Autoliv, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Autoliv supplies passive and active automotive safety systems. Effective January 1, 2015, it reorganized reporting into Passive Safety and Electronics; prior-year segment figures were recast.
Financial performance
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Net sales | $2,291.5m | $2,383.0m | $4,465.6m | $4,678.8m |
| Gross margin | 20.1% | 19.5% | 19.8% | 19.4% |
| Operating income / margin | $208.7m / 9.1% | $139.4m / 5.8% | $288.7m / 6.5% | $331.1m / 7.1% |
| Net income attributable to controlling interest | $136.7m | $82.8m | $172.4m | $213.1m |
| Diluted EPS | $1.55 | $0.89 | $1.95 | $2.27 |
Q2 reported sales fell 3.8%, while organic sales grew 6.1%; currency translation reduced sales by about $237m. H1 sales fell 4.6%, with 5.0% organic growth and about $447m of adverse currency effects. Q2 earnings benefited substantially from comparison with roughly $70m of U.S. antitrust class-action settlement costs in Q2 2014. H1 operating income fell 12.8%, reflecting capacity-alignment and antitrust costs, higher R&D on a comparable-currency basis, and increased interest expense.
- Segment trends: Q2 Passive Safety organic sales grew 5.7%, with a 10.2% operating margin versus 5.5% a year earlier. Electronics organic sales grew 8.3%, but its margin declined to 3.2% from 4.8%, primarily due to higher R&D and adverse currency transaction effects. Active Safety organic sales rose 25.6% in Q2 and 28.4% in H1.
- Cash flow and investment: H1 operating cash flow was $237.9m, versus $271.0m. Investing cash flow was negative $246.3m, including $250.0m of capital expenditures; operating cash flow less investing cash flow was negative $8m. Q2 operating cash flow was $154m, compared with $86m a year earlier.
- Liquidity and debt: June 30 cash was $1,323.3m; total debt was $1,598.8m and reported net debt was $268.5m, up from $61.8m at year-end 2014. Current assets were $4,044.1m and current liabilities $2,225.3m. Leverage ratio was 0.5x, within the company’s stated 0.5x–1.5x long-term range.
- Capital returns: H1 dividends paid were $97.1m and share repurchases were $104.4m. No shares were repurchased in Q2. The company declared a $0.56 per-share Q3 dividend.
Outlook and management commentary
- Q3 2015 organic sales growth was forecast above 7%; currency effects were expected to be negative by more than 9%, implying a reported sales decline of less than 2%. Adjusted operating margin was expected around 9%, excluding acquisitions and capacity-alignment, antitrust and related costs.
- For full-year 2015, management indicated organic sales growth above 6%, reported sales down close to 2%, and adjusted operating margin around 9.5% on the same exclusions. The filing does not provide a specific GAAP operating-margin forecast.
- Full-year operating cash flow was expected around $0.8bn, excluding antitrust and other discrete items. Capital expenditures were forecast at 5%–6% of sales, above the usual 4%–5% range, largely due to replacement-inflator business. The tax-rate forecast was around 31%, excluding discrete items.
- Capacity alignment costs were expected to exceed $90m for 2015, higher than previously estimated, with ongoing European footprint changes. Autoliv expected to supply up to 20m replacement inflators, mainly in 2015–2016; final volumes remained uncertain.
- Management cited strength in Europe and North America and strong demand for active-safety products, but noted China’s slowdown, unfavorable vehicle mix and model transitions, and sharply lower South American production.
Material risks, contingencies and unusual items
- Antitrust matters remain significant. The company had agreed to additional settlements totaling $81m in March 2015, following U.S. class-action settlements recorded in 2014. The European Commission investigation remained unresolved; management said a material adverse impact on operating results and cash flows was probable when the matter is resolved or becomes estimable. No provision was recorded for that investigation as of June 30. Canadian antitrust cases were also considered probable to result in losses, but amounts could not be estimated and no provision was recorded.
- Brazilian and South African antitrust investigations and a Turkish customs investigation had uncertain outcomes and no loss provisions recorded. Brazil’s CADE investigation was announced July 6, after quarter-end. A Brazilian state tax assessment of approximately $18.5m was disputed; no accrual was made.
- Product-related liabilities, mainly recall-related, increased to $62.9m from $51.3m at the start of H1. The company warned that recalls, warranty, product-liability and intellectual-property claims may exceed reserves or insurance.
- Foreign exchange is a material exposure: approximately 75% of sales are denominated in currencies other than the U.S. dollar. H1 currency translation also reduced accumulated other comprehensive income by $90.7m.
- After quarter-end, Autoliv signed a Volvo advanced-driver-assistance algorithm license agreement and agreed to acquire MACOM’s automotive module business for $100m, subject to adjustments, with up to $30m of earn-out payments and consulting fees up to $15m. Closing was expected in Q3 2015.
Key facts for investors to verify
- Whether organic growth and the forecast adjusted margins convert into reported revenue and GAAP profitability amid currency pressure and elevated restructuring costs.
- Actual replacement-inflator delivery volumes, timing, margins and associated capital requirements.
- Final outcomes, timing and potential financial exposure from antitrust, tax, customs and product-related matters, including the European Commission investigation.
- MACOM transaction closing, total purchase consideration and contribution to Electronics growth and profitability.
- Cash generation versus capital spending, dividends and repurchases, and the resulting trajectory of cash and net debt.