alv-10q_20190331.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 March 31, 2019

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.)

 

 

 

Klarabergsviadukten 70, Section B7

 

 

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 every Interactive Data File required to be submitted 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 such files).    Yes:      No:  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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 April 17, 2019, there were 87,224,738 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 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 general industry and market conditions or regional growth or decline; changes in and the successful execution of our capacity alignment: restructuring and cost reduction initiatives and the market reaction thereto; 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; market acceptance of our new products; 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; successful implementation of strategic partnerships and collaborations; 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 Toyota Recall); higher expenses for our pension and other postretirement benefits, including higher funding needs 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” of this Quarterly Report on Form 10-Q, Item 1A “Risk Factors” 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, 2018 filed with the SEC on February 21, 2019.

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.       

New Accounting Standards

 

9

3.       

Discontinued Operations

 

10

4.       

Leases

 

11

5.       

Revenue

 

12

6.       

Fair Value Measurements

 

13

7.       

Income Taxes

 

14

8.        

Inventories

 

15

9.       

Restructuring

 

15

10.     

Product-Related Liabilities

 

15

11.     

Retirement Plans

 

16

12.     

Equity

 

17

13.     

Contingent Liabilities

 

17

14.     

Stock Incentive Plan

 

19

15.     

Earnings Per Share

 

19

16.     

Related Party Transactions

 

20

17.     

Subsequent Events

 

20

 

 

 

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

 

21

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

29

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

29

 

 

 

PART II - OTHER INFORMATION

 

30

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

30

 

 

 

ITEM 1A. RISK FACTORS

 

30

 

 

 

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

 

30

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

30

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

30

 

 

 

ITEM 5. OTHER INFORMATION

 

30

 

 

 

ITEM 6. EXHIBITS

 

31

 

3


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in millions, except per share data)

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Net sales

 

$

2,174.0

 

 

$

2,240.9

 

Cost of sales

 

 

(1,795.2

)

 

 

(1,780.6

)

Gross profit

 

 

378.8

 

 

 

460.3

 

Selling, general and administrative expenses

 

 

(101.4

)

 

 

(101.1

)

Research, development and engineering expenses, net

 

 

(107.4

)

 

 

(108.5

)

Amortization of intangibles

 

 

(2.8

)

 

 

(2.8

)

Other income (expense), net

 

 

6.0

 

 

 

(4.5

)

Operating income

 

 

173.2

 

 

 

243.4

 

Income from equity method investments

 

 

1.0

 

 

 

1.3

 

Interest income

 

 

1.0

 

 

 

1.7

 

Interest expense

 

 

(18.0

)

 

 

(13.6

)

Other non-operating items, net

 

 

(3.6

)

 

 

(3.9

)

Income from continuing operations before income taxes

 

 

153.6

 

 

 

228.9

 

Income tax expense

 

 

(42.1

)

 

 

(69.8

)

Net income from continuing operations

 

 

111.5

 

 

 

159.1

 

Loss from discontinued operations, net of income taxes (Note 3)

 

 

 

 

 

(36.7

)

Net income

 

 

111.5

 

 

 

122.4

 

Less: Net income from continuing operations attributable to non-controlling interest

 

 

0.1

 

 

 

0.4

 

Less: Net loss from discontinued operations attributable to non-controlling interest

 

 

 

 

 

(4.7

)

Net income attributable to controlling interest

 

$

111.4

 

 

$

126.7

 

 

 

 

 

 

 

 

 

 

Amounts attributable to controlling interest:

 

 

 

 

 

 

 

 

Net Income from continuing operations

 

$

111.4

 

 

$

158.7

 

Net Loss from discontinued operations (Note 3)

 

 

 

 

 

(32.0

)

Net income attributable to controlling interest

 

$

111.4

 

 

$

126.7

 

 

 

 

 

 

 

 

 

 

Earnings per share continuing operations – basic 1)

 

$

1.28

 

 

$

1.82

 

Loss per share discontinued operations – basic 1)

 

 

 

 

 

(0.36

)

Basic earnings per share

 

$

1.28

 

 

$

1.46

 

 

 

 

 

 

 

 

 

 

Earnings per share continuing operations – diluted 1)

 

$

1.27

 

 

$

1.82

 

Loss per share discontinued operations – diluted 1)

 

 

 

 

 

(0.37

)

