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| ALV > SEC Filings for ALV > Form 10-Q on 21-Oct-2009 | All Recent SEC Filings |
21-Oct-2009
Quarterly Report
The following discussion should be read in conjunction with our Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2008 Annual Report on Form 10-K filed with the SEC on February 24, 2009. Unless otherwise noted, all dollar amounts are in millions.
Autoliv is the world's largest automotive safety system supplier with sales to all the leading vehicle manufacturers in the world. Autoliv develops, markets and manufactures airbags, seatbelts, safety electronics, steering wheels, anti-whiplash systems, child safety as well as night vision systems and other active safety systems. Autoliv accounts for more than one third of its market. Autoliv has manufacturing facilities in 29 vehicle-producing countries.
Autoliv is a Delaware holding corporation with principal executive offices in Stockholm, Sweden, which owns two principal subsidiaries, Autoliv AB ("AAB") and Autoliv ASP, Inc. ("ASP"). AAB, a Swedish corporation, is a leading developer, manufacturer and supplier to the automotive industry of car occupant restraint systems. Starting with seat belts in 1956, AAB expanded its product lines to include seat belt pretensioners (1989), frontal airbags (1991), side-impact airbags (1994), steering wheels (1995) and seat sub-systems (1996). ASP, an Indiana corporation, pioneered airbag technology in 1968 and has since grown into one of the world's leading producers of airbag modules and inflators. ASP designs, develops and manufactures airbag inflators, modules and airbag cushions, seat belts and steering wheels. It sells inflators and modules for use in driver, passenger, side-impact and knee bolster airbag systems for worldwide automotive markets.
Shares of Autoliv common stock are traded on the New York Stock Exchange under the symbol "ALV" and Swedish Depositary Receipts representing shares of Autoliv common stock trade on the NASDAQ OMX Nordic Exchange in Stockholm under the symbol "ALIV". Options in Autoliv shares are traded in Philadelphia and AMSE under the symbol "ALV". Corporate Units from the Company's Equity Unit offering in 2009 are traded on the New York Stock Exchange under the symbol ALV.PrZ.
Non-GAAP financial measures
Some of the following discussions refer to non-GAAP financial measures: see "Organic sales", "Operating working capital", "Net debt", "Leverage ratio" and "Interest coverage ratio". Management believes that these non-GAAP financial measures assist investors in analyzing trends in the Company's business. Investors should consider these non-GAAP financial measures in addition to, rather than as a substitute for, financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures have been identified as applicable in each section of this report with a tabular presentation reconciling them to GAAP. It should be noted that these measures, as defined, may not be comparable to similarly titled measures used by other companies.
RESULTS OF OPERATIONS
Overview
The following table shows some of the key ratios. Management uses these measures internally as a means of analyzing the Company's current and future financial performance and our core operations as well as identifying trends in our financial conditions and results of operations. We have provided this information to investors to assist in meaningful comparisons of past and present operating results and to assist in highlighting the results of ongoing core operations. These ratios are more fully explained in our MD&A discussion below and should be read in conjunction with the consolidated financial statements in our annual report and the unaudited condensed consolidated financial statements in this quarterly report.
KEY RATIOS
(Dollars in millions)
Quarter First nine months
July-September January-September
or as of September 30 or as of September 30
2009 2008 2009 2008
Operating working capital 1) $ 465 $ 647 $ 465 $ 647
Capital employed 7, 12) $ 3,243 $ 3,601 $ 3,243 $ 3,601
Net debt 1) $ 878 $ 1,279 $ 878 $ 1,279
Net debt to capitalization, % 1, 2) 27 36 27 36
Gross margin, % 3) 18.0 16.9 14.7 18.6
Operating margin, % 4) 4.5 3.8 (1.2 ) 6.3
Return on total equity, % 8, 12) 5.8 5.7 (3.0 ) 11.7
Return on capital employed, % 9, 12) 7.6 6.5 (1.5 ) 12.4
No. of employees at period-end 10) 30,603 35,752 30,603 35,752
Headcount at period-end 11) 36,192 41,327 36,192 41,327
Days receivables outstanding 5) 71 74 80 66
Days inventory outstanding 6) 37 44 42 39
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1) See tabular presentation reconciling this non-GAAP measure to GAAP below under the heading "Liquidity and Sources of Capital"
2) Net debt in relation to net debt and total equity (including non-controlling interest)
3) Gross profit relative to sales
4) Operating income (loss) relative to sales
5) Outstanding receivables relative to average daily sales
6) Outstanding inventory relative to average daily sales
7) Total equity and net debt
8) Net income (loss) relative to average total equity
9) Operating income and equity in earnings of affiliates, relative to average capital employed
10) Employees with a continuous employment agreement, recalculated to full time equivalent heads
11) Employees plus temporary, hourly workers
12) 2008 key ratios adjusted in accordance with FASB ASC 810 Consolidation, ASC 810-10-65, Transition and Open Effective Date Information (formerly referred to as FAS-160)
THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2008
Market overview
During the three-month period July - September 2009, global light vehicle production (LVP) is estimated by CSM and J.D. Power to have declined by 5% compared to the same quarter 2008. LVP in the Triad (i.e. North America, Europe and Japan), where Autoliv generates more than 80% of its sales is estimated to have dropped by 18%.
