Autoliv, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Autoliv supplies automotive safety systems and components, including airbags, seatbelts and active-safety products. It operates in 27 countries and sells to major global vehicle manufacturers. Nearly 80% of sales are denominated in currencies other than the U.S. dollar.
Key financial results
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $2,088.8 million | $2,061.5 million | $4,267.7 million | $4,170.1 million |
| Gross profit | $422.1 million | $421.6 million | $863.2 million | $887.6 million |
| Operating income | $190.4 million | $205.4 million | $343.7 million | $460.2 million |
| Net income attributable to controlling interest | $126.4 million | $145.0 million | $226.9 million | $326.5 million |
| Diluted EPS | $1.33 | $1.54 | $2.40 | $3.47 |
| Operating margin | 9.1% | 10.0% | 8.1% | 11.0% |
| Gross margin | 20.2% | 20.5% | 20.2% | 21.3% |
Cash flow and investment: First-half operating cash flow was $316.6 million, versus $273.3 million a year earlier. Investing activities used $159.4 million, including $166.0 million of property, plant and equipment expenditures. Q2 operating cash flow was $219 million, compared with $132 million in Q2 2011.
Liquidity and debt at June 30: Cash and equivalents were $917.3 million; short- and long-term debt totaled $644.2 million. The company reported net cash of $283.2 million, a $216 million improvement during Q2. Total current assets were $3,282.6 million and current liabilities were $2,033.4 million. First-half dividends paid were $85.0 million.
Changes versus comparable periods
- Q2 reported sales increased about 1%, while organic sales increased 7.5%; currency effects reduced sales by $123.5 million. First-half reported sales rose 2.3%, with organic growth of 6.2% and negative currency effects of $156.1 million. Organic sales is a non-U.S. GAAP measure.
- Q2 operating income fell $15 million year over year, with operating margin down 0.9 percentage points. Management cited higher R&D expense, capacity alignment costs, softer markets in Europe and South America, higher raw-material prices, and underutilized new capacity.
- First-half operating income declined $116 million. Management attributed the decline mainly to $51 million higher capacity-alignment costs, $13 million higher antitrust-investigation costs and $21 million higher net R&D expense.
- Q2 diluted EPS decreased $0.21. The higher effective tax rate was the largest stated headwind; negative currency effects and a higher share count also reduced EPS. First-half effective tax rate was 29.6%, versus 22.7%.
- Sales performance varied by region: Q2 organic sales increased 18.7% in the Americas and 18.4% in China, while declining 8.2% in Europe and remaining nearly flat in the Rest of Asia. Japan’s strong reported growth reflected the prior-year tsunami-related production rebound.
Outlook, commentary and significant items
- Management expected Q3 organic sales growth of nearly 4%, but consolidated sales to decline about 3%, reflecting currency headwinds of more than 6% and the Autoliv Mekan divestiture.
- For full-year 2012, management indicated organic sales growth of approximately 6% and reported sales growth of about 1%, assuming prevailing exchange rates. It expected operating margin of approximately 10%, excluding capacity-alignment and antitrust costs.
- Full-year capacity-alignment costs were expected to be $60–80 million. Capital expenditures were expected to remain about 4.5% of sales. Management forecast operating cash flow of about $0.7 billion, excluding antitrust-related payments, and an effective tax rate around 28% for the rest of the year, excluding discrete items.
- Autoliv entered a DOJ plea agreement, approved in June, concerning two antitrust violations involving a Japanese subsidiary. The $14.5 million fine was paid in July and had been accrued in Q1. The separate European Commission investigation remained unresolved; the company could not estimate its impact and stated that a material adverse effect on operating results and cash flows was probable when resolved or estimable.
- Eight purported U.S. antitrust class actions had been filed by the report date. Autoliv disputed the allegations, but recorded no provision because the outcome and loss amount could not be estimated. Further investigations in other jurisdictions were possible.
- Restructuring reserves were $67.4 million at June 30, primarily employee-related. Product-related liability reserves were $31.6 million; Q2 cash payments mainly related to recalls. Autoliv said its established warranty reserves were believed adequate but noted that actual claims could differ materially from estimates.
- The company issued approximately 5.8 million shares on April 30 to settle Equity Unit purchase contracts and received about $106 million. Shares outstanding increased; the settlement contributed to the improvement in net cash and equity.
Important facts for investors to verify
- Developments and potential financial exposure from the EC investigation, U.S. antitrust litigation and any additional competition-authority actions.
- Whether full-year margin and cash-flow expectations are achieved, particularly given the exclusion of antitrust and capacity-alignment costs from margin guidance.
- Capacity-alignment spending, underutilized manufacturing capacity, raw-material costs and the effects of currency movements and vehicle-production mix.
- Progress in warranty and recall claims, the adequacy of the $31.6 million product-liability reserve, and any changes in restructuring provisions.
- Execution of the sales outlook across regions and products, including whether active-safety growth and market-share gains offset weaker European demand.