Autoliv, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Autoliv develops and supplies automotive passive-safety products and active-safety systems. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $2,208.0m | $2,119.0m | $6,886.8m | $6,451.5m |
| Gross profit / margin | $426.4m / 19.3% | $404.9m / 19.1% | $1,335.9m / 19.4% | $1,249.7m / 19.4% |
| Operating income / margin | $174.8m / 7.9% | $182.3m / 8.6% | $505.9m / 7.3% | $558.7m / 8.7% |
| Net income attributable to controlling interest | $106.5m | $123.9m | $319.6m | $386.1m |
| Diluted EPS | $1.16 | $1.29 | $3.43 | $4.02 |
| Operating cash flow | $212m | $206m | $483.4m | $538.7m |
Q3 reported sales rose 4.2%; organic sales increased 4.6%, with currency reducing sales by about $9m. Nine-month reported and organic sales growth were both 6.7%. Active safety was a notable growth driver: organic sales rose 29.2% in Q3 and 42.9% in the first nine months.
Q3 gross profit increased, but operating income declined 4.1% and net income attributable to controlling interest declined 14.0%. For the first nine months, operating income fell 9.5% and controlling-interest net income fell 17.2%. Higher R&D, capacity-alignment and antitrust costs, as well as higher interest expense and tax rates, weighed on earnings. Q3 diluted EPS also benefited from a lower share count.
Cash, debt and capital allocation
- Cash and cash equivalents were $1,846.7m at September 30, versus $1,118.3m at year-end 2013. Total debt was $1,770.9m, including $250.4m short-term and $1,520.5m long-term. Autoliv reported adjusted net cash of $86.4m, including debt-related derivatives.
- Operating cash flow for the first nine months was $483.4m, down from $538.7m. Cash used in investing was $327.2m, including $326.8m in capital expenditures; operating cash flow less net investing cash use was $156m, versus $270m in 2013.
- Cash flow was affected by the $70m payment toward U.S. antitrust settlements and $58m higher capital investment. The company issued $1.25bn of long-term private-placement notes in April, with an average interest rate of 3.84%; the 2014 equity-unit notes matured and were repaid.
- Autoliv repurchased $430m of shares and paid $146.6m in dividends during the first nine months. Q3 repurchases totaled 2.32m shares for $238m. The declared quarterly dividend was $0.54 per share.
- Operating working capital was $616.9m, or 6.7% of sales; management’s stated target is not to exceed 10% of trailing 12-month sales. The leverage ratio was 0.1x, against a long-term target around 1x within a 0.5x–1.5x range.
Management outlook and business conditions
- For Q4 2014, management expected organic sales growth of about 2%, a 3% negative currency effect and reported sales decline of about 1%. Adjusted operating margin, excluding capacity-alignment and antitrust costs, was expected to be about 9.5%.
- Full-year expectations were organic sales growth of about 5.5%, reported sales growth of about 4.5%, and operating margin around 9% excluding capacity-alignment and antitrust costs. Expected capacity-alignment costs were more than $40m for 2014.
- Management expected a full-year effective tax rate around 30%, excluding discrete items; operational cash flow of at least $0.7bn, excluding discrete items; and capital expenditures at the high end of 4.5%–5.0% of sales.
- Management described Q3 sales, gross profit and operating cash flow as records for a third quarter, while noting that sales missed its initial quarterly expectation because of weaker-than-expected China sales and unfavorable vehicle mix. It cited increased macroeconomic uncertainty and slower-than-anticipated vehicle production growth, with the slower pace expected to continue into the first half of 2015.
- China’s unfavorable vehicle mix was expected to persist in Q4. Regional conditions included sharp South American production declines, weaker production in parts of Asia and Eastern Europe, and slower overall market growth than anticipated earlier in the year.
Unusual items, contingencies and risks
- Capacity-alignment costs were $10m in Q3 and $26m for the first nine months. Antitrust-related costs, including settlements, were $2m in Q3 and $74m for the first nine months, compared with $6m in the comparable 2013 nine-month period.
- Autoliv recorded $65m of expense for U.S. occupant-safety antitrust class-action settlements in Q2; the settlements were subject to final court approval and possible opt-outs. It also recorded approximately $4.5m net expense for a proposed $22.5m securities-litigation settlement, with the balance expected to be covered by insurance.
- The European Commission antitrust investigation remained unresolved and unprovided for. Management concluded it was probable that resolution or estimability would materially adversely affect operating results and cash flows. Autoliv also said losses in Canadian antitrust cases were probable, but could not estimate the amount and recorded no provision. Other investigations were ongoing, including in Korea and South Africa.
- An Autoliv Brazilian subsidiary received an October 2014 tax assessment of R$55m (about $22.6m); the company disputed the assessment, intended to defend itself, and had recorded no provision as of September 30.
- Product-related reserves rose to $51.3m from $36.4m at the start of the nine-month period; 2014 provisions mainly related to recalls and cash payments mainly to warranty matters. The filing cautions that recall, warranty, product-liability and intellectual-property claims may be material and that reserves and insurance may not cover all losses.
- Other risks include vehicle-production changes, customer and supplier dependence, currency and interest-rate movements, raw-material costs, labor disruptions, regulation, litigation and the effects of indebtedness. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Q4 and full-year sales and adjusted-margin guidance was achieved, particularly given China’s vehicle mix and macroeconomic uncertainty.
- The final status and potential financial impact of the European and Canadian antitrust matters, U.S. settlement approvals and opt-outs, and other investigations.
- Whether product-related reserves and insurance remain adequate as recall and warranty claims develop.
- How the $1.25bn debt issuance, higher interest expense, share repurchases and dividends affect ongoing cash generation and capital allocation.
- Whether capacity-alignment costs, capital expenditures and the expected tax rate tracked management’s stated ranges.