alv-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2016

Commission File No.: 001-12933

 

AUTOLIV, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

51-0378542

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

Vasagatan 11, 7th floor, SE-111 20,

 

 

Box 70381,

 

 

SE-107 24 Stockholm, Sweden

 

N/A

(Address of principal executive offices)

 

(Zip Code)

+46 8 587 20 600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes:      No:  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes:      No:  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:      No:  

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of October 21, 2016, there were 88,224,177 shares of common stock of Autoliv, Inc., par value $1.00 per share, outstanding.  

 

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that are not historical facts but rather forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include those that address activities, events or developments that Autoliv, Inc. (“Autoliv,” the “Company” or “we”) or its management believes or anticipates may occur in the future. All forward-looking statements, including without limitation, statements regarding the expected consummation of the joint venture with Volvo Cars, management’s examination of historical operating trends and data as well as estimates of future sales, operating margin, cash flow, effective tax rate or other future operating performance or financial results are based upon our current expectations, various assumptions and/or data available from third parties. Our expectations and assumptions are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that such forward-looking statements will materialize or prove to be correct as forward-looking statements are inherently subject to known and unknown risks, uncertainties and other factors which may cause actual future results, performance or achievements to differ materially from the future results, performance or achievements expressed in or implied by such forward-looking statements.

In some cases, you can identify these statements by forward-looking words such as “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “may,” “likely,” “might,” “would,” “should,” “could,” or the negative of these terms and other comparable terminology, although not all forward-looking statements contain such words.

Because these forward-looking statements involve risks and uncertainties, the outcome could differ materially from those set out in the forward-looking statements for a variety of reasons, including without limitation: changes in light vehicle production; fluctuation in vehicle production schedules for which the Company is a supplier; changes in and the successful execution of our capacity alignment, restructuring and cost reduction initiatives and the market reaction thereto; changes in general industry and market conditions or regional growth or decline; loss of business from increased competition; higher raw material, fuel and energy costs; changes in consumer and customer preferences for end products; customer losses; changes in regulatory conditions; customer bankruptcies; consolidations or restructuring or divestiture of customer brands; unfavorable fluctuations in currencies or interest rates among the various jurisdictions in which we operate; component shortages; costs or difficulties related to the integration of any new or acquired businesses and technologies; continued uncertainty in pricing negotiations with customers; successful integration of acquisitions and operations of joint ventures; our ability to be awarded new business; product liability, warranty and recall claims and investigations and other litigation and customer reactions thereto (including the resolution of the ongoing Toyota Recall (defined below)); higher expenses for our pension and other postretirement benefits including higher funding requirements for our pension plans; work stoppages or other labor issues; possible adverse results of pending or future litigation or infringement claims; our ability to protect our intellectual property rights; negative impacts of antitrust investigations or other governmental investigations and associated litigation relating to the conduct of our business; tax assessments by governmental authorities and changes in our effective tax rate; dependence on key personnel; legislative or regulatory changes impacting or limiting our business; political conditions; dependence on and relationships with customers and suppliers; and other risks and uncertainties identified in Item 1A “Risk Factors” in our Form 10-K and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 19, 2016.

For any forward-looking statements contained in this or any other document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we assume no obligation to update publicly or revise any forward-looking statements in light of new information or future events, except as required by law.

 

 

2


 

 

INDEX

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1.     FINANCIAL STATEMENTS

 

 

 

 

 

1        Basis of Presentation

 

8

2        Recently Issued Accounting Pronouncements

 

8

3        Business Combinations

 

10

4        Fair Value Measurement

 

11

5        Income Taxes

 

14

6        Inventories

 

14

7        Goodwill

 

15

8        Restructuring

 

15

9        Product-Related Liabilities

 

16

10      Retirement Plan

 

16

11      Controlling and Non-Controlling Interest

 

17

12      Contingent Liabilities

 

17

13      Stock Incentive Plan

 

20

14      Earnings per share

 

21

15      Segment Information

 

21

16      Subsequent Events

 

22

 

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

23

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

39

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

40

 

 

 

PART II - OTHER INFORMATION

 

40

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

40

 

 

 

ITEM 1A. RISK FACTORS

 

40

 

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

43

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

43

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

43

 

 

 

ITEM 5. OTHER INFORMATION

 

43

 

 

 

ITEM 6. EXHIBITS

 

44

 

3


 

CONSOLIDATED STATEMENTS OF NET INCOME (UNAUDITED)

(Dollars in millions, except per share data)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

2016

 

 

September 30,

2015

 

 

September 30,

2016

 

 

September 30,

2015

 

Net sales

 

$

2,461.3

 

 

$

2,184.5

 

 

$

7,469.8

 

 

$

6,650.1

 

Cost of sales

 

 

