Autoliv, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Autoliv supplies automotive safety systems and components globally. Unless noted, amounts are U.S. dollars in millions.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $2,061.5 | $1,801.5 | $4,170.1 | $3,522.3 |
| Gross profit | $421.6 | $412.0 | $887.6 | $795.5 |
| Operating income | $205.4 | $229.1 | $460.2 | $424.5 |
| Net income attributable to controlling interest | $145.0 | $146.5 | $326.5 | $273.0 |
| Diluted EPS | $1.54 | $1.60 | $3.47 | $2.99 |
| Gross margin | 20.5% | 22.9% | 21.3% | 22.6% |
| Operating margin | 10.0% | 12.7% | 11.0% | 12.1% |
- Q2 reported sales rose 14%; organic sales increased 5%, with currency effects adding about 9%. First-half reported sales rose 18%, including 9.5% organic growth, 5.8% currency benefit and 3.1% from acquisitions net of divestments.
- First-half operating cash flow was $273.3 versus $399.8 in 2010. Capital expenditures were $175.5 versus $86.2; cash declined $28.0 to $559.7.
- At June 30, total debt was $693.8, cash was $559.7 and net debt was $131.8. Net debt to capitalization was 4%. The company reported $1.4 billion of unutilized long-term committed facilities and a $1.1 billion revolving credit facility.
- Current assets were $2,979.6 and current liabilities $2,074.7. Operating working capital increased to $599.3 from $388.4 at year-end 2010.
- Quarterly dividend was increased to $0.45 per share; $0.43 per share was paid during Q2.
Changes versus the prior comparable period
- Q2 sales growth was supported by vehicle launches and mix, but global light vehicle production declined slightly amid Japan-related supply disruptions. Autoliv estimated the Japan earthquake reduced global sales by more than $100 million, about $50 million less than expected in April.
- Q2 gross profit increased, but gross margin fell 2.4 percentage points, primarily from higher raw-material costs, production disruptions and currency revaluation. Operating income fell $23.7, with higher R&D and SG&A costs also contributing.
- First-half operating income and net income increased, but margins declined. First-half diluted EPS rose 16% to $3.47.
- First-half operating cash flow was lower, reflecting a $203.0 use of cash from changes in operating assets and liabilities, compared with a $54.2 use in 2010. Higher capital spending reflected capacity expansion in Asia and South America and active safety.
- First-half effective tax rate declined to 22.7% from 28.5%. A $24 million non-cash release of tax reserves materially benefited Q2 results.
Outlook, commentary and material risks
- For Q3, management expected organic sales growth of about 9%, versus estimated global vehicle production growth of 6%; currency effects were expected to add 7%, with consolidated sales growth of about 16% and an operating margin near 10% if exchange rates held.
- For full-year 2011, management forecast organic sales growth above 9% and consolidated sales growth of about 16%. The indicative operating-margin outlook was revised to “more than 11%” from “around 11.5%,” citing higher-than-expected emerging-market expansion costs and volatile production schedules. The forecast excluded costs from the ongoing antitrust investigations, which were not estimable. Tax rate for the remainder of the year was expected to be around 28%, excluding discrete items.
- The U.S. Department of Justice and European Commission were investigating possible anticompetitive conduct among automotive suppliers, including Autoliv. The company said eventual results and cash flows could be materially affected but could not estimate the impact or timing.
- Other exposures include product warranty, recall and liability claims; intellectual-property disputes; and French former-employee claims totaling about €11 million. Autoliv also disclosed a July discovery that an Asian plant had not properly reported or maintained certain test protocols; the potential impact was not estimable.
- Autoliv cited continuing uncertainty from Japan-related supplier and customer disruptions, raw-material and energy costs, currency movements, customer production schedules, competition and litigation. Q2 product-related reserves were $37.4.
- The company prepaid $95 million of debt after establishing a new revolving facility; the transactions incurred a $6 million extinguishment cost and were expected to save about $5 million annually in interest and other financing costs. The EIB facility was amended after quarter-end and remained unused at June 30.
Important facts for investors to verify
- Whether sales growth, margins and production assumptions tracked management’s Q3 and full-year forecasts, particularly as Japan supply disruptions and volatile production schedules evolved.
- The extent of any antitrust-related liabilities, legal costs or other effects once estimable; management explicitly excluded these from its margin outlook.
- Whether raw-material, expansion and R&D costs continue to pressure margins and cash generation, and whether higher capital spending yields expected capacity and growth.
- The impact of the tax-reserve release on comparability: the $24 million benefit was non-cash and lowered the reported effective tax rate.
- The filing gives inconsistent descriptions of the amended EIB facility’s maximum loan duration: one section says eight years and another says seven. Verify the executed amendment’s terms.