Market Overview
During the six-month period January - June 2008, global light vehicle production grew by 3%, whereas production in the Triad declined by half of one percent.
In Europe, light vehicle production increased by nearly 5%, due to a 20% increase in Eastern Europe. In Western Europe light vehicle production declined by 1%.
In North America, light vehicle production declined by 12% due to GM, Ford and Chrysler cutting back their production by 18%. The Asian and European vehicle manufacturers reduced their production in North America by just over 1%.
In Japan, light vehicle production increased by 5% in the six-month period.
In the Rest of the World (RoW) light vehicle production rose by 11%.
Consolidated Sales
For the year’s first six months, sales increased by 9% to $3,735 million due to currency translation effects of 10% and the AIN-acquisition that added nearly 1%. An organic sales decrease of less than 2% was due to the declines in light vehicle production in North America and Western Europe. The sales decline was also due to upcoming model change-overs for the Renault Mégane, the Volkswagen Golf and other important vehicle models for Autoliv.
Sales of airbag products increased by 6% to $2,367 million. Excluding currency effects of 9%, organic sales declined by 3% mainly due to the North American market.
Sales of seatbelt products increased by 14% to $1,368 million including 12% from currency effects and 2% from the AIN-acquisition. The almost flat organic sales despite the declines in vehicle production in Autoliv’s most important markets is due to strong performance in the RoW along with rapidly increasing demand in established markets for active seatbelts with electrically driven pre-crash pretensioners.
Sales from Autoliv’s European companies increased by 13% to $2,113 million due to currency effects of 15%. The organic sales decline of 2% was due to a decrease in West European light vehicle production and an overall negative vehicle model mix in European light vehicle production.
Sales from Autoliv’s North American companies decreased by 11% to $794 million. Organic sales declined by 12% virtually in line with light vehicle production, while the stronger Mexican peso had a slightly positive impact. Organic growth in seatbelt sales continued even in the current tough market environment.
Sales from Autoliv companies in Japan jumped by 31% to $383 million due to organic growth and currency effects of slightly more than 16% and 14%, respectively. Organic growth was three times stronger than Japanese light vehicle production. This was mainly due to increased sales of Inflatable Curtains to such vehicles as Toyota’s Alphard, Land Cruiser Prado, Vitz and Zone.
Sales from Autoliv companies in the RoW rose by 22% to $445 million including 4% from currency effects and 8% from the AIN-acquisition. Organic growth of slightly more than 9% was driven by strong seatbelt sales primarily in China and Brazil and new business with Chrysler, Ford, Honda, Nissan, Peugeot, Renault and Volkswagen.
Earnings
Gross profit increased by 6% or $40 million to $721 million due to currency effects. However, gross margin decreased to 19.3% from 19.9% due to higher raw material and other direct cost along with pricing pressure from customers.
Operating income rose by $48 million to $276 million. Most of the increase was due to the $30 million increase in 2007 legal reserves. Excluding this discrete item, operating income improved on a comparable basis by 7% from $258 million due to currency effects and productivity improvements in R,D&E. Operating margin improved to 7.4% from 6.6% but is slightly below 7.5% which represents the margin excluding the increase in legal reserves in 2007.
Income before taxes increased by 23% or $46 million to $248 million and by 7% or $16 million excluding the increase in legal reserves in 2007. Interest expense, net rose by $3 million partially offset by a reduction in cost for other financial items as a result of positive instead of negative effects from loans in foreign currencies.
Net income increased by 32% or $41 million to $172 million. Half of the increase was due to the increase in legal reserves in 2007 and the other half to better profit performance and a lower effective tax rate which declined to 29.0% from 33.0%.
Earnings per share improved to $2.35 from $1.63. On a comparable basis (i.e. excluding the effect in 2007 of the increase in legal reserves), earnings per share improved by 24% from $1.89. Earnings per share was favorably impacted by 17 cents from the stock repurchase program, by 13 cents from a lower effective tax rate, 9 cents from currency effects and 7 cents from higher pre-tax income. The average number of shares outstanding decreased by 9% to 73.2 million.
Cash Flow and Balance Sheet
Operations generated $324 million in cash and $187 million before financing compared to $401 million and $167 million during the first six months 2007. Capital expenditures, net amounted to $131 million and depreciation and amortization to $170 million compared to $156 million and $159 million, respectively, last year.
Due to dividends and stock buybacks totalling $165 million, net debt increased by $13 million since the beginning of the year despite strong cash flow. Gross interest-bearing debt decreased by $16 million to $1,336 million. Net debt to capitalization was 33% as it was at the beginning of the year but increased from 29% a year ago.
Equity increased by $67 million despite stock repurchases of $108 million, dividends of $57 million and $1 million for an equity adjustment related to pension liabilities. Equity was favorably impacted by $172 million from net income, $55 million from currency effects, and $6 million from effects of stock compensation.
