| | Three Months Ended March 31, |
| | 2004 | 2003 |
|
| Earnings per share1) | $.80 | $.54 |
| Equity per share | 25.61 | 21.99 |
| Cash dividend declared per share | .20 | .13 |
| Working Capital, $ in millions2) | 544 | 409 |
| Capital employed, $ in millions | 3,183 | 2,962 |
| Net debt, $ in millions3) | 754 | 880 |
| Net debt to capitalization, %4) | 23 | 29 |
| |
| Gross margin, %5) | 20.0 | 18.4 |
| Operating margin, %6) | 8.1 | 7.2 |
| |
| Return on shareholders' equity, % | 12.7 | 10.0 |
| Return on capital employed, % | 15.4 | 12.5 |
| |
| Average no. of shares in millions1) | 95.5 | 96.1 |
| No. of shares at period-end in millions7) | 94.8 | 94.7 |
| No. of employees at period-end | 32,700 | 30,400 |
| Headcount at period-end | 37,700 | 34,200 |
| Days receivables outstanding8) | 81 | 81 |
| Days inventory outstanding9) | 29 | 29 |
1) Assuming dilution and net of treasury shares
2) In 2004, derivative liability, current of $5.2 million is excluded from Working capital
3) Short- and long-term interest bearing liabilities and related derivatives, less cash and equivalents. See note 3 to Unaudited Consolidated Financial Statements
4) Net debt in relation to net debt and equity (including minority)
5) Gross profit relative to sales
6) Operating income relative to sales
7) Excluding dilution and net of treasury shares
8) Outstanding receivables at average exchange rates relative to average daily sales
9) Outstanding inventory at average exchange rates relative to average daily sales
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See "Notes to unaudited consolidated financial statements" |
10. Contingent Liabilities
Legal Proceedings
Various claims, lawsuits and proceedings are pending or threatened against the Company or its subsidiaries, covering a range of matters that arise in the ordinary course of its business activities with respect to commercial, product liability and other matters.
Litigation is subject to many uncertainties, and the outcome of any litigation cannot be assured. After discussions with counsel, it is the opinion of management that the litigations to which the Company is currently a party will not have a material adverse impact on the consolidated financial position of Autoliv, but the Company cannot provide assurance that Autoliv will not experience any material product liability or other losses in the future.
In December 2003, a U.S. Federal District Court awarded a supplier of Autoliv ASP, Inc. approximately $27 million plus interest of $5.8 million in connection with a commercial dispute. Autoliv intends to appeal the verdict as soon as possible. While legal proceedings are subject to inherent uncertainty, Autoliv believes that it has valid grounds for appeal which would result in a new trial and that it is possible that the judgment could be eliminated or substantially altered. Consequently, in the opinion of the Company's management, it is not possible to determine the final outcome of this litigation at this time. It cannot be assured that the final outcome of this litigation will not result in a loss that will have to be recorded by the Company.
The Company believes that it is currently adequately insured against product and other liability risks, at levels sufficient to cover potential claims, but Autoliv cannot be assured that the level of coverage will be sufficient in the future or that such coverage will be available on the market.
Product Warranty and Recalls
Autoliv is exposed to product liability and warranty claims in the event that our products fail to perform as expected and such failure results, or is alleged to result, in bodily injury and/or property damage. We cannot assure that we will not experience any material warranty or product liability losses in the future or that we will not incur significant costs to defend such claims. In addition, if any of our products are or are alleged to be defective, we may be required to participate in a recall involving such products. Each vehicle manufacturer has its own practices regarding product recalls and other product liability actions relating to its suppliers. As suppliers become more integrally involved in the vehicle design process and assume more of the vehicle assembly functions, vehicle manufacturers are increasingly looking to their suppliers for contribution when faced with recalls and product liability claims. A recall claim or a product liability claim brought against us in excess of our available insurance may have a material adverse effect on our business. Vehicle manufacturers are also increasingly requiring their outside suppliers to guarantee or warrant their products and bear the costs of repair and replacement of such products under new vehicle warranties. A vehicle manufacturer may attempt to hold us responsible for some or all or of the repair or replacement costs of defective products under new vehicle warranties, when the product supplied did not perform as represented. Accordingly the future costs of warranty claims by our customers may be material, however, we believe our established reserves are adequate to cover potential warranty settlements. The Company's warranty reserves are based upon our best estimates of amounts necessary to settle future and existing claims. The Company regularly evaluate the appropriateness of these reserves, and adjust them when appropriate. However, the final amounts determined to be due related to these matters could differ materially from our recorded estimates.
