AUTOLIV INC quarterly report, Q1 FY2017

Autoliv, Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017. Unaudited U.S. GAAP interim financial statements; comparisons are with Q1 2016 unless otherwise stated. Autoliv supplies automotive passive- and active-safety systems, reported in Passive Safety and Electronics segments.

Financial performance and liquidity

MetricQ1 2017Q1 2016 / comparison
Net sales$2,608.1 million$2,430.0 million; up 7.3%
Gross profit / margin$542.5 million / 20.8%$501.0 million / 20.6%
Operating income / margin$217.6 million / 8.3%$205.2 million / 8.4%
Income before taxes$194.4 million$190.3 million
Net income attributable to controlling interest$143.9 million; diluted EPS $1.62$133.2 million; diluted EPS $1.51
Effective tax rate26.9%29.9%
Cash from operating activities$149.2 million$200.5 million
Capital expenditures$129.5 million$91.8 million

Net sales growth comprised 4.4% organic growth, approximately 5% acquisition contribution, and approximately 2% negative currency translation. Passive Safety sales grew 2.6% reported and 4.7% organically; its operating margin was 10.0%, up from 9.6%. Electronics sales increased 27.8% reported, reflecting the ANBS acquisition; organic growth was 2.9%. Electronics operating margin declined to 2.3% from 2.6%.

Operating cash flow fell mainly because of working-capital timing and lower factoring volumes. Operating cash flow less investing cash outflow was positive $27.8 million, versus negative $118.1 million in Q1 2016, which included the ANBS acquisition. Cash and cash equivalents were $1,235.2 million at March 31, up from $1,226.7 million at year-end.

Total debt was $1,548.9 million, versus $1,543.4 million at December 31, 2016; net debt was $312.1 million, compared with $313.3 million. The company reported a 0.4x leverage ratio, below its long-term target of around 1x within a 0.5x–1.5x range. Current assets were $4,329.0 million and current liabilities $2,701.3 million. Operating working capital was $666.2 million at quarter-end, up from $579.2 million at year-end.

Changes, management commentary and outlook

  • Revenue rose 7.3%, but reported operating margin edged down 0.1 percentage point. Higher R&D spending and acquisition effects more than offset improved gross margin. Net R&D expense rose to $192.7 million, or 7.4% of sales, from $158.8 million, or 6.5%.
  • Management said the quarter was slightly better than expected. Light-vehicle production grew 5.9%; Autoliv said it underperformed that production growth in Q1 but still expected to outperform for full-year 2017. It cited elevated inventory and slower sales momentum, particularly in North America and China.
  • Q2 2017 guidance: organic sales growth around 2%, currency impact around negative 3%, consolidated sales down around 1%, and adjusted operating margin around 8.5% excluding capacity-alignment and antitrust costs.
  • Full-year 2017 outlook was unchanged: organic sales growth around 4%; consolidated sales growth around 3% after currency and M&A effects; adjusted operating margin around 8.5% excluding capacity-alignment and antitrust costs; tax rate around 30%, excluding discrete items; and operational cash flow above $0.8 billion, excluding antitrust and other discrete items. Capital expenditures were expected at 5%–6% of sales and net R&D at the high end of 6.5%–7.0% of sales.
  • Management cited continuing raw-material cost pressure and high investment to support growth. Passive Safety’s historically high order intake requires a shift toward production execution; Electronics continues to invest in R&D and capacity.

Risks, contingencies and unusual items

  • The company recorded a $12 million impairment of an acquired M/A-COM customer contract after receiving new customer indications. A $13 million reduction in the related earn-out liability largely offset the charge; the combined net impact was a $1 million gain.
  • Product-related liabilities were $117.7 million at quarter-end, compared with $61.8 million a year earlier; the company said most of the increase related to 2016 recalls and was largely covered by insurance.
  • For the Toyota recall of approximately 1.4 million vehicles, Autoliv said a loss was reasonably possible and estimated its net loss, if required to indemnify Toyota, at less than $20 million after expected insurance recoveries. Ultimate cost and insurance recoveries remain uncertain.
  • The European Commission antitrust investigation remains unresolved. Management concluded a material adverse effect on operating results and cash flows is probable for the period in which the investigation is resolved or becomes estimable; no loss provision had been recorded. Other antitrust matters include settlements, pending appeals and claims, including Canadian cases subject to court approval.
  • Other disclosed exposures include Brazilian and Turkish tax matters, product liability, warranty and recall claims, intellectual-property claims, and tax audit uncertainty. Management said it could not assure that future litigation or product-related losses would not be material.
  • After quarter-end, Autoliv and Volvo Cars completed the 50/50 Zenuity autonomous-driving software joint venture. Autoliv invested approximately SEK 1.1 billion; the investment will be accounted for under the equity method.

Important facts for investors to verify

  • Whether organic growth and adjusted-margin guidance are achieved, and how currency, vehicle production and OEM inventory trends develop.
  • Whether operating cash flow rebounds from Q1 and working capital remains within management’s target of no more than 10% of trailing 12-month sales.
  • How R&D, capital spending, raw-material costs and the planned production ramp affect margins and cash generation.
  • Developments in the EC antitrust investigation, Toyota recall responsibility and insurance recovery, and other product-related or legal exposures.
  • Electronics profitability and Brake Systems sales, including customer and vehicle-model concentration, and the commercial progress and investment needs of Zenuity.