Autoliv Profits Fall on Higher Costs

Autoliv Inc. (ALV - Analyst Report) revealed a 45% fall in profits to $100.5 million or $1.07 per share in the first quarter of 2012 from $181.5 million or $1.93 in the same quarter the prior year. With this, the company has significantly missed the Zacks Consensus Estimate by 54 cents per share.

Consolidated sales grew marginally by 3% to $2.2 billion. Organic sales rose 5%, which is almost in line with the growth in global light vehicle production (LVP), despite the steep fall in LVP in Europe, the company’s largest market, which was more than offset by impressive performance in China based on investments made earlier.

Operating income plunged 40% to $153.3 million from $254.8 million a year ago. The decrease is attributable to the fall in gross profit on the back of higher raw material costs and ramp-up of production in North America and China resulting in overtime and other extra costs, higher capacity alignment costs, and increased research, development and engineering expenses. Operating margin declined to 7.0% from 12.1% in the first quarter of 2011.

Segments Results

Sales of Airbag products (including steering wheels and passive safety electronics) went up 3% to $1.4 billion. Organic sales grew 4%. The improved segment sales were driven by strong demand for curtain airbags and other side airbags. Sales of knee airbags grew at a fast pace due to their further integration into more vehicle models.

Sales of Seatbelt products increased more than 3% to $709.2 million, driven by strong demand for advanced seatbelt systems globally. Organic sales increased nearly 6%.

Sales of Active Safety products (automotive radar and night vision systems) escalated 29% to $47.6 million and organically by 30%. The increase was attributable to new radar business for Daimler’s (DDAIF) Mercedes B- and M-classes and new camera business for BMW’s 1- and 3-series.

Financial Position

Autoliv had cash and cash equivalents of $732.0 million as of March 31, 2012 compared with $605.2 million as of March 31, 2011. Total debt reduced to $678.0 million from $747.0 billion as of March 31, 2011.

Consequently, long-term debt-to-capitalization ratio declined to 16.5% as of March 31, 2012 from 19% as of March 31, 2011. However, gross interest-bearing debt increased by $12 million to $678 million, partially due to currency effects.

In the quarter, the company’s cash flow from operations fell sharply to $98.0 million from $141.4 million a year ago, due to significantly higher accounts payables at the end of last year. Capital expenditures (net) decreased to $78.4 million from $80.1 million in the prior-year quarter.

Guidance

Autiliv expects consolidated sales to grow by 3% in the second quarter of 2012 where currency effects are expected to have a negative impact of 4%. Consequently, organic sales are expected to rise by 7% in the quarter

For the full year 2012, Autoliv expects consolidated sales to grow by 4% and organically by 7%, implying negative currency effects of 3%. Operating margin is expected to be more than 9% for the second quarter and 10%–11% for the full year.

Capital expenditures is expected to be 4.5% of sales in 2012. The company anticipates to generate strong cash flow to the tune of $0.7 billion for the year, excluding payments for antitrust investigations.

Our Take

Autoliv has a stable market share in both airbag modules and seat belts in North America, Europe and Asia. The company has continuously expanded in low-cost countries, including Romania and China, in order to meet local demand and to consolidate manufacturing from high-cost countries.

However, we are concerned about the company’s increased raw material costs. Further, the company faces significant customer concentration risks as its top-5 represent about 60% of sales.

Due to these factors, the company retains a Zacks #3 Rank on its stock, which translates to a Hold rating for the short term (1–3 months).