At December 31, 2003 the reserve for product related performance issues (recall, warranties and product liability) amounted to $52.0 million. At March 31, 2004 the corresponding reserve is $51.5 million.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with our Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2003 Annual Report on Form 10-K filed with the SEC on March 11, 2004. Unless otherwise noted, all dollar amounts are in millions.
Autoliv is one of the world's leading suppliers of automotive occupant safety restraint systems with a broad range of product offerings including modules and components for passenger and driver-side airbags, side-impact airbag protection systems, seat belts, steering wheels, safety seats and other safety systems and products. Autoliv has production facilities in 29 countries and has as customers almost all of the world's largest car manufacturers.
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 OM Stockholm Stock Exchange under the symbol "ALIV". Options in Autoliv shares are listed on the Chicago Board Options Exchange under the symbol "ALIV".
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2003
Market overview
During the three-month period January through March 2004, light vehicle production declined by approximately 1% in the Triad (i.e. Western Europe, North America and Japan) compared to the same quarter last year.
In Europe, where Autoliv generates more than half of its revenues, light vehicle production declined by almost 2% which was close to our expectations at the beginning of the quarter. Renault and Volvo increased their production by 8% and 3%, respectively, partly due to the success of Renault's new Mégane and Volvo's XC90, two vehicles to which Autoliv is the exclusive safety system supplier. Autoliv is also the exclusive safety system supplier to the new Ford C-max and Volvo V50 that have been introduced successfully. These favorable effects were partly offset by the delay in the start of production of the new Opel Astra and the modest ramp up of production for the new Volkswagen Golf and Peugeot's new 407. Therefore, vehicle mix was less advantageous for Autoliv than in the previous quarters.
In North America, which accounts for almost 30% of Autoliv's revenues, light vehicle production decreased by less than 1%, which was close to expectations. "The Big 3" (i.e. GM, Ford and Chrysler) cut back production by 5%, while the Asian and European vehicle manufacturers increased their North American production by 13%. This was a favorable mix, because Autoliv has - as of this year - a higher sales value per vehicle to the Asian manufacturers in North America than to the average "Big 3 vehicle". This change in average supply value is mainly due to rapidly increasing installations of side curtain airbags in the Asian vehicles. The most important production increases for Autoliv were the Nissan Quest and Titan.
In Japan, which accounts for nearly one tenth of consolidated sales, light vehicle production was unchanged.
In addition to vehicle production, the automotive safety market is driven by new regulations and the rollout of new safety systems, such as side-impact airbags. It is therefore significant that the vehicle manufacturers in the U.S. at the end of last year announced "a new voluntary industry safety commitment … for enhanced side-impact protection through the use of features such as side airbags, airbag curtains and revised side-impact structures". The self commitment calls for all vehicles offered in the U.S. by participating manufacturers to meet the performance criteria by no later than September 2009.
Sales for the First Quarter
Consolidated net sales during the three-month period which ended March 31, 2004, rose by 19% to $1,488 million compared to the corresponding period in 2003. At the beginning of the quarter, sales were expected to increase by approximately 15%, but vehicle production mix has been more favorable than expected.
Currency translation effects boosted sales by 11%, as expected, and acquisitions added 4%. Organic sales growth (sales excluding currency effects and acquisitions) was 4%, despite the 1% drop in light vehicle production in the Triad.
Consequently, Autoliv continued to increase its global market share.
Autoliv's organic sales growth was primarily driven by a 38% increase in the sales of side airbags for head protection and higher market shares for seat belts, particularly in North America. Organic growth was also strong for steering wheels (up 18%) and electronics (up 12%) in-part due to more high-priced leather-wrapped steering wheels and to new electronics business for the BMW 5 and 6 series and for Hyundai.