(1,966.0

)

 

 

(1,744.4

)

 

 

(5,947.0

)

 

 

(5,326.7

)

Gross profit

 

 

495.3

 

 

 

440.1

 

 

 

1,522.8

 

 

 

1,323.4

 

Selling, general and administrative expenses

 

 

(116.5

)

 

 

(101.3

)

 

 

(349.9

)

 

 

(303.1

)

Research, development and engineering expenses, net

 

 

(165.5

)

 

 

(130.4

)

 

 

(500.7

)

 

 

(397.2

)

Amortization of intangibles

 

 

(12.2

)

 

 

(4.2

)

 

 

(32.0

)

 

 

(11.2

)

Other expense, net

 

 

(10.0

)

 

 

(46.4

)

 

 

(31.2

)

 

 

(165.4

)

Operating income

 

 

191.1

 

 

 

157.8

 

 

 

609.0

 

 

 

446.5

 

Income from equity method investments

 

 

0.5

 

 

 

0.6

 

 

 

1.2

 

 

 

3.5

 

Interest income

 

 

1.0

 

 

 

0.8

 

 

 

3.1

 

 

 

1.8

 

Interest expense

 

 

(15.6

)

 

 

(15.6

)

 

 

(46.7

)

 

 

(49.6

)

Other non-operating items, net

 

 

8.1

 

 

 

8.2

 

 

 

9.2

 

 

 

8.6

 

Income before income taxes

 

 

185.1

 

 

 

151.8

 

 

 

575.8

 

 

 

410.8

 

Income tax expense

 

 

(49.6

)

 

 

(52.7

)

 

 

(158.4

)

 

 

(139.2

)

Net income

 

$

135.5

 

 

$

99.1

 

 

$

417.4

 

 

$

271.6

 

Less: Net (loss) income attributable to non-controlling interest

 

 

(2.3

)

 

 

0.2

 

 

 

(2.0

)

 

 

0.3

 

Net income attributable to controlling interest

 

$

137.8

 

 

$

98.9

 

 

$

419.4

 

 

$

271.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share – basic

 

$

1.56

 

 

$

1.12

 

 

$

4.76

 

 

$

3.08

 

Net earnings per share – diluted

 

$

1.56

 

 

$

1.12

 

 

$

4.74

 

 

$

3.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, net of

   treasury shares (in millions)

 

 

88.2

 

 

 

88.1

 

 

 

88.2

 

 

 

88.2

 

Weighted average number of shares outstanding, assuming

   dilution and net of treasury shares (in millions)

 

 

88.5

 

 

 

88.3

 

 

 

88.4

 

 

 

88.4

 

Number of shares outstanding, excluding dilution and net of

   treasury shares (in millions)

 

 

88.2

 

 

 

88.1

 

 

 

88.2

 

 

 

88.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividend per share – declared

 

$

0.58

 

 

$

0.56

 

 

$

1.74

 

 

$

1.68

 

Cash dividend per share – paid

 

$

0.58

 

 

$

0.56

 

 

$

1.72

 

 

$

1.66

 

 

See “Notes to unaudited condensed consolidated financial statements.”

 

 

4


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in millions)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

2016

 

 

September 30,

2015

 

 

September 30,

2016

 

 

September 30,

2015

 

Net income

 

$

135.5

 

 

$

99.1

 

 

$

417.4

 

 

$

271.6

 

Other comprehensive income (loss) before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in cumulative translation adjustments

 

 

(2.1

)

 

 

(75.6

)

 

 

36.5

 

 

 

(166.2

)

Net change in cash flow hedges

 

 

1.2

 

 

 

1.1

 

 

 

3.9

 

 

 

0.6

 

Net change in unrealized components of defined benefit plans

 

 

1.2

 

 

 

2.5

 

 

 

3.2

 

 

 

6.9

 

Other comprehensive (loss) income, before tax

 

 

0.3

 

 

 

(72.0

)

 

 

43.6

 

 

 

(158.7

)

Tax effect allocated to other comprehensive income (loss)

 

 

(0.4

)

 

 

(0.8

)

 

 

(1.0

)

 

 

(2.2

)

Other comprehensive (loss) income, net of tax

 

 

(0.1

)

 

 

(72.8

)

 

 

42.6

 

 

 

(160.9

)

Comprehensive income

 

$

135.4

 

 

$

26.3

 

 

$

460.0

 

 

$

110.7

 

Less: Comprehensive (loss) income attributable to non-controlling

   interest

 

 

1.0

 

 

 

(0.1

)

 

 

11.0

 

 

 

0.0

 

Comprehensive income attributable to controlling interest

 

$

134.4

 

 

$

26.4

 

 

$

449.0

 

 

$

110.7

 

 

See “Notes to unaudited condensed consolidated financial statements.”

