Autoliv, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited and amounts are in U.S. dollars unless noted. Autoliv develops and supplies automotive safety products, including airbags, seatbelts, safety electronics, radar, and vision systems.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2,383.0 million | $2,197.5 million | $4,678.8 million | $4,332.5 million |
| Gross profit / margin | $464.2 million / 19.5% | $430.5 million / 19.6% | $909.5 million / 19.4% | $844.8 million / 19.5% |
| Operating income / margin | $139.4 million / 5.8% | $194.0 million / 8.8% | $331.1 million / 7.1% | $376.4 million / 8.7% |
| Net income attributable to controlling interest | $82.8 million | $138.7 million | $213.1 million | $262.2 million |
| Diluted EPS | $0.89 | $1.44 | $2.27 | $2.73 |
| Operating cash flow | $86 million | $192 million | $271.0 million | $332.6 million |
- Q2 organic sales grew 7.4%; reported sales increased 8.4%. For the first half, organic sales grew 7.6% and reported sales rose 8.0%.
- Active safety was the fastest-growing product group: organic sales increased 39.5% in Q2 and 51.8% for the first half. China, Japan, and Europe also contributed to growth.
- Q2 operating income included about $70 million of U.S. antitrust class-action settlement costs and $11 million of capacity-alignment costs. Management said these reduced the Q2 operating margin by 3.5 percentage points.
- For the first half, net cash from investing activities was an outflow of $209.1 million; capital expenditures were $208.4 million. Operating cash flow less net investing outflow was $62 million.
Liquidity, debt, and capital
- At June 30, cash and cash equivalents were $2,060.2 million; short-term debt was $246.4 million and long-term debt was $1,528.3 million. The company reported net cash of $296 million, a non-U.S. GAAP measure that includes debt-related derivatives.
- Cash increased by $941.9 million during the first half, largely reflecting issuance of $1.253 billion of long-term debt. Autoliv issued $1.25 billion of private-placement notes at an average interest rate of approximately 3.84%, with maturities from 2019 through 2029.
- First-half dividends paid were $97.2 million and share repurchases were $191.5 million. Q2 repurchases totaled 944,707 shares for $97 million. The company declared a Q3 dividend of $0.54 per share.
- Operating working capital was $640.2 million, or 7.0% of sales; management’s target was no more than 10% of last-12-month sales.
Material changes and management commentary
- Sales growth exceeded the company’s initial Q2 expectation of around 5% organic growth, supported by stronger-than-expected vehicle production in several regions and active safety sales. Global light-vehicle production grew an estimated 2.5% in Q2.
- Despite higher sales and gross profit, operating income and earnings declined substantially year over year, primarily because of legal settlements and capacity-alignment costs, alongside higher interest expense and a higher tax rate.
- Management cited growth in China and active safety, a sustained but gradual European recovery, and stronger-than-expected Japanese performance. It plans to increase active-safety development and engineering spending and emphasized quality as a key priority.
- Headcount, including temporary personnel, was 58,810 at quarter-end, up from 53,555 a year earlier.
Outlook, risks, and contingencies
- Q3 2014 outlook: organic sales growth of around 6%, reported sales growth of around 7%, and an adjusted operating margin of around 8.5%, excluding capacity-alignment and antitrust costs.
- Full-year outlook: organic sales growth above 6%, reported sales growth close to 7%, and operating margin around 9%, excluding capacity-alignment and antitrust costs. Capacity-alignment costs are expected to exceed $40 million for 2014.
- Management expected a full-year effective tax rate around 29%, excluding discrete items; operational cash flow of at least $700 million, excluding discrete items; and capital expenditures of 4.5%–5.0% of sales.
- Autoliv agreed to pay $65 million to settle three U.S. antitrust purchaser class actions; the settlements remained subject to final court approval and could be affected by opt-outs. A separate U.S. securities class-action settlement was proposed at $22.5 million, with Autoliv recording approximately $4.5 million net expense and its insurer expected to pay the balance, subject to finalization and court approval.
- The European Commission antitrust investigation remained unresolved. Management said a material adverse impact on operating results and cash flows was probable when the matter is resolved or becomes estimable; no loss provision was recorded. Canadian antitrust cases were also outstanding; the company considered a loss probable but could not estimate the amount. A Korean investigation was ongoing with no provision recorded.
- Product-related reserves were $47.7 million at June 30, up from $37.1 million a year earlier; Q2 provisions mainly concerned recall issues. The filing warns that product liability, warranty, recall, and intellectual-property claims may exceed reserves or insurance.
- Other identified risks include indebtedness, currency and interest-rate movements, vehicle production changes, customer and supplier exposure, raw-material costs, competition, regulatory changes, and litigation. Management reported no material change to other previously disclosed risk factors.
Important facts for investors to verify
- Final court approval, opt-outs, and ultimate cash cost of the $65 million U.S. antitrust settlements and the proposed securities settlement.
- Developments and potential financial exposure in the European, Canadian, Korean, and other antitrust proceedings, for which some losses were unprovided or not estimable.
- Whether sales growth and the active-safety ramp translate into improved margins after legal and capacity-alignment costs.
- Execution of the capacity-alignment program, its final 2014 cost, and the company’s adjusted-margin and cash-flow outlook.
- Debt-service implications of the 2014 private placement and the effect of repurchases and dividends on net cash and liquidity.