Autoliv(ALV) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents Autoliv's unaudited condensed consolidated financial statements for the periods ended September 30, 2023, along with detailed notes on accounting policies and financial performance Consolidated Statements of Income (Three Months Ended September 30) | Metric | 2023 (Millions $) | 2022 (Millions $) | Change (%) | | :----- | :---------------- | :---------------- | :--------- | | Net Sales | 2,596 | 2,302 | 13% | | Gross Profit | 465 | 383 | 21% | | Operating Income | 232 | 171 | 36% | | Net Income | 134 | 106 | 27% | | Diluted EPS | 1.57 | 1.21 | 30% | Consolidated Statements of Income (Nine Months Ended September 30) | Metric | 2023 (Millions $) | 2022 (Millions $) | Change (%) | | :----- | :---------------- | :---------------- | :--------- | | Net Sales | 7,724 | 6,507 | 19% | | Gross Profit | 1,291 | 998 | 29% | | Operating Income | 453 | 429 | 5.5% | | Net Income | 262 | 268 | (2.5%) | | Diluted EPS | 3.04 | 3.06 | (0.5%) | Condensed Consolidated Balance Sheets (As of September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 (Millions $) | Dec 31, 2022 (Millions $) | | :----- | :------------------------ | :------------------------ | | Total Assets | 7,987 | 7,717 | | Total Current Liabilities | 3,851 | 3,642 | | Total Equity | 2,486 | 2,626 | Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Metric | 2023 (Millions $) | 2022 (Millions $) | | :----- | :---------------- | :---------------- | | Net Cash Provided by Operating Activities | 535 | 251 | | Net Cash Used in Investing Activities | (419) | (319) | | Net Cash Used in Financing Activities | (232) | (389) | | Cash and Cash Equivalents at End of Period | 475 | 483 | 1. Basis of Presentation The interim unaudited condensed consolidated financial statements are prepared under U.S. GAAP, focusing on Autoliv's single reportable segment of airbag and seatbelt products - The Company has one reportable segment, which includes Autoliv's airbag and seatbelt products and components[24] - Statements in this report that are not historical fact are forward-looking statements that involve risks and uncertainties[24] 2. New Accounting Standards Autoliv adopted ASU 2022-04 on January 1, 2023, requiring disclosure of supplier finance programs, with obligations recorded in Accounts Payable - The Company adopted ASU 2022-04, Liabilities-Supplier Finance Programs, as of January 1, 2023[27] - Autoliv uses an external payment service provider for certain suppliers, with outstanding obligations recorded in Accounts Payable[27] Supplier Finance Program Obligations (Nine Months Ended September 30, 2023) | Metric | Amount (Millions $) | | :----- | :------------------ | | Confirmed obligations outstanding at beginning of period | 314 | | Invoices confirmed during the period | 1,046 | | Confirmed invoices paid during the period | (1,030) | | Confirmed obligations outstanding at end of the period | 330 | 3. Fair Value Measurements Autoliv uses derivative financial instruments to mitigate market risk, classifying all derivatives as Level 2 and certain nonrecurring asset measurements as Level 3 - All of the Company's derivatives are classified as Level 2 financial instruments in the fair value hierarchy[30] Derivatives Not Designated as Hedging Instruments (As of September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 (Millions $) | Dec 31, 2022 (Millions $) | | :----- | :------------------------ | :------------------------ | | Nominal Volume | 2,016 | 2,616 | | Derivative Asset | 13 | 22 | | Derivative Liability | 25 | 15 | Fair Value of Debt (As of September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 (Millions $) | Dec 31, 2022 (Millions $) | | :----- | :------------------------ | :------------------------ | | Total Long-term Debt (Carrying Value) | 1,277 | 1,054 | | Total Long-term Debt (Fair Value) | 1,262 | 1,027 | | Total Short-term Debt (Carrying Value) | 590 | 711 | | Total Short-term Debt (Fair Value) | 588 | 705 | 4. Income Taxes Autoliv's effective tax rate increased to 33.4% for the three and nine months ended September 30, 2023, with a $7 million net increase in income tax reserves Effective Tax Rate | Period | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Three Months | 33.4% | 30.8% | | Nine Months | 33.4% | 31.1% | - During the