 

 

5


 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

 

 

 

As of

 

 

 

September 30,

2016

(unaudited)

 

 

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,182.6

 

 

$

1,333.5

 

Receivables, net

 

 

1,991.4

 

 

 

1,787.6

 

Inventories, net

 

 

799.2

 

 

 

711.4

 

Other current assets

 

 

172.1

 

 

 

205.8

 

Total current assets

 

 

4,145.3

 

 

 

4,038.3

 

Property, plant and equipment, net

 

 

1,675.8

 

 

 

1,437.1

 

Investments and other non-current assets

 

 

345.1

 

 

 

255.8

 

Goodwill

 

 

1,891.5

 

 

 

1,666.3

 

Intangible assets, net

 

 

243.5

 

 

 

128.0

 

Total assets

 

$

8,301.2

 

 

$

7,525.5

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Short-term debt

 

$

73.0

 

 

$

39.6

 

Accounts payable

 

 

1,191.5

 

 

 

1,169.6

 

Accrued expenses

 

 

963.3

 

 

 

755.6

 

Other current liabilities

 

 

198.2

 

 

 

261.6

 

Total current liabilities

 

 

2,426.0

 

 

 

2,226.4

 

Long-term debt

 

 

1,471.8

 

 

 

1,499.4

 

Pension liability

 

 

216.2

 

 

 

197.0

 

Other non-current liabilities

 

 

150.2

 

 

 

134.6

 

Total non-current liabilities

 

 

1,838.2

 

 

 

1,831.0

 

Common stock

 

 

102.8

 

 

 

102.8

 

Additional paid-in capital

 

 

1,329.3

 

 

 

1,329.3

 

Retained earnings

 

 

3,765.3

 

 

 

3,499.4

 

Accumulated other comprehensive loss

 

 

(378.8

)

 

 

(408.5

)

Treasury stock

 

 

(1,055.9

)

 

 

(1,067.4

)

Total controlling interest

 

 

3,762.7

 

 

 

3,455.6

 

Non-controlling interest

 

 

274.3

 

 

 

12.5

 

Total equity

 

 

4,037.0

 

 

 

3,468.1

 

Total liabilities and equity

 

$

8,301.2

 

 

$

7,525.5

 

 

See “Notes to unaudited condensed consolidated financial statements.”

 

 

6


 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in millions)

 

 

 

Nine months ended

 

 

 

September 30,

2016

 

 

September 30,

2015

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

417.4

 

 

$

271.6

 

Depreciation and amortization

 

 

279.4

 

 

 

229.6

 

Other, net

 

 

17.4

 

 

 

(12.9

)

Changes in operating assets and liabilities

 

 

(140.0

)

 

 

(59.1

)

Net cash provided by operating activities

 

 

574.2

 

 

 

429.2

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(343.6

)

 

 

(347.7

)

Proceeds from sale of property, plant and equipment

 

 

4.1

 

 

 

14.0

 

Acquisitions and divestitures of businesses and other, net

 

 

(227.4

)

 

 

(138.2

)

Net cash used in investing activities

 

 

(566.9

)

 

 

(471.9

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net decrease in short-term debt

 

 

(4.7

)

 

 

(18.6

)

Repayments and other changes in long-term debt

 

 

 

 

 

(12.2

)

Dividends paid to non-controlling interest

 

 

(1.7

)

 

 

 

Dividends paid

 

 

(151.7

)

 

 

(146.4

)

Repurchased shares

 

 

 

 

 

(104.4

)

Common stock options exercised

 

 

5.1

 

 

 

17.3

 

Other, net

 

 

0.8

 

 

 

1.9

 

Net cash used in financing activities

 

 

(152.2

)

 

 

(262.4

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(6.0

)

 

 

(42.8

)

Decrease in cash and cash equivalents

 

 

(150.9

)

 

 

(347.9

)

Cash and cash equivalents at beginning of period

 

 

1,333.5

 

 

 

1,529.0

 

Cash and cash equivalents at end of period

 

$

1,182.6

 

 

$

1,181.1

 

 

See “Notes to unaudited condensed consolidated financial statements.”

 

 

7


 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unless otherwise noted, all amounts are presented in millions of dollars, except for per share amounts)

September 30, 2016

 

1 Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the prior year audited financial statements and all adjustments considered necessary for a fair presentation have been included in the financial statements. All such adjustments are of a normal recurring nature. The result for the interim period is not necessarily indicative of the results to be expected for any future period or for the fiscal year ending December 31, 2016.

The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.

Statements in this report that are not of historical fact are forward-looking statements that involve risks and uncertainties that could affect the actual results of the Company. A description of the important factors that could cause Autoliv's actual results to differ materially from the forward-looking statements contained in this report may be found in this report and Autoliv's other reports filed with the Securities and Exchange Commission (the “SEC”). For further information, refer to the consolidated financial statements, footnotes and definitions thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 19, 2016.

