contractual adjustments; the related notes were to be remarketed in early 2012.
Management stated that current litigation was not expected to have a material adverse impact on consolidated financial position, while also noting that material future litigation, product-liability or other losses could occur. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track the duration and financial consequences of Thailand supply disruption, including whether the estimated Q4 operating-income impact exceeds $6 million.
- Monitor DOJ and EC antitrust investigations, related legal spending, and any liability recognition or changes to guidance.
- Assess whether raw-material costs, currency movements and operating expenses continue to pressure gross and operating margins.
- Compare actual Q4 sales, vehicle-production trends and margins with management’s outlook, particularly amid macroeconomic uncertainty.
- Review cash conversion and elevated capital spending, and confirm liquidity and debt levels remain consistent with the company’s stated policy.
- Follow product-liability reserves and the French and SEVA matters, and assess potential dilution and financing terms when the equity units are settled and notes remarketed.