Autoliv, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Dollar amounts are in millions unless otherwise stated. On June 29, Autoliv completed the spin-off of its Electronics business as Veoneer; historical Veoneer results are presented as discontinued operations. Autoliv now reports one segment, Passive Safety.
Financial performance
- Q2 continuing-operations sales: $2,211.5, up 11.5% year over year; organic growth was 7.3%, with favorable currency translation contributing 4.2%. Q2 sales growth was strongest in China (18.0% organic) and the Americas (12.8%).
- Q2 profitability: Gross profit was $439.7, up 5.9%, but gross margin fell to 19.9% from 20.9%. Operating income rose 4.2% to $229.1; operating margin declined to 10.4% from 11.1%. Continuing-operations income attributable to controlling interest was $192.7, and diluted EPS was $2.20, versus $135.7 and $1.54, respectively.
- Q2 consolidated results: Net income was $34.1, compared with $128.3 a year earlier, reflecting a $159.1 loss from discontinued operations. Net income attributable to controlling interest was $37.2 versus $129.8.
- First-half results: Continuing-operations sales were $4,452.4, up 10.6% reported and 4.4% organically. Operating income was $472.5, up 6.9%, while operating margin decreased to 10.6% from 11.0%. Continuing-operations diluted EPS was $4.02 versus $3.21. Consolidated net income was $156.5 versus $270.4, including a $195.8 discontinued-operations loss.
- Cash flow and investment: Management reported continuing-operations operating cash flow of $47 in Q2 and $63 for the first half, versus $179 and $329 in the comparable periods. The cash-flow statement presents cash flows for continuing and discontinued operations together. First-half capital expenditures were $306.4, versus $270.6; net cash used in investing was $376.9.
- Liquidity and debt at June 30: Cash was $507.5, down from $959.5 at year-end 2017. Short-term debt was $605.6 and long-term debt $1,678.0, for total debt of $2,283.6. Management’s non-GAAP net debt was $1,784.7, versus $368.4 at year-end; leverage ratio was 1.6x, above the stated long-term target range of 0.5x–1.5x.
- Balance sheet and shareholder returns: Total equity was $2,007.6, compared with $4,169.4 at year-end, principally reflecting the Veoneer distribution. The company paid $106.6 in dividends during the first half; quarterly dividend declared was $0.62 per share.
Material changes and management commentary
- The spin-off transferred Veoneer to Autoliv shareholders; Autoliv provided approximately $1 billion of cash capitalization, funded largely with debt. The distribution reduced equity by approximately $2.129 billion.
- Management cited higher raw-material costs, currency effects and launch-related costs as pressures on gross margin. Higher research, development and engineering expense also weighed on operating margin; increased sales provided some offset through operating leverage. Product launches rose 72% year over year in Q2, with some model ramp-ups delayed and launch costs elevated.
- Q2’s 8.1% effective tax rate was helped by discrete tax benefits, principally reversal of deferred-tax valuation allowances following the spin-off. Management’s full-year tax-rate indication, excluding discrete items, was approximately 27%.
- Separation costs totaled $79.4, including $70.9 incurred in the first half; management stated total separation costs for 2017–2018, including tax effects, were approximately $105, below the original estimate of up to $150.
Outlook, risks and contingencies
- 2018 outlook: Management indicated approximately 8% organic sales growth and approximately 10% consolidated sales growth, including an expected positive currency effect of around 2%. Adjusted operating margin was expected to exceed 11%; operating cash flow, excluding discrete items, was expected to be similar to 2017’s $870; net capital expenditures were projected at 5%–6% of sales.
- Management reiterated its 2020 goals of more than $10 billion in sales and approximately 13% adjusted operating margin. It noted monitoring of possible trade barriers and NAFTA-related developments.
- Material uncertainties include the continuing European Commission antitrust investigation; management said its resolution could materially adversely affect operating results and cash flows, but the impact could not be estimated. The Toyota side-curtain-airbag recall involves approximately 1.4 million vehicles; Autoliv estimated its potential loss net of expected insurance at less than $20, but actual costs could differ materially.
- Autoliv retained certain pre-April 1, 2018 Electronics product, warranty and recall obligations and indemnification liabilities for Veoneer. The filing also identifies risks from product liability, recalls, customer production changes, raw-material costs, currency movements, component shortages, litigation and tax assessments.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether organic growth and launch execution support the 2018 outlook, and whether margins recover from raw-material, currency and launch-cost pressure.
- How much of reported earnings growth depends on non-recurring tax benefits, and the resulting underlying tax rate.
- Whether cash generation improves as operating working capital rises; operating working capital was 9.1% of sales, near the company’s stated 10% ceiling.
- Debt, leverage and liquidity following Veoneer’s capitalization, including progress toward the stated leverage target range.
- Developments and potential financial exposure from the European Commission antitrust investigation, Toyota recall, and retained Veoneer-related indemnities.