 

 

2 Recently Issued Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight cash flow classification issues and thereby reducing the current and potential future diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 are effective for public companies for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company plans to early adopt this standard as of January 1, 2017. The adoption of this standard is not expected to have a material impact for any periods presented.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for public companies during the fiscal year 2020, and earlier adoption is permitted during the fiscal year 2019. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company plans to adopt this standard prospectively as of January 1, 2017. The adoption of this standard is not expected to have a material impact on the consolidated financial statements.

8


 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exceptions. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted for all entities. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements, which will require right of use assets and lease liabilities be recorded in the consolidated balance sheet for operating leases.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740), which simplifies the presentation of deferred income taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company early adopted the standard prospectively in its interim reporting for March 31, 2016. The impact of the change on the consolidated condensed balance sheet was approximately $70 million reclassified from current deferred tax assets to non-current deferred tax assets and approximately $20 million reclassified from current deferred tax liabilities to non-current deferred tax liabilities.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard was originally to be effective for public entities for annual and interim periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), that defers the effective date of ASU 2014-09 for all entities by one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, which is an amendment that clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. The effective date and transition requirements for the amendments in this Update are the same as in Topic 606. The Company is currently in the process of evaluating which adoption method to use and assessing the potential impact the new standard and the related Updates will have on its operations and consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, this Update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company plans to adopt this standard as of January 1, 2017. The adoption of this standard is not expected to have a material impact for any periods presented.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30), simplifying the Presentation of Debt Issuance Costs, that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (that is, debt issuance cost asset and the debt liability). The Company adopted the standard in its interim reporting for March 31, 2016. The effect of the change on the balance sheet as of March 31, 2016 was $1.7 million reclassified from debt issuance cost asset to the debt liability. Prior period information was not retrospectively adjusted as the effects of the adoption of ASU 2015-03 were not material to those periods.

 

9


 

 

3 Business Combinations

Autoliv-Nissin Brake Systems

On March 31, 2016, the Company acquired a 51% interest in the entities that formed Autoliv-Nissin Brake Systems (ANBS) for approximately $263 million in cash. ANBS designs, manufactures and sells products in the brake control and actuation systems business. Nissin Kogyo retained a 49% interest in the entities that formed ANBS. The Company has management and operational control of ANBS and has consolidated the results of operation and balance sheet from ANBS from the date of the acquisition forward. The transaction was accounted for as a business combination.

The acquisition combines Nissin Kogyo's world leading expertise and technology in brake control and actuation systems with Autoliv's global reach and customer base to create a global competitive offering in the growing global brake control systems market. ANBS will also further strengthen the Company’s role as a leading system supplier of products and systems for autonomous driving vehicles. ANBS is included in the Electronics segment. From the date of the acquisition through September 30, 2016, the ANBS business reported net sales of $278 million and a net loss attributable to controlling interest of $3 million, net of a loss attributable to the non-controlling interest of $3 million. The operating loss from the date of the acquisition through September 30, 2016 included $0.9 million of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of acquired inventory. The total purchase accounting inventory fair value step-up adjustments included in the balance sheet at the acquisition date were $0.9 million.

Total ANBS acquisition related costs were approximately $3.5 million for the year ended December 31, 2015 and approximately $2.0 million for the nine months ended September 30, 2016 and were reflected in Selling, general and administrative expenses in the Consolidated Statements of Net Income.

The pro forma effects of this acquisition would not materially impact the Company's reported results for any period presented.

The preliminary acquisition date fair value of the consideration transferred for the Company’s 51% interest in the entities that formed ANBS was $262.8 million in a cash transaction.

The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed as of March 31, 2016:

Amounts preliminary recognized as of acquisition date March 31, 2016 (in millions)

 

Assets:

 

 

 

 

Cash and cash equivalents

 

$

37.7

 

Receivables

 

 

1.5

 

Inventories

 

 

33.0

 

Other current assets

 

 

8.0

 

Property, plant and equipment

 

 

134.5

 

Other non-current assets

 

 

0.7

 

Intangibles

 

 

129.0

 

Goodwill

 

 

217.8

 

Total assets

 

$

562.2

 

 

 

 

 

 

Liabilities:

 

 

 

 

Accounts payable

 

$

6.0

 

Other current liabilities

 

 

19.1

 

Pension liabilities

 

 

9.1

 

Other non-current liabilities

 

 

12.7

 

Total liabilities

 

$

46.9

 

Net assets acquired

 

$

515.3

 

Less: Non-controlling interest

 

$

(252.5

)

Controlling interest

 

$

262.8

 

 

Acquired Intangibles primarily consist of the fair value of customer contracts of $64.9 million and certain technology of $64.1 million. The customer contracts will be amortized straight-line over 7 years and the technology will be amortized straight-line over 10 years.