In Europe (including Eastern Europe), where Autoliv derives approximately half of its consolidated sales, LVP is estimated to have declined by 12%. In Western Europe, the decline was 6% as expected and in Eastern Europe 24%. The decline in Eastern Europe was 6 percentage points (pp) worse than expected at the beginning of the quarter.
In North America, which accounts for almost one quarter of the Company's consolidated sales, LVP dropped by 21%, which was 6 pp better than expected in July, mainly due to the "Cash for Clunkers" program. The cuts in North American LVP especially affected the production of passenger cars which fell by 32%, while production of light trucks declined by 7%. This was 12 pp less than expected. Chrysler cut production by 22% and GM cut production by 41%, while Ford increased production by 15%. Asian and European vehicle manufacturers combined reduced their North American production by 18%.
In Japan, which accounts for about one tenth of Autoliv's consolidated sales, LVP decreased by 25%. This decrease affected particularly the manufacturing levels for vehicles with higher safety content such as vehicles for export to markets in North America and Western Europe.
In the Rest of the World (RoW), which accounts for more than 15% of consolidated sales, LVP increased by 21% instead of declining by 3% as expected in July. This was primarily due to the LVP in China and India growing by 66% and 18%, respectively, and LVP in Korea improving by 20% which was 23 pp better than expected.
Consolidated Sales
The Company has substantial operations outside the United States and currently more than 80% of its sales are denominated in currencies other than the U.S. dollar. This makes the Company and its performance in regions outside the United States sensitive to changes in U.S. dollar exchange rates. The measure "Organic sales" presents the increase or decrease in the Company's overall U.S. dollar net sales on a comparative basis, allowing separate discussion of the impacts of acquisitions/divestments and exchange rate fluctuations. The tabular reconciliation below presents the change in "Organic sales" reconciled to the change in the total net sales as can be derived from our unaudited financial statements.
Reconciliation of the change in "Organic sales" to GAAP financial measure
Components of net sales increase (decrease)
Europe North America Japan RoW Total
% $ % $ % $ % $ % $
Organic sales change (16.4 ) (131.1 ) (10.9 ) (40.2 ) (40.2 ) (73.6 ) 32.1 63.1 (11.8 ) (181.8 )
Effect of exchange rates (4.8 ) (37.5 ) (5.2 ) (19.2 ) 14.8 27.1 (7.2 ) (14.3 ) (2.8 ) (43.9 )
Impact of acquisitions/divestments 0.7 5.3 0.4 1.6 - - - - 0.4 6.9
Reported net sales change (20.5 ) (163.3 ) (15.7 ) (57.8 ) (25.4 ) (46.5 ) 24.9 48.8 (14.2 ) (218.8 )
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Consolidated net sales declined by slightly more than 14% to $1,326 million compared to the same quarter 2008. Currency effects caused sales to decline by slightly less than 3%. The effect of acquisitions was 0.4%. Consequently, organic sales (i.e. sales excluding currency effects, and acquisitions/divestitures; non-U.S. GAAP measure, see table above) declined by 12%. This was better than expected in July due to the U.S. "Cash for Clunkers" program and Autoliv's relatively strong performance in North America. It was also due to market share gains and revitalized light vehicle production in China, South Korea and India.