Diluted earnings per share

 

$

1.27

 

 

$

1.45

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, net of

   treasury shares (in millions)

 

 

87.2

 

 

 

87.0

 

Weighted average number of shares outstanding, assuming

   dilution and net of treasury shares (in millions)

 

 

87.4

 

 

 

87.3

 

 

 

 

 

 

 

 

 

 

Cash dividend per share – declared

 

$

0.62

 

 

$

0.62

 

Cash dividend per share – paid

 

$

0.62

 

 

$

0.60

 

 

1)

Participating share awards with the right to receive dividend equivalents are (under the two class method) excluded from the earnings per share calculation (see Note 14 to the unaudited condensed consolidated financial statements).

See Notes to unaudited condensed consolidated financial statements.

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in millions)

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Net income

 

$

111.5

 

 

$

122.4

 

Other comprehensive income before tax:

 

 

 

 

 

 

 

 

Change in cumulative translation adjustments

 

 

20.8

 

 

 

91.6

 

Net change in cash flow hedges

 

 

 

 

 

0.4

 

Net change in unrealized components of defined benefit plans

 

 

0.1

 

 

 

0.8

 

Other comprehensive income, before tax

 

 

20.9

 

 

 

92.8

 

Tax effect allocated to other comprehensive income

 

 

(0.0

)

 

 

(0.2

)

Other comprehensive  income, net of tax

 

 

20.9

 

 

 

92.6

 

Comprehensive income

 

$

132.4

 

 

$

215.0

 

Less: Comprehensive income attributable to non-controlling interest

 

 

0.4

 

 

 

1.5

 

Comprehensive income attributable to controlling interest

 

$

132.0

 

 

$

213.5

 

 

See Notes to unaudited condensed consolidated financial statements.

5


CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in millions)

 

 

 

As of

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

436.6

 

 

$

615.8

 

Receivables, net

 

 

1,746.7

 

 

 

1,652.1

 

Inventories, net

 

 

741.1

 

 

 

757.9

 

Other current assets

 

 

183.8

 

 

 

244.6

 

Related party receivables (Note 16)

 

 

2.9

 

 

 

15.0

 

Total current assets

 

 

3,111.1

 

 

 

3,285.4

 

Property, plant and equipment, net

 

 

1,710.9

 

 

 

1,690.1

 

Investments and other non-current assets

 

 

384.3

 

 

 

323.5

 

Right-of-use assets - operating leases (Note 4)

 

 

147.3

 

 

 

 

Goodwill

 

 

1,388.3

 

 

 

1,389.9

 

Intangible assets, net

 

 

30.7

 

 

 

32.7

 

Total assets

 

$

6,772.6

 

 

$

6,721.6

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Short-term debt

 

$

437.6

 

 

$

620.7

 

Accounts payable

 

 

947.2

 

 

 

978.3

 

Accrued expenses

 

 

1,015.1

 

 

 

935.4

 

Other current liabilities

 

 

253.3

 

 

 

267.4

 

Related party liabilities (Note 16)

 

 

48.3

 

 

 

63.7

 

Operating lease liabilities - current (Note 4)

 

 

37.0

 

 

 

 

Total current liabilities

 

 

2,738.5

 

 

 

2,865.5

 

Long-term debt

 

 

1,598.1

 

 

 

1,609.0

 

Pension liability

 

 

200.4

 

 

 

198.2

 

Other non-current liabilities

 

 

151.1

 

 

 

152.1

 

Operating lease liabilities - non-current (Note 4)

 

 

110.5

 

 

 

 

Total non-current liabilities

 

 

2,060.1

 

 

 

1,959.3

 

Common stock

 

 

102.8

 

 

 

102.8

 

Additional paid-in capital

 

 

1,329.3

 

 

 

1,329.3

 

Retained earnings (Note 12)

 

 

2,096.4

 

 

 

2,041.8

 

Accumulated other comprehensive loss (Note 12)

 

 

(402.6

)

 

 

(423.2

)

Treasury stock (Note 12)

 

 

(1,165.4

)

 

 

(1,167.0

)

Total controlling interest

 

 

1,960.5

 

 

 

1,883.7

 

Non-controlling interest (Note 12)

 

 

13.5

 

 

 

13.1

 

Total equity

 

 

1,974.0

 

 

 

1,896.8

 