nine months ended September 30, 2023, the Company recorded a net increase of $7 million to income tax reserves for unrecognized tax benefits[41] - Total unrecognized tax benefits as of September 30, 2023, were $53 million, with $16 million classified as current and $37 million as non-current[41] 5. Inventories Inventories are valued at the lower of cost and net realizable value, totaling $982 million net of reserve as of September 30, 2023 Inventories, Net of Reserve (Millions $) | Component | Sep 30, 2023 | Dec 31, 2022 | | :-------- | :----------- | :----------- | | Raw materials | 454 | 445 | | Work in progress | 325 | 350 | | Finished products | 289 | 265 | | Inventory valuation reserve | (87) | (91) | | Total inventories, net | 982 | 969 | 6. Restructuring Autoliv's restructuring reserve totaled $122 million as of September 30, 2023, primarily for European footprint optimization activities expected to conclude by 2025 - As of September 30, 2023, approximately $105 million of the $122 million total restructuring reserve balance is for footprint optimization activities in Europe (Germany and UK)[45] Employee-Related Restructuring Reserves (Millions $) | Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----- | :------------------------------ | :----------------------------- | | Reserve at beginning of period | 127 | 32 | | Provision - charge | 8 | 118 | | Cash payments | (9) | (24) | | Reserve at end of period | 122 | 122 | 7. Product-Related Liabilities Autoliv's product-related liabilities, mainly for recall issues, totaled $120 million as of September 30, 2023, with a majority covered by $120 million in insurance receivables - As of September 30, 2023, the reserve for product-related liabilities was $120 million, mainly for recall-related issues[47][48] - A majority of the product-related liabilities are covered by insurance, with total insurance receivables of $120 million as of September 30, 2023[47] - Provisions for the three and nine months ended September 30, 2023, primarily relate to warranty issues, while cash payments mainly relate to the Andrews litigation settlement[47] 8. Retirement Plans Net periodic benefit cost for Autoliv's defined benefit plans was $2 million for U.S. and $13 million for Non-U.S. plans for the nine months ended September 30, 2023, with settlement accounting triggered for the primary U.S. pension plan Net Periodic Benefit Cost (Millions $) | Plan Type | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :-------- | :------------------------------ | :----------------------------- | | U.S. Plans | 1 | 2 | | Non-U.S. Plans | 4 | 13 | - The Company triggered settlement accounting for the primary U.S. pension plan in the third quarter of 2023 due to lump-sum payments exceeding service and interest costs[52] - The discount rate for the U.S. plan was changed from 5.32% to 5.98% in Q3 2023 due to re-measurement, with the expected long-term rate of return on plan assets remaining at 5.05%[52] 9. Contingent Liabilities Autoliv faces various legal proceedings, including the ARC Inflator Class Action (loss reasonably possible), Honda Buckle Recall ($27 million accrual), and ZF Inflator Recall (estimated $0 to $43 million potential loss, anticipated immaterial net of insurance) - Autoliv is a defendant in the ARC Inflator Class Action, with a loss determined to be reasonably possible, but no accrual has been made and no estimated range of potential loss can be determined[59] - For the Honda Buckle Recall, a loss is probable, and the accrual exceeding product liability insurance receivable is $27 million[60] - For the ZF Inflator Recall, a loss is reasonably possible, with an estimated range of $0 to $43 million, but anticipated to be immaterial net of insurance claims and claims against ZF[61] 10. Stock Incentive Plan Eligible employees and directors participate in the 1997 Stock Incentive Plan, with stock-based compensation expense of $3 million and $8 million for the three and nine months ended September 30, 2023, respectively Stock-Based Compensation Expense (Millions $) | Period | 2023 | 2022 | | :----- | :--- | :--- | | Three Months Ended Sep 30 | 3 | 3 | | Nine Months Ended Sep 30 | 8 | 7 | - Approximately 8 thousand shares (three months) and 120 thousand shares (nine months) of common stock from treasury were utilized by the Plan