Autoliv's organic sales decline of 12% was 6 pp better than the decline in the Triad's LVP. This was due to market share gains, a favorable sales mix in North America and the Company's strong performance in the Rest of the World, particularly in China. It was also due to recent launches of a number of new vehicle models for which Autoliv is a supplier (see Sales by Region below).
Sales by Product
Sales of airbag products (including steering wheels and electronics) decreased by slightly more than 12% to $858 million. Excluding negative currency effects of slightly less than 2% and a small positive effect from an acquisition last year (see Significant Events), organic sales declined by 11% compared to the 18% decline in LVP in the Triad, i.e. the dominant markets for airbags. Autoliv's relatively better performance was due to new business with Ford, Volkswagen, Chevrolet, Opel, Suzuki, Nissan, Toyota and Great Wall. These improvements more than offset the negative LVP mix effect from vehicles with lower safety value, primarily driven by the scrapping incentive programs in Europe.
Sales of seatbelt products (including seat sub-systems) dropped by 17% to $468 million. Excluding negative currency effects of 4%, organic sales declined by 13% which was 8 pp more than the decline in global light vehicle production. This primarily reflects Autoliv's greater dependence on advanced higher-value-added seatbelts, particularly for the European and North American markets. It also reflects the expiration of some contracts.
Sales by Region
Sales from Autoliv's European companies declined by 21% to $634 million. Excluding negative currency effects of less than 5% and a small favorable effect from acquisitions, organic sales declined by 16% compared to the 12% decline in European light vehicle production. The difference is due to the negative LVP mix effect resulting from the governmental scrapping incentives that favored smaller vehicles. These cars tend to have less safety content than an average vehicle. However, Autoliv benefited to some extent from the strong demand for small cars such as Fiat's Grande Punto, Peugeot's 107, as well as for Citroën's C1 and C3 Picasso. The negative LVP effect was also partially offset by new business for Opel's Insignia and the production ramp up for the new Renault Mégane.
Sales from Autoliv's North American companies dropped by 16% to $310 million. Excluding negative currency effects of 5% from a weaker Mexican peso and a small favorable effect from acquisitions, organic sales declined by 11% while the North American LVP dropped almost twice as much. Autoliv's better-than-market performance was primarily due to new business for Ford's new F-Series; Chrysler's Dodge Ram; Chevrolet's Traverse and Equinox; and Toyota's Rav4 and Venza.
Sales from Autoliv's companies in Japan declined by 25% to $136 million. Excluding favorable currency effects of 15%, organic sales declined by 40%. This was primarily due to the 25% drop in Japanese LVP. Autoliv's sales were also affected by the fact that production declined the most for premium cars, SUVs and other vehicles with higher safety value for export to North America and Western Europe. These negative effects were partially offset by new business for the Toyota Prius and the Lexus RX.
Sales from Autoliv's companies in the Rest of the World (RoW) increased by 25% to $246 million despite negative currency effects of 7%. Autoliv's increase in organic sales of 32% was even better than the strong growth in the region's LVP of 21%. Autoliv's market share gains reflects new business in China (for Suzuki, Buick, Chevrolet, Daewoo, Nissan, Volkswagen, Audi, Honda, Kia, Great Wall and Geely) and in India (for Mahindra). Autoliv's strong performance was also due to a favorable vehicle production mix in the region.
Earnings for the Three-Month Period Ended September 30, 2009
Despite the sharp drop in LVP of 18% in the Triad resulting in a consolidated sales decline of 14% for Autoliv, the Company improved its gross margin, operating margin and operating income compared to the same quarter 2008. The gross margin improved to 18.0% from 16.9%.
Gross profit declined by $22 million to $239 million, but operating income improved by $2 million to $60 million and operating margin improved to 4.5% from 3.8% in the same quarter 2008. Better operating income despite lower gross profit reflects $19 million lower restructuring costs and $9 million lower selling, general and administrative expense. Research, development and engineering expense, net increased slightly. This was due to the Company's Small Car Safety (SCS) project and an exceptionally high engineering income last year. Severance and restructuring costs amounted to $14 million in the third quarter 2009 compared to $33 million in the same quarter 2008. The fact that the operating margin the third quarter 2009 was higher than in 2008 despite the sharp sales drop is mainly due to the action program initiated in July last year and other cost saving initiatives. It also reflects lower raw material prices.