10


 

The recognized goodwill of $217.8 million reflects expected synergies from combining Autoliv's global reach and customer base with Nissin Kogyo's world leading expertise (including workforce) and technology in brake control and actuation systems. A significant portion of the goodwill is deductible for tax purposes.

The fair values recognized for the acquired assets, assumed liabilities and goodwill are preliminary pending finalization of valuation process.

 

 

4 Fair Value Measurement

Assets and liabilities measured at fair value on a recurring basis

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, other current liabilities and short-term debt approximate their fair value because of the short term maturity of these instruments.

The fair value of the contingent consideration relating to the M/A-COM acquisition in August 2015 is re-measured on a recurring basis (for further information, see the Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 19, 2016). As of September 30, 2016, there was no material change in the fair value of this contingent consideration.

The Company uses derivative financial instruments, “derivatives”, as part of its debt management to mitigate the market risk that occurs from its exposure to changes in interest and foreign exchange rates. The Company does not enter into derivatives for trading or other speculative purposes. The Company’s use of derivatives is in accordance with the strategies contained in the Company’s overall financial risk policy. The derivatives outstanding at September 30, 2016 were foreign exchange swaps and forward contracts. All swaps principally match the terms and maturity of the underlying debt and no swaps have a maturity beyond six months. The foreign exchange forward contracts are designated as cash flow hedges of certain external purchases. All derivatives are recognized in the consolidated financial statements at fair value. Certain derivatives are from time to time designated either as fair value hedges or cash flow hedges in line with the hedge accounting criteria. For certain other derivatives, hedge accounting is not applied either because non-hedge accounting treatment creates the same accounting result or the hedge does not meet the hedge accounting requirements, although entered into applying the same rationale concerning mitigating market risk that occurs from changes in interest and foreign exchange rates.

When a hedge is classified as a fair value hedge, the change in the fair value of the hedge is recognized in the Consolidated Statements of Net Income along with the off-setting change in the fair value of the hedged item. When a hedge is classified as a cash flow hedge, any change in the fair value of the hedge is initially recorded in equity as a component of Other Comprehensive Income (OCI) and reclassified into the Consolidated Statements of Net Income when the hedge transaction affects net earnings. The Company uses the forward rate with respect to the measurement of changes in fair value of cash flow hedges when revaluing foreign exchange forward contracts. There were no material reclassifications from OCI to the Consolidated Statements of Net Income during the first nine months of 2016. Any ineffectiveness in the first nine months of 2016 was not material.

The Company’s derivatives are all classified as Level 2 of the fair value hierarchy and there have been no transfers between the levels during this or comparable periods.

11


 

The tables below present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015. The carrying value is the same as the fair value as these instruments are recognized in the consolidated financial statements at fair value. Although the Company is party to close-out netting agreements (i.e. ISDA agreements) with all derivative counterparties, the fair values in the tables below and in the Condensed Consolidated Balance Sheet at September 30, 2016 and in the Consolidated Balance Sheet at December 31, 2015, have been presented on a gross basis. The amounts subject to netting agreements that the Company chose not to offset are presented below. According to the close-out netting agreements, transaction amounts payable to a counterparty on the same date and in the same currency can be netted.

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

Fair Value

Measurements

 

 

 

Description

 

Nominal

volume

 

 

Derivative

asset

 

 

Derivative

liability

 

 

Balance sheet location

Derivatives designated as hedging

   instruments 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts, less than

   1 year (cash flow hedge)

 

$

65.3

 

 

$

4.0

 

 

$

0.0

 

 

Other current assets/ Other

current liabilities

Foreign exchange forward contracts, less than

   2 years (cash flow hedge)

 

 

11.7

 

 

 

0.9

 

 

 

0.0

 

 

Other non-current assets/ Other

non-current liabilities

Total derivatives designated as hedging

   instruments

 

$

77.0

 

 

$

4.9

 

 

$

0.0

 

 

 

Derivatives not designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange swaps, less than

   6 months

 

$

367.2

 

2)

$

0.4

 

3)

$

0.7

 

4)

Other current assets/ Other

current liabilities

Total derivatives not designated as hedging

   instruments

 

$

367.2

 

 

$

0.4

 

 

$

0.7

 

 

 

 

1)

There is no netting since there are no offsetting contracts.

2)

Net nominal amount after deducting for offsetting swaps under ISDA agreements is $367.2 million.

3)

Net amount after deducting for offsetting swaps under ISDA agreements is $0.4 million.

