Autoliv, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Autoliv develops and supplies automotive safety products, including airbags, seatbelts, safety electronics, radar, and driver-assistance systems. Financial amounts are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $2,197.5 | $2,088.8 | $4,332.5 | $4,267.7 |
| Gross profit / margin | $430.5 / 19.6% | $422.1 / 20.2% | $844.8 / 19.5% | $863.2 / 20.2% |
| Operating income / margin | $194.0 / 8.8% | $190.4 / 9.1% | $376.4 / 8.7% | $343.7 / 8.1% |
| Income before taxes | $192.7 | $182.4 | $362.8 | $323.5 |
| Net income attributable to controlling interest | $138.7 | $126.4 | $262.2 | $226.9 |
| Diluted EPS | $1.44 | $1.33 | $2.73 | $2.40 |
- Q2 reported sales rose 5%; organic sales increased 5.7%, excluding currency and acquisition/divestiture effects. H1 reported sales rose 1.5%; organic sales grew 2.4%.
- Q2 gross margin declined 0.6 percentage points year over year, attributed mainly to production-footprint changes for growth, European operational inefficiencies, and adverse currency effects. H1 gross margin fell 0.7 points.
- Q2 operating income increased modestly despite the lower margin. Antitrust and capacity-alignment costs totaled $6 million, reducing operating margin by 0.3 points; excluding these costs, margin was 9.1%. H1 operating income rose $33 million, with lower capacity-alignment and antitrust costs contributing $46 million and $13 million, respectively; adjusted operating margin was 8.9%.
- Effective tax rate was 27.6% in Q2 and 27.1% for H1, compared with 30.8% and 29.6%, respectively, in 2012.
Cash flow, balance sheet, and liquidity
- H1 cash provided by operations was $332.6 million, versus $316.6 million a year earlier. Net cash used in investing was $174.6 million, including $176.7 million of capital expenditures. Operating cash flow less investing cash outflow was $158 million, versus $157 million in H1 2012.
- Management reported Q2 operating cash flow of $192 million, compared with $219 million in Q2 2012; operating cash flow less investing outflow was $103 million, versus $138 million.
- At June 30, cash and equivalents were $1,042.4 million; total debt was $624.0 million, comprising $183.8 million short-term and $440.2 million long-term. Net cash, including debt-related derivative adjustments, was $432.2 million, up from $360.8 million at year-end 2012.
- Total current assets were $3,595.1 million and current liabilities $2,117.2 million. Operating working capital was $667.1 million, up from $579.2 million at year-end; receivables outstanding were 72 days and inventory outstanding 29 days.
- H1 dividends paid were $95.6 million. The declared dividend was $0.50 per share in Q2, versus $0.47 a year earlier. Capital expenditures were $176.7 million for H1.
Business changes and management commentary
- Management described Q2 as a record-sales quarter and said global vehicle production was better than expected. Stronger-than-anticipated production in Europe, Japan, and North America, plus favorable European premium-vehicle mix, supported results.
- Q2 regional organic sales grew 16% in China, 7% in the Americas, 4% in Europe, and 6% in Rest of Asia; Japan declined 4%. H1 organic sales grew 20% in China and 5% in the Americas, while Europe declined 3% and Japan declined 10%.
- Q2 active-safety sales rose more than 70% to $85 million; H1 active-safety sales increased 52% to $148 million. Airbag and seatbelt sales were broadly flat to modestly higher in H1.
- Management said Europe remained challenging despite stronger-than-expected Q2 production; restructuring the European production footprint was taking longer than expected. The company planned approximately $50 million of investment in a new China textile center and had begun construction of an airbag plant in Thailand.
Outlook, risks, and unusual items
- Q3 guidance: organic sales growth close to 6%, consolidated sales growth around 5% after an expected currency headwind close to 1%, and operating margin around 8.5% excluding antitrust and capacity-alignment costs.
- FY 2013 outlook: organic sales growth around 4%, the upper end of the prior 2%–4% range; operating margin around 9% excluding antitrust and capacity-alignment costs; capacity-alignment costs of $25–$50 million; effective tax rate around 27% excluding discrete items; operating cash flow approximately $0.7 billion; capital expenditures around 4.5% of sales.
- Restructuring reserves were $70.7 million at June 30, primarily employee-related and mainly associated with European headcount reductions. Management did not expect the programs to materially harm liquidity.
- Antitrust exposure is material and uncertain. Autoliv had pleaded guilty to two U.S. antitrust counts and paid a $14.5 million fine in 2012. European Commission, Canadian, and Korean investigations remained unresolved; management said a material adverse impact from the EC investigation was probable but could not be estimated, and no loss provision was recorded. U.S. and Canadian civil antitrust class actions and a U.S. securities class action were also pending; no provision was recorded for the civil antitrust cases.
- Product-related reserves were $37.1 million at June 30; 2013 provisions mainly related to recall issues and cash payments mainly to warranty issues. The filing cautions that warranty, recall, product-liability, and intellectual-property claims could exceed estimates or insurance coverage.
- The company reported no material changes to market-risk disclosures, no material off-balance-sheet arrangements, and no reportable subsequent events. A July 16 agreement made up to €200 million of European Investment Bank financing available for R&D, subject to potential drawdown.
Important facts for investors to verify
- Whether the company can sustain guided organic growth while restoring gross margin amid footprint adjustments and European operating inefficiencies.
- Progress and cash costs of capacity alignment, including whether FY costs remain within the stated $25–$50 million range.
- Developments, potential financial exposure, and timing of the EC and other antitrust investigations and related civil and securities litigation; losses are not fully estimable in the filing.
- Whether cash generation, working capital, and planned capital investment support the stated full-year cash-flow and capital-expenditure outlook.
- Execution and returns from China and Thailand investments, and progress toward the stated $500 million active-safety sales target for 2015.