Autoliv, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial figures are in millions except per-share data. Autoliv supplies automotive passive- and active-safety products and reports in Passive Safety and Electronics segments.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $2,578.5 | $2,291.5 | $5,008.5 | $4,465.6 |
| Gross profit / margin | $526.5 / 20.4% | $460.0 / 20.1% | $1,027.5 / 20.5% | $883.3 / 19.8% |
| Operating income / margin | $212.7 / 8.2% | $208.7 / 9.1% | $417.9 / 8.3% | $288.7 / 6.5% |
| Net income attributable to controlling interest | $148.4 | $136.7 | $281.6 | $172.4 |
| Diluted EPS | $1.68 | $1.55 | $3.19 | $1.95 |
| Effective tax rate | 25.9% | 29.7% | 27.8% | 33.4% |
- Growth: Reported sales increased 12.5% in Q2 and 12.2% in the first half. Organic growth, a non-U.S. GAAP measure, was 7.7% and 11.1%, respectively. Acquisitions contributed materially to reported growth, particularly in Electronics.
- Cash flow: First-half operating cash flow was $303.1 versus $237.9. Investing used $448.9 versus $246.3, including $227.8 for acquisitions and related items; capital expenditures were $223.5. Operating cash flow less investing cash flow was negative $145.8, compared with negative $8.4 a year earlier. Q2 operating cash flow was $103, down from $154, primarily due to receivables-payment timing.
- Liquidity and debt: At June 30, cash was $1,113.1, current assets $4,122.5, and current liabilities $2,467.8. Short- and long-term debt totaled $1,555.4; reported net debt was $437.8, up from $201.6 at year-end 2015. Leverage ratio was 0.5x. A $1.1 billion revolving facility was refinanced after quarter-end in July, with a five-year maturity and extension options.
- Capital returns: Dividends paid in the first half were $100.5; the declared quarterly dividend was $0.58 per share. No shares were repurchased in Q2.
Material changes and management commentary
- Q2 gross margin improved 0.3 percentage points, supported by organic growth, favorable currency effects, and raw-material savings. Operating margin fell 0.9 points as spending on growth and engineering increased; Q2 R,D&E expense rose $36 year over year.
- First-half operating margin rose 1.8 points, partly because the prior-year period included higher capacity-alignment and antitrust settlement costs. First-half EPS growth also benefited from lower legal and capacity-alignment costs and a lower underlying tax rate.
- Autoliv acquired a 51% controlling interest in Autoliv-Nissin Brake Systems (ANBS) for about $264 cash on March 31. ANBS contributed $137 of sales and break-even operating income from acquisition through June 30. Purchase accounting is preliminary; the transaction added $221.4 of goodwill.
- Management cited strong order intake and future growth opportunities, while adding nearly 400 engineering resources in Q2 and planning to add more than 1,000 over the next 12 months.
Outlook, risks, and contingencies
- Guidance: Q3 organic sales growth around 6%, with recent acquisitions adding around 6% and currency reducing growth by less than 1%; consolidated sales growth was expected around 12%. Adjusted operating margin was expected around 7.5%, excluding capacity-alignment and antitrust costs.
- Full year 2016: Organic sales growth around 7%; acquisitions expected to add around 5%, currency to reduce growth by more than 1%, and consolidated sales growth to exceed 10%. Adjusted operating margin was expected above 8.5%, including $20–30 of ANBS integration and purchase-accounting costs and costs of growth investments. Management expected a tax rate around 29%, operating cash flow around $0.8 billion excluding discrete items, and capital expenditures of 5–6% of sales.
- Toyota recall: Toyota recalled approximately 1.4 million vehicles with a specified side-curtain airbag after seven reported unintended partial inflations; no injuries were reported. Root-cause work was ongoing. Autoliv considered a loss reasonably possible; if liable, it estimated net cost after expected insurance recoveries would be below $20, but actual costs could differ materially.
- Antitrust and other legal matters: 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, but no provision was recorded because the amount could not be estimated. The company had accrued amounts it described as not material for certain South African, Brazilian, and Canadian antitrust matters. Other proceedings include a Brazilian tax assessment and a Turkish customs investigation.
- Product warranty, recall, liability, foreign-exchange, vehicle-production, customer, and regulatory risks remain significant. Product-related liabilities were $68.3 at June 30. The filing reports no material off-balance-sheet arrangements and no material change in contractual obligations.
Key facts for investors to verify
- Whether organic growth and adjusted-margin guidance were achieved, and how much growth came from acquisitions versus underlying demand.
- The final scope, responsibility allocation, insurance recoveries, and net cost of the Toyota recall.
- Developments and potential financial exposure in the EC antitrust investigation and other pending legal matters.
- ANBS integration costs, purchase-accounting adjustments, and the business’s subsequent profitability and cash contribution.
- Cash conversion, working-capital trends, capital spending, and net-debt progression as growth investment continues.