Income before taxes declined by $8 million to $39 million. The $2 million improvement in operating income was offset primarily by a swing of $6 million in other financial items from an income of $1 million to a cost of $5 million. This reflects negative currency effects in 2009 versus positive currency effects in 2008. Interest expense, net increased by $4 million to $18 million, primarily due to new long-term debt issued in the first quarter.
Total net income was unchanged $34 million, while net income attributable to controlling interest improved by $2 million. The effective tax rate was 14% compared to 28% in the third quarter 2008.
Earnings per share declined by 7 cents to $0.37. The weighted average number of shares outstanding, assuming dilution, increased by 25% to 89.1 million from the same quarter 2008. This was due to the sale in the first quarter 2009 of treasury shares and equity units with mandatory share purchase contracts.
NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2008
Market overview
During the nine-month period January - September 2009, global light vehicle production (LVP) dropped by 22% and LVP in the Triad by 34%.
In Europe, light vehicle production decreased by 28%. In Western Europe, LVP declined by 26% and in Eastern Europe by 33%.
In North America, light vehicle production dropped by 41%, primarily due to GM, Ford and Chrysler cutting production by 46%. Asian and European vehicle manufacturers reduced their LVP in North America by 35%.
In Japan, LVP decreased by 37% in the nine-month period.
In the Rest of the World (RoW) LVP has recovered sharply and has now increased by 4% for the first nine months.
Consolidated Sales
The Company has substantial operations outside the United States and currently more than 80% of its sales are denominated in currencies other than the U.S. dollar. This makes the Company and its performance in regions outside the United States sensitive to changes in U.S. dollar exchange rates. The measure "Organic sales" presents the increase or decrease in the Company's overall U.S. dollar net sales on a comparative basis, allowing separate discussion of the impacts of acquisitions/divestments and exchange rate fluctuations. The tabular reconciliation below presents the change in "Organic sales" reconciled to the change in the total net sales as can be derived from our unaudited financial statements.
Reconciliation of the change in "Organic sales" to GAAP financial measure
Components of net sales increase (decrease)
First nine months January-September, 2009
Europe North America Japan RoW Total
% $ % $ % $ % $ % $
Organic sales change (27.8 ) (808.6 ) (29.0 ) (336.8 ) (55.7 ) (315.3 ) 2.6 16.7 (27.3 ) (1,444.0 )
Effect of exchange rates (11.8 ) (344.3 ) (5.1 ) (59.4 ) 11.7 66.1 (11.1 ) (71.1 ) (7.8 ) (408.7 )
Impact of acquisitions/divestments 0.5 14.5 0.4 4.1 - - - - 0.4 18.6
Reported net sales change (39.1 ) (1,138.4 ) (33.7 ) (392.1 ) (44.0 ) (249.2 ) (8.5 ) (54.4 ) (34.7 ) (1,834.1 )
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For the year's first nine months, consolidated sales decreased by 35% to $3,446 million. Excluding negative currency effects of 8% and the effect of a small acquisition, organic sales (i.e. sales excluding currency effects, and acquisitions/divestitures; non-U.S. GAAP measure, see table above) decreased by 27%, which was 7 pp better than the decline in LVP in the Triad. This was mainly due to Autoliv's outperformance in North America and new business (see Sales by Region below).
Sales by Product
Sales of airbag products decreased by 34% to $2,200 million. Excluding negative currency effects of 7% and a small acquisition, organic sales declined by 28% compared to the 34% LVP decline in the Triad.
Sales of seatbelt products decreased by 36% to $1,246 million including 10% from negative currency effects. The decline in organic sales of 26% was 4 pp more than the decline in global LVP. This primarily reflects Autoliv's greater dependence on advanced higher value-added seatbelts, particularly for the European and North American markets. This was partially offset by new business for the Suzuki Alto, the Great Wall Coolbear and the Mahindra Xylo.
Sales by Region
Sales from Autoliv's European companies decreased by 39% to $1,772 million. Excluding negative currency effects of 12% and a small acquisition, organic sales declined by 28%, in line with European LVP.
Sales from Autoliv's North American companies decreased by 34% to $770 million. Excluding negative currency effects of 5% and a small acquisition, organic sales declined by 29%, which was significantly less than the 41% drop in North American LVP. This was due to new business for Ford's F-Series; Chevrolet's Traverse and Equinox; and Toyota's Rav4 and Venza.