during the periods ended September 30, 2023[64] 11. Earnings Per Share Basic and diluted earnings per share for the three months ended September 30, 2023, were $1.58 and $1.57, respectively, and $3.05 and $3.04 for the nine months Earnings Per Share (EPS) | Metric | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----- | :------------------------------ | :----------------------------- | | Net income attributable to controlling interest (Millions $) | 134 | 261 | | Basic EPS | 1.58 | 3.05 | | Diluted EPS | 1.57 | 3.04 | 12. Revenue Disaggregation Autoliv's net sales for the three months ended September 30, 2023, totaled $2,596 million, primarily from Airbags, Steering Wheels and Other ($1,761 million) and Seatbelt Products and Other ($835 million), with Americas as the leading region Net Sales by Products (Millions $) | Product Category | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--------------- | :------------------------------ | :----------------------------- | | Airbags, Steering Wheels and Other | 1,761 | 5,191 | | Seatbelt Products and Other | 835 | 2,533 | | Total Net Sales | 2,596 | 7,724 | Net Sales by Region (Millions $) | Region | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :----- | :------------------------------ | :----------------------------- | | China | 538 | 1,488 | | Asia, excl. China | 495 | 1,449 | | Americas | 918 | 2,665 | | Europe | 646 | 2,122 | | Total Net Sales | 2,596 | 7,724 | 13. Subsequent Events No reportable events occurred subsequent to September 30, 2023 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes Autoliv's financial condition and results for Q3 and the first nine months of 2023, covering sales growth, profitability, cost reductions, liquidity, and non-U.S. GAAP measures - Autoliv's organic sales growth significantly outperformed Light Vehicle Production (LVP) in Q3 2023, with an 11% organic sales increase against 3.8% global LVP growth[77][78] - Adjusted operating income was a new third-quarter record since the 2018 spin-off, with adjusted operating margin increasing from 7.5% to 9.4% year-over-year[77][78] - The company detailed intentions to reduce its indirect workforce by up to 2,000, expecting annual cost reductions of around $35 million in 2024, $65 million in 2025, and $85 million when fully implemented[77][81] Executive Overview Autoliv reported strong Q3 2023 performance with significant organic sales growth, record adjusted operating income, and a focus on structural cost reductions and Chinese OEM market penetration - Organic sales growth continued to significantly outperform LVP, and adjusted operating income was a new third-quarter record since the spin-off in 2018[77] - In the first nine months, sales to fast-growing domestic OEMs in China increased by more than 50% year over year[77] - Full-year sales indication increased due to better-than-expected LVP development, despite the UAW strike[77] Business and Market Condition Update for the Third Quarter 2023 Global LVP grew 3.8% in Q3 2023, with inflationary cost pressures largely offset by customer compensations, and Autoliv expects a full-year 20% tax rate due to reorganization - Global light vehicle production growth was 3.8% year-over-year in Q3 2023, with continued gradual improvement in call-off volatility, though still higher than pre-pandemic levels[79] - Most inflationary cost pressure in Q3 2023 was offset by customer price and other compensations; raw material cost impact was negligible[80] - Autoliv expects its full-year 2023 tax rate to be around 20%, down from previous expectations, due to ongoing reorganization of global functions and European operations[81] Results of Operations (Three Months Ended September 30, 2023 vs. 2022) Autoliv's Q3 2023 net sales increased 13% to $2,596 million with 11% organic growth, leading to a 36% rise in operating income to $232 million and 30% diluted EPS growth to $1.57 Key Financial Ratios (Q3 2023 vs. Q3 2022) | Metric | Q3 2023 | Q3 2022 | | :----- | :------ | :------ | | Gross Margin (%) | 17.9% | 16.7% | | Operating Margin (%) | 8.9% | 7.4% | | Return on Total Equity (%) | 21.3% | 16.8% | | Return on Capital Employed (%) | 24.2% | 18.0% | | Headcount at period-end | 71,200 | 67,800 | Sales Development (Three Months Ended September 30) | Metric | 2023 (Millions $) | 2022 (Millions $) | Reported Change (%) | Organic Change (%) | | :----- | :---------------- | :---------------- | :------------------ | :----------------- | | Airbags, Steering Wheels and Other | 1,761 | 1,510 | 17% | 15% | | Seatbelt Products and Other | 835 | 792 | 5.5% | 2.6% | | Total Net Sales | 2,596 | 2,302 | 13% | 11% | Sales by Region (Three Months Ended September 30) | Region | 2023 (Millions $) | 2022 (Millions $) | Reported Change (%) | Organic Change (%) | | :----- | :---------------- | :---------------- | :------------------ | :----------------- | | Asia | 1,033 | 955 | 8.1% | 12% | | Americas | 918 | 794 | 16% | 11% | | Europe | 646 | 552 | 17% | 8.5% | | Global LVP Growth | N/A | N/A | N/A | 3.8% | Results of Operations (Nine Months Ended September 30, 2023 vs. 2022) For the first nine months of 2023, net sales grew 19% to $7,724 million with 19% organic growth, while operating income increased 5.5% to $453 million, and net income decreased 2.5% to $262 million due to 'Other income (expense), net' changes Sales Development (Nine Months Ended September 30) | Metric | 2023 (Millions $) | 2022 (Millions $) | Reported Change (%) | Organic Change (%) | | :----- | :---------------- | :---------------- | :------------------ | :----------------- | | Airbags, Steering Wheels and Other | 5,191 | 4,226 | 23% | 23% | | Seatbelt Products and Other | 2,533 | 2,281 | 11% | 11% | | Total Net Sales | 7,724 | 6,507 | 19% | 19% | Sales by Region (Nine Months Ended September 30) | Region | 2023 (Millions $) | 2022 (Millions $) | Reported Change (%) | Organic Change (%) | | :----- | :---------------- | :---------------- | :------------------ | :----------------- | | Asia | 2,937 | 2,544 | 15% | 21% | | Americas | 2,665 | 2,225 | 20% | 16% | | Europe | 2,122 | 1,738 | 22% | 20% | | Global LVP Growth | N/A | N/A | N/A | 9.1% | - Other income (expense), net was negative $115 million in the first nine months of 2023, compared to positive $91 million in the prior year, which included an $80 million gain from property sale and $20 million from a patent litigation settlement[104] Liquidity and Capital Resources Autoliv's trade working capital decreased to $1,303 million, operating cash flow increased to $535 million, free cash flow improved to $117 million, and the leverage ratio improved to 1.3x, maintaining $1.6 billion in liquidity Liquidity and Capital Metrics (Millions $) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----- | :----------- | :----------- | | Trade Working Capital | 1,303 | 1,314 | | Operating Cash Flow (9M) | 535 | 251 | | Free Cash Flow (9M) | 117 | (69) | | Net Debt | 1,375 | 1,288 | | Leverage Ratio | 1.3x | 1.6x | - As of September 30, 2023, Autoliv's cash balance was around $0.5 billion, and including committed, unused loan facilities, its liquidity position was around $1.6 billion[107] - Total equity decreased by $5 million compared to September 30, 2022, due to dividend payments and stock repurchases, partly offset by net income and positive currency translation effects[107] Non-U.S. GAAP Measures Autoliv utilizes non-U.S. GAAP measures like adjusted operating income, margin, and EPS to provide supplemental information and improve comparability, excluding specific items such as capacity alignments and litigation settlements Adjusted Operating Income & EPS (Three Months Ended Sep 30) | Metric | U.S. GAAP (Millions $) | Adjustments (Millions $) | Non-U.S. GAAP (Millions $) | | :----- | :--------------------- | :----------------------- | :------------------------- | | Operating Income | 232 | 11 | 243 | | Operating Margin (%) | 8.9% | 0.4% | 9.4% | | Diluted EPS | 1.57 | 0.09 | 1.66 | Adjusted Operating Income & EPS (Nine Months Ended Sep 30) | Metric | U.S. GAAP (Millions $) | Adjustments (Millions $) | Non-U.S. GAAP (Millions $) | | :----- | :--------------------- | :----------------------- | :------------------------- | | Operating Income | 453 | 133 | 586 | | Operating Margin (%) | 5.9% | 1.7% | 7.6% | | Diluted EPS | 3.04 | 1.44 | 4.48 | - Adjustments to operating income for the nine months ended September 30, 2023, primarily include $122 million for capacity alignments, $8 million for the Andrews litigation settlement, and $3 million for antitrust-related matters[115] Full Year 2023 Indications Autoliv projects full-year 2023 organic sales growth of around 