Sales by Region
Sales from Autoliv's European companies rose by 21%, primarily due to a 17% currency effect. The fact that organic sales grew by 4% at the same time as European light vehicle production fell by almost 2% is mainly due to higher penetration rates for the Inflatable Curtain and by additional market share gains in seat belts, steering wheels and safety electronics.
Sales from Autoliv's North American companies increased by 4%. Sales were driven by a 35% organic growth in seat belts and a doubling of sales of side curtain airbags. These increases are partly a reflection of Autoliv's rapidly growing supply value to the Asian vehicles produced in North America and of a recovery in last year's seat belt sales which was affected by many contract change-overs. Growth in seat belt sales was spearheaded by a 43% increase in the pretensioner product area.
North American sales of all airbag products declined by 2% both due to the 5% drop in the Big 3's production which hit Autoliv's sales of frontal airbags, and lower sales of inflators, partly as an effect of the on-going phase-out of low-margin inflators. Airbag sales were favorably impacted by the demand for side curtains (up 120%), electronics (up 38%) and steering wheels (up 22%). In addition, sales of knee airbags jumped from a low level thanks to new business for the Chrysler Minivan.
Sales from Autoliv's companies in Japan jumped 81%. Most of the increase was due to the NSK-acquisition. Currency effects added 11% and organic growth 4%. The organic sales growth was primarily due to higher market shares for frontal airbags. The introduction of Mazda's new 3-series and strong demand for Mitsubishi's Colt (both vehicles to which Autoliv is the sole safety system supplier) helped Autoliv to also outperform the vehicle production in Japan.
Sales from Autoliv companies in theRest of the World (RoW) rose by 29%. Excluding currency effects of 19% and acquisitions of 1%, organic sales increased by 9%. The organic growth occurred in all product areas. Organic sales in Korea rose by 16%, mainly as a result of new side curtain business, and in China by 57% partly as a result of a sharp increase in the demand for airbags.
Sales by Product
Consolidated sales of airbag products (incl. steering wheels) increased by 12% to $982 million, including a 10% effect from currencies. Since the change in organic sales was an increase of approximately 2%, Autoliv managed to outgrow the weak global vehicle production. This was accomplished by the market penetration of the Inflatable Curtain and increased market shares in electronics and steering wheels, as well as by new business generated from investments previously made in the Rest of the World, where both vehicle production and the demand for frontal airbags is growing rapidly.
Sales of seat belt products (incl. seat sub-systems) zoomed up by 39% to $506 million, including currency effects of 15% and a 13% effect of acquisitions. Most of the organic growth of 11% came from significant market shares gains in North America, but market share gains in Europe and the Rest of the World also contributed to the sales expansion.
Earnings for the Three-Month Period Ended March 31, 2004
During the quarter, earnings increased on all levels in the income statement and the return on shareholders' equity improved for the 13th consecutive quarter (when compared to the previous year's quarter). The return on equity rose to 12.7% from 10.0% during the same quarter 2003 and the return on capital employed improved at the same time to 15.4% from 12.5%.
The improvements are mainly due to the strong sales performance generated by new products, expansion in Asia and higher market shares in the established markets in Europe and North America. The fact that Autoliv has succeeded in offsetting the significant pricing pressure from vehicle manufacturers is also the result of cost savings initiatives, such as redesigning products and systems, moving production to low-labor cost countries, reductions in component costs and plant consolidations.
For the first quarter 2004, gross profit increased by 30% to $298 million. Currency translation effects contributed 11% to the increase. Currency hedging increased gross profit by $1 million compared to a reduction of $5 million in 2003. Gross margin rose to 20.0% from 18.4% despite pricing pressure from customers. The margin improvement was due to the strong sales performance in combination with the above-mentioned cost-reduction actions.
Operating margin improved to 8.1% from 7.2% in the corresponding quarter last year, despite the fact that research, development and engineering expenses rose by 36% to 6.7% of sales compared to 5.9% during the same quarter 2003. The increase in R,D&E expense mainly reflects a lower income from customer-funded engineering services as a consequence of many vehicle manufacturers wanting to pay for engineering assignments over the life of a vehicle model instead of as a lump sum at the end of the engineering project. The sharp increase in R,D&E expenses was partly offset by a reduction, in relation to sales, in Selling, General and Administrative expense (S,G&A). Excluding the effect of currency changes, the amount of S,G&A expense was virtually unchanged from a year ago, despite the strong sales growth during the last 12 months.