Total liabilities and equity

 

$

6,772.6

 

 

$

6,721.6

 

 

See Notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

6


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in millions)

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Operating activities

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

111.5

 

 

$

159.1

 

Net loss from discontinued operations

 

 

 

 

 

(36.7

)

Depreciation and amortization

 

 

90.1

 

 

 

109.8

 

Change in legal provision

 

 

(6.8

)

 

 

 

Net change in operating assets and liabilities

 

 

(37.1

)

 

 

(222.7

)

Other, net

 

 

(4.0

)

 

 

6.1

 

Net cash provided by operating activities (Note 3)

 

 

153.7

 

 

 

15.6

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(108.4

)

 

 

(141.0

)

Proceeds from sale of property, plant and equipment

 

 

0.4

 

 

 

1.7

 

Acquisitions of businesses and interest in/additional contributions

   to affiliates, net of cash acquired

 

 

 

 

 

(72.9

)

Net cash used in investing activities (Note 3)

 

 

(108.0

)

 

 

(212.2

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net (decrease) increase in short-term debt

 

 

(173.1

)

 

 

65.4

 

Dividends paid

 

 

(54.3

)

 

 

(52.4

)

Common stock options exercised

 

 

0.1

 

 

 

4.9

 

Net cash (used in) provided by financing activities

 

 

(227.3

)

 

 

17.9

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2.4

 

 

 

13.1

 

Decrease in cash and cash equivalents

 

 

(179.2

)

 

 

(165.6

)

Cash and cash equivalents at beginning of period

 

 

615.8

 

 

 

959.5

 

Cash and cash equivalents at end of period

 

$

436.6

 

 

$

793.9

 

 

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)

March 31, 2019

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 results for the interim period are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending December 31, 2019.

The Condensed Consolidated Balance Sheet at December 31, 2018 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.

On June 29, 2018 (the “Distribution Date”), Autoliv completed the spin-off of its former Electronics segment (the “spin-off”) through the distribution of all of the issued and outstanding stock of Veoneer, Inc. (“Veoneer”). To effect the spin-off, Autoliv distributed to each Autoliv stockholder one share of Veoneer common stock, par value $1.00 per share, for every one share of Autoliv common stock, par value $1.00 per share, held by such person on the common stock record date, and each Autoliv Swedish Depository Receipt (SDR) holder received one Veoneer SDR for each Autoliv SDR held by such person on the applicable SDR record date. On July 2, 2018, Veoneer’s common stock began regular-way trading on the New York Stock Exchange under the symbol “VNE” and its SDRs began trading on Nasdaq Stockholm under the symbol “VNE SDB.” The Company did not retain any equity interest in Veoneer.

In accordance with U.S. GAAP, the financial position and results of operations of the Electronics business are presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. The restated historical financial statements reflecting the spin-off are unaudited, but have been derived from Autoliv’s historical audited annual reports. The sum of the individual earnings per share amounts from continuing operations and discontinued operations may not equal the total company earnings per share amounts due to rounding. The cash flows and comprehensive income related to the Electronics business have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows and Comprehensive Income, respectively, for all periods presented. With the exception of Note 3, the Notes to the Unaudited Condensed Consolidated Financial Statements reflect the continuing operations of Autoliv. See Note 3 - Discontinued Operations below for additional information regarding discontinued operations.

On April 1, 2018, in preparation for the spin-off, pursuant to the terms of a master transfer agreement entered into between Autoliv and Veoneer, assets related to the Electronics business were transferred to, and liabilities related to the Electronics business were retained or assumed by, Veoneer. However, responsibility for certain product, warranty and recall liabilities for Electronics products manufactured prior to April 1, 2018 was retained by Autoliv as provided in the distribution agreement between Autoliv and Veoneer, which governs certain relationships between the parties following the spin-off.

Certain amounts in the prior year’s condensed consolidated financial statements and related footnotes thereto have been reclassified to conform with the current year presentation as a result of the spin-off.

Autoliv has concluded that it has one reportable segment, based on the way the Company currently evaluates its financial performance and manages its operations. The Company will re-evaluate the one reportable segment as the operating model evolves, including management structure.  The Company’s single reportable segment includes the Company’s airbag and seatbelt products and components.

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, 2018, filed with the SEC on February 21, 2019.