17%, an adjusted operating margin of 8.5%-9%, a tax rate of around 20%, operating cash flow of around $900 million, and capital expenditures at around 6% of sales Full Year 2023 Indications | Financial Measure | Indication | | :---------------- | :--------- | | Organic sales growth | Around 17% | | Foreign currency impact on net sales | Around 1% positive | | Adjusted operating margin | Around 8.5%-9% | | Tax rate | Around 20% | | Operating cash flow | Around $900 million | | Capital expenditures, net % of sales | Around 6% | - The outlook assumes the UAW strike is not prolonged beyond what is included in the S&P Global October outlook[126] Other Recent Events Autoliv announced key product launches and strategic collaborations in Q3 2023, alongside headcount reduction initiatives and the repurchase of 1.23 million shares of common stock - Key product launches in the nine months ended September 30, 2023, included airbags, seatbelts, and steering wheels for models like BMW 5-series/i5, Honda Elevate, Volvo EX30, and Rolls Royce Spectre[129] - Autoliv China and Great Wall Motor announced an intention to collaborate on advanced technologies, including overhead passenger airbags and airbags for zero gravity seats[130] - Autoliv repurchased and retired 1.23 million shares of common stock at an average price of $97.23 per share in Q3 2023 under its 2022-2024 stock repurchase program[130] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes occurred in quantitative and qualitative market risk disclosures as of September 30, 2023, compared to the prior annual report - No material changes to market risk disclosures as of September 30, 2023[132] ITEM 4. CONTROLS AND PROCEDURES Autoliv's management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - The Company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of September 30, 2023[133] - There have been no material changes in the Company's internal control over financial reporting during the fiscal quarter[133] PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information on legal proceedings is incorporated by reference from Note 9, 'Contingent Liabilities,' in Part I, Item 1 of this Quarterly Report - Information on legal proceedings is incorporated by reference from Note 9, 'Contingent Liabilities,' in Part I, Item 1[135] ITEM 1A. RISK FACTORS No material changes to risk factors were reported as of September 30, 2023, compared to the Company's prior annual report - No material changes to risk factors as of September 30, 2023[136] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Autoliv repurchased 1,233,868 common shares at an average price of $97.23 under its 2022-2024 stock repurchase program during the three months ended September 30, 2023 Common Stock Repurchases (Three Months Ended September 30, 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share (USD) | | :----- | :------------------------------- | :--------------------------------- | | July 1-31, 2023 | 96,900 | 100.42 | | August 1-31, 2023 | 773,175 | 96.45 | | September 1-30, 2023 | 363,793 | 98.12 | | Total | 1,233,868 | 97.23 | | Maximum Number of Shares Yet May Be Purchased Under the Plans or Programs | 13,400,109 | N/A | - The stock repurchase program, approved on November 16, 2021, authorizes the Company to repurchase up to $1.5 billion or up to 17 million common shares between January 2022 and the end of 2024[138] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable to Autoliv, Inc. for the current reporting period ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to Autoliv, Inc. for the current reporting period ITEM 5. OTHER INFORMATION No director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the three months ended September 30, 2023 - No director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the three months ended September 30, 2023[140] ITEM 6. EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including XBRL documents, corporate governance, debt agreements, and CEO/CFO certifications - Exhibits include Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) and the Cover Page Interactive Data File[143][144][146][147] - Key exhibits include Autoliv's Restated Certificate of Incorporation, Third Restated By-Laws, various Indentures and Note Purchase and Guaranty Agreements, and certifications from the CEO and CFO[145]