Income before taxes improved by 43% to $115 million. In addition to the better operating income, this improvement was due to a $3 million reduction in net interest expense as a result of lower interest rates and lower net debt. Higher earnings in joint ventures, partly due to the acquisition of the remaining 60% of NSK's Asian seat belt operations, also contributed to the improvement.
The effective tax rate has been reduced to 31.5% from 33% in the first quarter last year primarily as a result of a reduced level of losses being generated without any tax benefit and relatively higher income in countries with lower tax rates.
Net income rose by 47% to $76 million and earnings per share by 48% to 80 cents. Of the improvement in earnings per share, 16 cents was due to currency exchange effects (including translation, currency hedging and transaction effects), and 2 cents to the lower tax rate. The effect on earnings per share of the stock repurchase program was insignificant. This program reduced the average number of shares outstanding (assuming dilution) to 95.5 million from 96.1 million during last year's first quarter.
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LIQUIDITIY AND SOURCES OF CAPITAL
Operations continued to generate a healthy cash flow, for the 10th quarter in a row. During the first quarter 2004, cash flow from operations totaled $120 million, compared to $108 million during the same period 2003. The improvement was due to better earnings.
Capital expenditures, net, totaled $72 million which was in line with depreciation of $68 million. After capital expenditures, cash flow amounted to $49 million compared to $34 million during the first quarter 2003, when cash flow was affected by both capital expenditures of $60 million and the acquisition of $14 million for the remaining shares in Livbag.
In relation to 12-months sales, working capital continued to decline and amounted to 9.8% at the end of the quarter compared to 10.0%, at the beginning of the quarter. Autoliv therefore continued to meet its target that working capital should not exceed 10% of sales.
In absolute numbers, however, working capital increased during the quarter by $16 million or 3% as an effect of higher receivables and lower accounts payable. These negative effects were partly offset by a reduction in inventories and income tax receivables. Days receivables outstanding increased from 77 days on December 31, 2003 to the same level as at the end of the first quarter 2003 i.e. 81 days. Days Inventories decreased from 31 sales days to 29.
As an effect of the strong cash generation, net debt was reduced by $31 million during the quarter to $754 million and gross interest bearing debt by $12 million to $983 million, despite $32 million being used for stock buy-backs and the quarterly dividend. Net debt to capitalization was reduced to 23% from 24%.
In line with its bank commitments, Autoliv has adopted the policy to always maintain a net debt that is significantly below 3.0 times the EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) and an interest coverage ratio (see the Annual Report, for definitions) significantly above 2.75 times. On March 31, these covenant ratios were 1.1 and 11.7, respectively.
Equity increased during the quarter by $26 million to $2,428 million or $25.61 per share. Equity was reduced by $23 million from currency effects, by $18 million for stock buy backs, by $14 million for the quarterly dividend and by $1 million from changes in the market value of cash-flow hedges. Stock options excercised increased equity by $6 million. |
HEADCOUNT
Total headcount (employees plus temporary hourly workers) increased by 700 to 37,700 during the quarter. The increase was entirely concentrated in low-labor-cost countries, while headcount declined by 75 in high-labor cost countries.
Of headcount, 33% are in low-labor-cost countries (and 36% excluding temporaries), compared to 30% a year ago and less than 10% five years ago.
PROSPECTS
During the second quarter, light vehicle production in the Triad is expected to be almost flat with a 3% increase in North America, a 4% decline in Europe and a 2% increase in Japan. Despite this negative regional mix, Autoliv expects its organic sales to continue to outperform the vehicle production in the Triad at a similar rate as in the first quarter. In addition, currency effects are expected to add 5% to reported revenues, provided that the mid-April exchange rates prevail. Based on these assumptions, sales would increase in the magnitude of 10% in the second quarter 2004 compared to the same period 2003.
Mainly due to the expected strong organic sales performance and the cost savings described above, we expect Autoliv to exceed slightly the operating margin of 8.3% in last year's second quarter, despite the higher level of R,D&E expenses established in the first quarter. So far, Autoliv has been able to to delay and mitigate the effect of higher prices in the raw materials markets. There is a risk, however, that a sustained spike in spot prices for raw materials could have a gradual negative effect on Autoliv's improvements in earnings.