Return on equity amounted to 14% and return on capital employed to 16% compared to 11% and 13%, respectively. On a comparable basis, i.e. excluding the effect in 2007 of the increase in legal reserves, return on equity improved from 12% and return on capital employed from 15%.
Headcount
Total headcount (employees plus temporary hourly workers) at the end of June was 43,000, the same number as at the beginning of the quarter but an increase from 41,900 at the beginning of the year. During the quarter, headcount increased in low-cost countries by 300, which was completely offset by a decrease in high-cost countries. At the end of the quarter, 16% of headcount were temporaries.
Action Program
To mitigate the effects of both accelerating production cuts by customers and accelerating costs for raw materials the Company is developing an action program. The program is estimated to generate annual pre-tax savings of approximately $120 million. The savings are expected to be realized gradually, with full effect in 2010. The main items in the program are:
| | - | Adjustment of manufacturing capacity, including plant closures, due to lower expected vehicle production. |
| | - | Accelerated move of sourcing to low-cost countries, consolidation of supplier base and standardization of products. |
| | - | Reductions in overhead costs, including consolidation of tech centers. |
| | - | Increased investments in products for small, fuel-efficient cars. |
The program could affect up to 3,000 employees, both temporaries and permanent. The pre-tax cost for this program will be recorded later this year and is estimated to amount to up to $75 million.
Outlook
During the third quarter of 2008, global light vehicle production is expected to increase by nearly 4% due to Asia, Eastern Europe and South America. However, in North America and Western Europe, where Autoliv derives 70% of revenues, light vehicle production is expected to decline by 12% and 5%, respectively. These declines are expected to continue into the fourth quarter, while the strong production growth in the RoW is expected to level off. As a result, average global light vehicle production is expected to decrease by almost 1% during the fourth quarter. Given current exchange rates, currency rates are expected to boost sales by 9% in the third quarter and by 6% in the fourth quarter. The AIN-acquisition is expected to add 1% in the third quarter. Based on these assumptions, consolidated sales are expected to increase by 7% in the third quarter with the organic portion declining by 3% and consolidated sales increase by 8% during the full year 2008 with the organic portion declining by 1%.
Operating margin will be affected by accelerating raw material costs, supplier issues, pricing pressure from customers and prolonged start-up costs in Asia due to the slow-down in production growth rate in China. An operating margin of around 5% is therefore expected for the third quarter and in the range of 7.0% to 7.5% for the full year 2008. Both margins are before severance and other restructuring costs.
The effective tax rate is projected to amount to 29%.
Other Significant Events
· During the quarter, Autoliv repurchased 803,460 shares for $45 million at an average cost of $56.22 per share and during the first six months 2,042,460 shares for $108 million at an average cost of $53.04 per share. Under the existing authorizations, an additional 4.9 million shares can be repurchased.
· Mr. Günter Brenner has been appointed President of Autoliv Europe and Executive Vice President. He is currently Vice President General Manager, Global Occupant safety Systems of TRW. He succeeds Benoit Marsaud who will leave this position and the COO role on July 31 and manage selected projects reporting to the CEO.
· In the U.S., the National Highway Traffic Safety Administration will introduce more demanding crash tests and introduce new overall safety ratings. The new program will measure, for instance, the risk for leg injuries. It will apply to all new vehicle models as of model year 2010.
· In Europe, the EuroNCAP will phase in new crash test criteria starting in 2009 with full implementation in 2012. The new rating system addresses the need for pedestrian protection, whiplash protection and introduces a new overall safety rating system.
Dividend and Next Report
The Company has declared a 5% increase in its quarterly dividend. This dividend for the third quarter of 41 cents per share will be paid on September 4 to shareholders of record as of August 7, 2008. The ex-date, when the stock trades without the right to the dividend is August 5, 2008.
Autoliv intends to publish the quarterly report for the third quarter on Tuesday October 21, 2008.
“Safe Harbor Statement”
Statements in this report that are not statements of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements involve risks and uncertainties, including – but not limited to – the economic outlook for the Company’s markets, fluctuation of foreign currencies, fluctuation in vehicle production schedules for which the Company is a supplier, continued uncertainty in program awards and performance, the financial results of companies in which Autoliv has made technology investments, pricing negotiations with customers, fluctuating fuel and commodity prices and other costs, supply issues, product liability, warranty and recall claims, dependence on customers and suppliers, and other factors discussed in Autoliv’s filings with the Securities and Exchange Commission (SEC). We do not intend or assume any obligation to update any of these statements.
Definitions and SEC Filings
Please refer to www.autoliv.com or to the Annual Report for definitions of terms used in this report.
Filings with the SEC of Autoliv’s annual report, 10-K report, quarterly reports in the form of 10-Q, proxy statements, management certifications, press releases in the form of 8-K and other documents can also be obtained free of charge from Autoliv at the Company’s address. These documents are also available at the SEC’s website www.sec.gov and at Autoliv’s corporate website www.autoliv.com.