4)

Net amount after deducting for offsetting swaps under ISDA agreements is $0.7 million.

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Fair Value

Measurements

 

 

 

Description

 

Nominal

volume

 

 

Derivative

asset

 

 

Derivative

liability

 

 

Balance sheet location

Derivatives designated as hedging

   instruments 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts, less than

   1 year (cash flow hedge)

 

$

58.0

 

 

$

0.2

 

 

$

0.2

 

 

Other current assets/ Other

current liabilities

Foreign exchange forward contracts, less than

   2 years (cash flow hedge)

 

 

11.3

 

 

 

0.0

 

 

 

0.1

 

 

Other non-current assets/ Other

non-current liabilities

Total derivatives designated as hedging

   instruments

 

$

69.3

 

 

$

0.2

 

 

$

0.3

 

 

 

Derivatives not designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange swaps, less than

   6 months

 

$

482.4

 

2)

$

2.5

 

3)

$

5.1

 

4)

Other current assets/ Other

current liabilities

Total derivatives not designated as hedging

   instruments

 

$

482.4

 

 

$

2.5

 

 

$

5.1

 

 

 

 

1)

There is no netting since there are no offsetting contracts.

2)

Net nominal amount after deducting for offsetting swaps under ISDA agreements is $435.8 million.

3)

Net amount after deducting for offsetting swaps under ISDA agreements is $2.4 million.

4)

Net amount after deducting for offsetting swaps under ISDA agreements is $4.9 million.

12


 

Derivatives designated as hedging instruments

The derivatives designated as hedging instruments outstanding at September 30, 2016 were foreign exchange forward contracts, classified as cash flow hedges. For the three and nine months ended September 30, 2016, the cumulative gains and losses recognized in OCI on the cash flow hedges were a gain of $1.3 million and a gain of $4.0 million (net of taxes), respectively. The derivatives designated as hedging instruments outstanding at September 30, 2015 were foreign exchange forward contracts, classified as cash flow hedges. For the three and nine months ended September 30, 2015, the cumulative gains and losses recognized in OCI on derivative effective portion, net were a gain of $1.4 million and a gain of $1.0 million, respectively.

For the three and nine months ended September 30, 2016, the gains and losses reclassified from OCI and recognized in the Consolidated Statements of Net Income were a gain of $0.1 million and a gain of $0.3 million (net of taxes), respectively. Gains and losses recognized and remaining in OCI as of September 30, 2016 is a gain of $3.8 million (net of taxes). Any ineffectiveness in the first nine months of 2016 was not material. For the three and nine months ended September 30, 2015, the gains and losses reclassified from OCI and recognized in the Consolidated Statements of Net Income, net were a gain of $0.2 million and a gain of $0.2 million, respectively. Gains and losses recognized and remaining in OCI as of September 30, 2015 was a gain of $0.8 million (net of taxes). There was no material ineffectiveness recorded during the first nine months of 2015.

Derivatives not designated as hedging instruments

Derivatives not designated as hedging instruments relate to economic hedges and are marked to market with all amounts recognized in the Consolidated Statements of Net Income. The derivatives not designated as hedging instruments outstanding at September 30, 2016 were foreign exchange swaps. During the first quarter of 2016, the Company entered into foreign exchange option contracts to hedge foreign exchange risk related to the ANBS acquisition. These foreign exchange option contracts matured during the first quarter of 2016 and are no longer outstanding.

For the three and nine months ended September 30, 2016, the gains and losses recognized in other non-operating items, net were a loss of $1.3 million and a loss of $0.2 million, respectively, for derivative instruments not designated as hedging instruments. The derivatives not designated as hedging instruments outstanding at September 30, 2015 were foreign exchange swaps. For the three and nine months ended September 30, 2015, the gains and losses recognized in other financial items, net were a gain of $0.6 million and a loss of $1.0 million, respectively, for derivative instruments not designated as hedging instruments.  For the three and nine months ended September 30, 2016 and September 30, 2015, the gains and losses recognized as interest expense were immaterial.

Fair Value of Debt

The fair value of long-term debt is determined either from quoted market prices as provided by participants in the secondary market or for long-term debt without quoted market prices, from estimates using a discounted cash flow method based on the Company’s current borrowing rates for similar types of financing. The fair value and carrying value of debt is summarized in the table below. The Company has determined that each of these fair value measurements of debt reside within Level 2 of the fair value hierarchy.