OTHER RECENT EVENTS
Product Launches During the 1st Quarter of 2004
- Chrysler's Dodge Minivan: Knee airbags
- Chevrolet's new Malibu and Malibu Maxx: Seat belts with pretensioners
- Chrysler's new PT Cruiser Convertible: Driver and passenger airbags, and seat belts
- Chevrolet's new Equinox: Seat belts
- Ford's Escape: Driver and passenger airbags, seat belts, steering wheel, and airbag electronics
- Hyundai's Avante: Airbag electronics
- Hyundai's Sonata: Side airbags, Inflatable Curtains, and seat belts
- Kia's Cerato/Spectra: Airbag electronics
- Opel's new Astra: Side airbags, Inflatable Curtains, and seat belts with pretensioners
- Skoda's new Octavia: Driver and passenger airbags, Inflatable Curtains, and seat belts
- Smart's new ForFour: Smart driver and passenger airbags, side airbags, Inflatable curtains, seat belts with pretensionerns, and steering wheel
- Toyota's new Corolla Verso: Inflatable Curtains, side airbags
- Volvo's new V50: Smart frontal airbags, side airbags, Inflatable Curtains, seat belts with dual pretensionerns for front seats, whiplash system, integrated telephone, and integrated child seats
Investment in New Crash-Test Sleds
Currently, Autoliv is investing in six new crash-test sleds, with locations in China, Korea, Malaysia, Thailand and Australia. The sleds will have the capacity to perform a variety of crash tests ranging from individual seat belt tests to full car body tests that simulate crashes with complete cars at speeds up to 65 km/h (40 mph). The investment is driven by Autoliv's commitment to increase the levels of product development capability for vehicle safety systems throughout the region. Vehicle production in these five countries has grown by 65% during the last three years and is expected to grow another 35% to 12 million vehicles by 2006.
Acquisitions
These financial statements have been affected by three acquisitions, but only the NSK-acquisition has had a material impact. On April 1, 2003, Autoliv excercised its options and increased its holding in NSK's Asian seat belt operations from 40% to 100%. The operations had approximately $150 million in annual sales. Also in the second quarter 2003, Autoliv acquired a Japanese steering wheel operation (NSI) that had nearly $20 million in sales. In the third quarter 2003, Autoliv acquired Protektor, a small German company with $10 million in annual sales. Protektor specializes in seat belts for niche markets.
New Plants
In China, Autoliv will add a plant for electronics to its new airbag and seat belt facility. The new plant for electronics will not only produce safety electronics for the Chinese market but also include development resources and production capacity to supply safety electronics to the whole Asia Pacific region.
In Korea, Autoliv has acquired land and started expanding the existing building for the rapidily growing business with the Korean vehicle industry. Autoliv's sales in Korea are expected to double in 2005 from this year.
Industry Recognition
Autoliv has received a Global Supplier Award for 2003 from DaimlerChrysler. The award was given to the best suppliers in eight procurement segments. These companies have demonstrated outstanding performance "in quality, cost-efficiency, technology and delivery precision" world-wide. Autoliv was the best supplier in the category of Interior Components.
Test results recently published from the IIHS (Insurance Institute for Highway Safety) have once again confirmed the significant benefit of head airbags for side-impact protection. In the tests, only the three car models equipped with these new airbags earned the ratings "good" or "acceptable", while all of the ten car models without such side airbags were rated "poor". This was the same outcome as in June, 2003 when IIHS published the first results from 13 tests in the institute's new testing program.
DIVIDEND
The quarterly dividend of 20 cents per share will be paid on Thursday June 3, 2004 to shareholders of record as of May 6. The ex-date, when the shares will trade without the right to the dividend, is May 4.
During the last 14 months, Autoliv has raised its quarterly dividends in three steps by 82%.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As of March 31, 2004, our future contractual obligations have not changed significantly from the amounts reported within our 2003 Annual Report on Form 10-K.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information that was provided in the Company's 2003 Annual Report on Form 10-K filed with the SEC on March 11, 2004. |
