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Analyst Blog

Autoliv Inc. saw a 14% fall in profits to $1.33 per share in the second quarter of the year from $1.54 in the year-ago quarter due to weak markets in Europe and South America as well as higher raw material prices. With this, the company also missed the Zacks Consensus Estimate by 6 cents per share. In absolute terms, profits fell 13% to $126.4 million from $145.0 million a year ago.

Consolidated sales increased a meager 1% to $2.09 billion, lower than the Zacks Consensus Estimate of $2.13 billion. Excluding negative currency effects of 6% and a small divestiture, organic sales went up roughly 8%, outperforming its own guidance of 7% due to better performance in North America that more than offset lower sales in China and Western Europe.

Operating income declined to $190 million (9.1% of sales) from $205 million (10.0%) in the second quarter of 2011. The declines were driven by an increase in research development and engineering expenses by $9 million and capacity alignment costs by $4 million compared with the prior-year quarter.

Segments Results

Sales of Airbag Products (including steering wheels and passive safety electronics) edged up 1% to $1.37 billion, with more than 7% rise in organic sales. It was adversely affected by negative light vehicle production (LVP) mix with a fall in LVP in Western Europe.

Sales of Seatbelt Products were flat at $669 million due to negative currency effects of 8%. However, organic sales grew 8% due to strong performance in North America, China and Japan as well as global trend towards advanced and higher value-added seatbelt systems.

Sales of Active Safety Products (primarily automotive radar and night vision systems) escalated 27% to $49 million and organically by 30%. The strong improvement was driven by new radar business for Daimler’s 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 $917.3 million as of June 30, 2012 compared with $559.7 million as of June 30, 2011. Total debt declined to $644.2 million as of June 30, 2012 from $693.8 million as of June 30, 2011. Consequently, debt-to-capitalization ratio declined to 15.3% as of June 30, 2012 from 17.6% in the year-ago period.                                                     

In the first half of the year, cash flow from operations improved to $316.6 million from $273.3 million a year ago due to favorable changes in operating assets and liabilities.

Capital expenditures (net) decreased to $163.6 million from $170.6 million in the prior-year period.

Outlook

Autoliv anticipates organic sales to grow by about 4% in the third quarter of the year. However, consolidated sales are expected to decline by 3% in the quarter due to negative currency effects of 6% and the effect from the divestiture of Autoliv Mekan.

For full year 2012, given the forecast of a 5% increase in LVP provided by IHS Inc. , Autoliv expects organic sales to improve 6%. Meanwhile, consolidated sales are expected to increase marginally by 1% due to currency effects (4%) and divestiture of Autoliv Mekan as discussed above. The company expects operating margin to be 10% for the third quarter and the same for the full year.

In order to outperform global LVP, capital expenditures are expected to remain at a high level of 4.5% of sales in 2012. Operations are expected to continue to generate a strong cash flow in the magnitude of $700 million for the full year 2012, 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).

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