 

 

 

September 30,

 

 

September 30,

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2016

 

 

2015

 

 

2015

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

Long-term debt

 

value1)

 

 

value

 

 

value1)

 

 

value

 

U.S. Private placement

 

$

1,417.9

 

 

$

1,541.7

 

 

$

1,421.5

 

 

$

1,472.6

 

Medium-term notes

 

 

40.6

 

 

 

41.8

 

 

 

77.8

 

 

 

79.6

 

Other long-term debt

 

 

13.3

 

 

 

13.3

 

 

 

0.1

 

 

 

0.1

 

Total

 

$

1,471.8

 

 

$

1,596.8

 

 

$

1,499.4

 

 

$

1,552.3

 

Short-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overdrafts and other short-term debt

 

$

38.0

 

 

$

38.0

 

 

$

39.4

 

 

$

39.4

 

Short-term portion of long-term debt

 

 

35.0

 

 

 

35.0

 

 

 

0.2

 

 

 

0.2

 

Total

 

$

73.0

 

 

$

73.0

 

 

$

39.6

 

 

$

39.6

 

 

1)

Debt as reported in balance sheet.

Assets and liabilities measured at fair value on a non-recurring basis

In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also has assets and liabilities in its balance sheet that are measured at fair value on a non-recurring basis. Assets and liabilities that are measured at fair value on a non-recurring basis include long-lived assets, including equity method investments.

13


 

The Company has determined that the fair value measurements included in each of these assets and liabilities rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlements of liabilities, as observable inputs are not available. The Company has determined that each of these fair value measurements reside within Level 3 of the fair value hierarchy. To determine the fair value of long-lived assets, the Company utilizes the projected cash flows expected to be generated by the long-lived assets, then discounts the future cash flows over the expected life of the long-lived assets.

For the three and nine month periods ended September 30, 2016, the Company did not record any material impairment charges on its long-lived assets.

 

 

5 Income Taxes

The effective tax rate in the third quarter of 2016 was 26.8% compared to 34.7% in the same quarter of 2015. Discrete tax items, net in the third quarter of 2016 had a favorable impact of 1.1%. In the third quarter of 2015, discrete tax items, net had a favorable impact of 0.4%. 

The effective tax rate in the first nine months of 2016 was 27.5% compared to 33.9% for the first nine months of 2015. In the first nine months of 2016, the net impact of discrete tax items caused a 0.2% decrease to the effective tax rate.  The net impact of discrete tax items in the first nine months of 2015 caused a 0.6% decrease to the effective tax rate.

For the three and nine month periods ended September 30, 2016, the tax rate has been favorably impacted by the mix of earnings in various jurisdictions compared to the same period in the prior year.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. At any given time, the Company is undergoing tax audits in several tax jurisdictions covering multiple years. The Company is no longer subject to income tax examination by the U.S. federal income tax authorities for years prior to 2012.  With few exceptions, the Company is no longer subject to income tax examination by U.S. state or local tax authorities or by non-U.S. tax authorities for years prior to 2009.

As of September 30, 2016, the Company is not aware of any proposed income tax adjustments resulting from tax examinations that would have a material impact on the Company’s condensed consolidated financial statements. The conclusion of such audits could result in additional increases or decreases to unrecognized tax benefits in some future period or periods.

During the third quarter of 2016, the Company recorded a net increase of $2.0 million to income tax reserves for unrecognized tax benefits based on tax positions related to the current year, including accruing additional interest related to unrecognized tax benefits of prior years. During the third quarter of 2016, the Company recorded no adjustment to income tax reserves for unrecognized tax benefits of prior years due to the lapse of the applicable statute of limitations. Of the total unrecognized tax benefits of $34.8 million recorded at September 30, 2016, $11.2 million is classified as current tax payable and $23.6 million is classified as non-current tax payable on the Condensed Consolidated Balance Sheet.

 

 

6 Inventories

Inventories are stated at the lower of cost (principally FIFO) or market. The components of inventories were as follows:

 

 

 

As of

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Raw materials

 

$

400.9

 

 

$

339.9

 

Work in progress

 

 

263.7

 

 

 

243.4

 

Finished products

 

 

238.6

 

 

 

217.9

 

Inventories

 

$

903.2

 

 

$

801.2

 

Inventory valuation reserve

 

 

(104.0

)

 

 

(89.8

)

Total inventories, net of reserve

 

$

799.2

 

 

$

711.4

 

 

 

14


 

7 Goodwill

 

 

 

Passive Safety

Segment

 

 

Electronics Segment

 

 

Total

 

Carrying amount December 31, 2015

 

$

1,388.3

 

 

$

278.0

 

 

$

1,666.3

 

Acquisition

 

 

 

 

 

217.8

 

 

 

217.8

 

Effect of currency translation

 

 

2.5

 

 

 

4.9

 

 

 

7.4

 

Carrying amount September 30, 2016

 

$

1,390.8

 

 

$

500.7

 

 

$

1,891.5

 

 

The goodwill recognized in the first quarter of 2016 was related to the ANBS acquisition (see Note 3).