Sales from Autoliv's companies in Japan dropped by 44% to $317 million despite favorable currency effects of 12%. The decline of 56% in organic sales was due to the general decline in Japanese LVP of 37%, which was exacerbated by an even sharper drop for vehicles with high safety value for export to markets in North America and Western Europe.
Sales from Autoliv's companies in the RoW declined by less than 9% to $587 million including negative currency effects of 11%. The organic sales increase of slightly less than 3% was virtually in line with LVP in the region. Autoliv's sales were partially driven by new business in China, with several customers, and in India.
Earnings for the Nine-Month Period Ended September 30, 2009
Gross profit decreased by $477 million to $506 million and gross margin decreased to 14.7% from 18.6% due to the substantial cuts in global light vehicle production.
Operating income declined by $375 million to a loss of $41 million and operating margin decreased to (1.2%) from 6.3%, despite aggressive cost cutting. Severance and restructuring costs amounted to $62 million in 2009 compared to $40 million in the same period 2008. The decrease of $375 million in operating income was $102 million less than the decline in gross profit thanks to the Company's action program and other cost saving initiatives.
Income before taxes decreased by $388 million to a loss of $92 million. Interest expense, net rose by $7 million due to new long-term debt issued in the first quarter 2009.
Net income decreased by $261 million to a loss of $51 million due to the $388 million drop in pre-tax profit. Income taxes was a benefit of $41 million including a cost of $3 million from discrete items compared to a tax expense of $85 million and an effective tax rate of 29% in 2008.
Earnings per share declined by $3.44 to a loss of $0.64. There is no dilution since there is no profit for the nine-month period. The weighted average number of shares outstanding increased by 10% to 80.2 million due to sale of treasury shares and equity units with mandatory share purchase contracts.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flow from operations amounted to $125 million for the third quarter. This was $23 million better than in the third quarter 2008 despite the significant drop in sales and despite $18 million in cash payments for restructuring activities. The strong cash flow was partially due to a $17 million reduction in operating assets and liabilities during the third quarter. Cash flow provided by operating activities less cash used in investing activities amounted to $105 million for the third quarter 2009 which was $117 million more than the same quarter 2008 (which included an acquisition of $42 million). For the first nine months 2009 operations generated $244 million in cash and $156 million of cash flow provided by operating activities less cash used in investing activities compared to $426 million and $176 million during the first nine months 2008.
Capital expenditures, net of $24 million were $54 million less than depreciation and amortization in the third quarter 2009, and $47 million less than capital expenditures, net during the same quarter 2008. Capital expenditures, net amounted to $90 million and depreciation and amortization to $228 million compared to $202 million and $257 million, respectively, for the same nine month period 2008.
Despite a strong sales recovery in September, receivables in relation to days sales outstanding was 71, unchanged from the end of the previous quarter but lower than the 74 days a year ago. Days inventory on-hand improved to 37 days on September 30 from 39 days on June 30 and from 44 days a year ago.
The Company uses the non-GAAP measure "Operating working capital" as defined in the table below in its communication with investors and for management review of the development of the working capital cash generation from operations. The reconciling items used to derive this measure are by contrast managed as part of the Company's overall debt management.
Reconciliation of "Operating working capital" to GAAP financial measure
September 30, June 30, December 31, September 30,
2009 2009 2008 2008
Total current assets $ 2,115.3 $ 1,831.6 $ 2,086.3 $ 2,249.6
Total current liabilities (1,368.5 ) (1,224.5 ) (1,380.7 ) (1,794.1 )
Working capital 746.8 607.1 705.6 455.5
Cash and cash equivalents (429.6 ) (311.1 ) (488.6 ) (213.6 )
Short-term debt 145.3 150.9 270.0 377.3
Derivative (asset) and
liability, current 2.5 (3.2 ) 15.9 (1.0 )
Dividends payable 0.0 2.9 14.8 29.0
Operating working capital $ 465.0 $ 446.6 $ 517.7 $ 647.2
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Over the last 12 months working capital has been reduced by 28% or $182 million. However, working capital in relation to 12-month sales increased to 10.0% on September 30 from 9.2% one year earlier. This was due to the exceptionally low trailing 12-month sales. The Company expects to be in compliance with its policy for this key ratio of less than 10% by the end of next quarter.
The Company uses the non-GAAP measure "Net debt" as defined in the table below . . .
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