Autoliv Inc. ( ALV - Analyst Report ) recorded a 16.9% decline in earnings per share to $1.23 in the third quarter of the year from $1.48 in the third quarter of 2011 while net income dipped 15.1% to $117.5 million from $138.4 million a year ago. With this, the company also missed the Zacks Consensus Estimate by 19 cents per share.

The decline in profits was attributable to higher effective tax rate (causing a reduction of 9 cents in EPS), negative currency translation effects (6 cents), increase in shares outstanding (3 cents) and capacity alignment and antitrust investigation costs (2 cents).

Consolidated sales ebbed 3.5% to $1.9 billion due to lower sales in Airbag and Seatbelt segments. Excluding the adverse currency effects and the effect of a small divestiture, organic sales rose 2% during the quarter, which is narrower than the expected increase of 4%.

The diversion from expected growth in organic sales was attributable to temporary plant closures by vehicle manufacturers in Europe, the strike in South Korea and weaker demand in China for Japanese-made vehicles due to the political conflict between China and Japan.

Gross profit deteriorated 5.7% by $387.6 million from $411.2 million in the third quarter in 2011 while gross margin declined to 19.9% from 20.4% a year ago. The decline can be attributable to negative currency translation effects, a plant fire, uneven capacity utilization due to a weak demand in certain markets as well as overtime expenses from strong demand in other markets.

Performance by Segments

Sales of Airbag Products slid 4% to $1.3 billion. Excluding negative currency effects of 5%, organic sales inched up 1% compared to the 2% increase in global light vehicle production (LVP). Sales of knee airbags almost doubled due to their further integration into many vehicles, which partially offset the effects from the strike in South Korea and the fall in European LVP.

Sales of Seatbelt Products shrank 6% to $621.4 million, due to negative currency effects of 7% and a 1% divestiture effect from the sale of Klippan Ltd in 2011. Organic sales rose 2%, in line with the increase in global LVP despite the sharp decline in West European LVP. Sales continued to be strong in North America, China and the Rest of Asia due to the inclination advanced and higher value added seatbelt systems.

Sales of Active Safety Products surged 43% to $57.0 million and organically by 47% from the third quarter of 2011. This increase was attributable to new radar business for Daimler’s ( DDAIF ) Mercedes B-, E and M-classes and General Motors’ ( GM - Analyst Report ) Cadillac ATS, XTS and SRX models, as well as due to new camera business for BMW’s 1- and 3-series.

Financial Position

Autoliv had cash and cash equivalents of $908.2 million as of September 30, 2012 compared with $630.7 million in the corresponding period a year ago. Total debt reduced to $655.5 million from $702.0 million as of September 30, 2011. Consequently, debt-to-capitalization ratio declined to 15.1% from 17.6% a year ago.

In the first nine months of the year, the company’s cash flow from operations decreased to $447.3 million from $465.1 million a year ago, mainly due to lower profits. However, capital expenditures (net) increased marginally to $261.3 million from $256.6 million in the prior-year period.

Guidance

In the fourth quarter of the year, Autoliv expects consolidated sales to be flat on a year-over-year basis while organic sales are expected to grow between 0% and 2%. The lower expected growth can be attributable to a fall in European LVP and sluggish growth in China. The company anticipates an operating margin of 9% for the quarter, excluding costs related to capacity alignments and the antitrust investigations and related class action suits.

For full year 2012, Autoliv expects consolidated sales to be flat as well, with a 4% rise in organic sales. The company also expects an operating margin of more than 9.5% for the year, excluding costs mentioned above for the quarter.

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 in order to meet local demand and to consolidate manufacturing from high-cost countries.

However, it faces significant customer concentration risks and unfavorable economic conditions in Europe are expected to mar its results. These, along with the disappointing results, have led the company retain a Zacks #4 Rank, which translates to a Sell rating for the short term (1 to 3 months).