 

 

8 Restructuring

Restructuring provisions are made on a case-by-case basis and primarily include severance costs incurred in connection with headcount reductions and plant consolidations. The Company expects to finance restructuring programs over the next several years through cash generated from its ongoing operations or through cash available under existing credit facilities. The Company does not expect that the execution of these activities will have a material adverse impact on its liquidity position. The majority of restructuring activities relate to the Passive Safety segment. The changes in the employee-related reserves have been charged against Other income (expense), net in the Consolidated Statements of Net Income.

Three months ended September 30, 2016

The employee-related restructuring provisions and cash payments for the three months ended September 30, 2016 mainly related to headcount reductions in high-cost countries in Europe and Asia. The table below summarizes the change in the balance sheet position of the restructuring reserves from June 30, 2016 to September 30, 2016.

 

 

 

June 30,

2016

 

 

Provision/

Charge

 

 

Provision/

Reversal

 

 

Cash

payments

 

 

Translation

difference

 

 

September 30,

2016

 

Restructuring employee-related

 

$

66.5

 

 

$

3.4

 

 

$

(0.1

)

 

$

(11.8

)

 

$

0.4

 

 

$

58.4

 

Other

 

0.1

 

 

-

 

 

-

 

 

-

 

 

 

(0.1

)

 

-

 

Total reserve

 

$

66.6

 

 

$

3.4

 

 

$

(0.1

)

 

$

(11.8

)

 

$

0.3

 

 

$

58.4

 

 

Nine months ended September 30, 2016

The employee-related restructuring provisions and cash payments for the nine months ended September 30, 2016 mainly related to headcount reductions in high-cost countries in Europe and Asia. The table below summarizes the change in the balance sheet position of the restructuring reserves from December 31, 2015 to September 30, 2016.

 

 

 

December 31,

2015

 

 

Provision/

Charge

 

 

Provision/

Reversal

 

 

Cash

payments

 

 

Translation

difference

 

 

September 30,

2016

 

Restructuring employee-related

 

$

87.7

 

 

$

20.6

 

 

$

(0.8

)

 

$

(50.9

)

 

$

1.8

 

 

$

58.4

 

Other

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

(0.2

)

 

-

 

Total reserve

 

$

87.9

 

 

$

20.6

 

 

$

(0.8

)

 

$

(50.9

)

 

$

1.6

 

 

$

58.4

 

 

Three months ended September 30, 2015

The employee-related restructuring provisions and cash payments for the three months ended September 30, 2015 mainly related to headcount reductions in high-cost countries in Europe. The table below summarizes the change in the balance sheet position of the restructuring reserves from June 30, 2015 to September 30, 2015.

 

 

 

June 30,

2015

 

 

Provision/

Charge

 

 

Provision/

Reversal

 

 

Cash

payments

 

 

Translation

difference

 

 

September 30,

2015

 

Restructuring employee-related

 

$

81.9

 

 

$

41.1

 

 

$

(0.1

)

 

$

(12.5

)

 

$

(0.5

)

 

$

109.9

 

Total reserve

 

$

81.9

 

 

$

41.1

 

 

$

(0.1

)

 

$

(12.5

)

 

$

(0.5

)

 

$

109.9

 

 

15


 

Nine months ended September 30, 2015

The employee-related restructuring provisions and cash payments for the nine months ended September 30, 2015 mainly related to headcount reductions in high-cost countries in Europe. The table below summarizes the change in the balance sheet position of the restructuring reserves from December 31, 2014 to September 30, 2015.

 

 

 

December 31,

2014

 

 

Provision/

Charge

 

 

Provision/

Reversal

 

 

Cash

payments

 

 

Translation

difference

 

 

September 30,

2015

 

Restructuring employee-related

 

$

79.6

 

 

$

84.0

 

 

$

(1.9

)

 

$

(45.1

)

 

$

(6.7

)

 

$

109.9

 

Other

 

 

0.2

 

 

 

0.3

 

 

 

-

 

 

 

(0.5

)

 

-

 

 

-

 

Total reserve

 

$

79.8

 

 

$

84.3

 

 

$

(1.9

)

 

$

(45.6

)

 

$

(6.7

)

 

$

109.9

 

 

 

9 Product-Related Liabilities

The Company has reserves for product risks. Such reserves are related to product performance issues including recall, product liability and warranty issues. For further explanation, see Note 12 Contingent Liabilities below.

The table below summarizes the change in the balance sheet position of the product-related liabilities. The provisions and cash paid for the three months ended September 30, 2016 and September 30, 2015 mainly related to warranty related issues. The provisions and cash paid for the nine months ended September 30, 2016 mainly related to warranty related issues, while provisions and cash paid for the nine months ended September 30, 2015 mainly related to recall related issues.

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

2016