8


2. NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

In August 2017, the FASB issued ASU 2017-12, Derivative and Hedging (Topic 815), Targeted improvements to accounting for hedging activities. The amendments in ASU 2017-12 better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ASU 2017-12 also include certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The amendments in ASU 2017-12 modify disclosures required in current GAAP. Those modifications include a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges and eliminate the requirement to disclose the ineffective portion of the change in fair value of hedging instruments. The amendments also require new tabular disclosures related to cumulative basis adjustments for fair value hedges. The amendments in ASU 2017-12 are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the annual period that an entity adopts the amendments in ASU 2017-12. The adoption of ASU 2017-12 did not have a material impact on the consolidated financial statements since the Company had no cash flow hedges at the date of adoption.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 affects any entity that enters into a lease, with some specified scope exceptions. For public business entities, the amendments in ASU 2016-02 are effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The Company adopted ASU 2016-02 in the annual period beginning January 1, 2019. The Company applied the modified retrospective transition method and elected the transition option to use the effective date January 1, 2019, as the date of initial application. The Company did not adjust its comparative period financial statements for effects of ASU 2016-02, nor has it made the new required lease disclosures for periods before the effective date. The Company has recognized its cumulative effect transition adjustment as of the effective date. In addition, the Company has elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow the Company to carry forward the historical lease classification. The adoption of the new standard resulted in recording operating lease assets and lease liabilities of $155.4 million as of January 1, 2019. No material finance leases were identified as of January 1, 2019. In addition, there was no material impact on the consolidated financial statements where the Company is deemed to be the lessor in an “embedded lease” arrangement. 

 

Balance Sheet

(Dollars in millions)

 

Balance at

December 31,

2018

 

 

Adjustments

due to

ASU 2016-02

 

 

Balance at

January 1,

2019

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use asset, operating leases

 

$

 

 

$

155.4

 

 

$

155.4

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities - current

 

 

 

 

 

38.7

 

 

 

38.7

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities - non-current

 

 

 

 

 

116.7

 

 

 

116.7

 

 

Accounting Standards Issued But Not Yet Adopted

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20), Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in ASU 2018-14 remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in ASU 2018-14 are effective for public business entities for annual periods ending after December 15, 2020. Early adoption is permitted. An entity should apply the amendments in ASU 2018-14 on a retrospective basis to all periods presented. The Company is currently evaluating the impact of its pending adoption of ASU 2018-14 on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 are effective for all entities for annual periods beginning after December 15, 2019, including interim periods within these annual periods. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial annual year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify disclosures upon issuance of ASU 2018-13. The Company believes that the pending adoption of ASU 2018-13 will not have a material impact on the consolidated financial statements.

9


In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, 2019, and early adoption is permitted for annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of its pending adoption of ASU 2016-13 on the consolidated financial statements.

3. DISCONTINUED OPERATIONS

As discussed in Note 1. Basis of Presentation above, on June 29, 2018, the Company completed the spin-off of Veoneer and the requirements for the presentation of Veoneer as a discontinued operation were met on that date. Accordingly, Veoneer’s historical financial results are reflected in the Company’s unaudited condensed consolidated financial statements as discontinued operations. The Company did not allocate any general corporate overhead or interest expense to discontinued operations.

The financial results of Veoneer are presented as loss from discontinued operations, net of income taxes in the unaudited Condensed Consolidated Statements of Income. The following table presents the financial results of Veoneer (dollars in millions).

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Net sales

 

$

 

 

$

571.9

 

Cost of sales

 

 

 

 

 

(453.0

)

Gross profit

 

 

 

 

 

118.9

 

Selling, general and administrative expenses

 

 

 

 

 

(25.7

)

Research, development and engineering expenses, net

 

 

 

 

 

(105.2

)

Amortization of intangibles

 

 

 

 

 

(5.3

)

Other income (expense), net

 

 

 

 

 

(0.7

)

Operating loss

 

 

 

 

 

(18.0

)

Loss from equity method investments

 

 

 

 

 

(14.0

)

Interest expense

 

 

 

 

 

(0.1

)

Other non-operating items, net

 

 

 

 

 

0.1

 

Loss before income taxes

 

 

 

 

 

(32.0

)

Income tax expense

 

 

 

 

 

(4.7

)

Loss from discontinued operations, net of income taxes

 

 

 

 

 

(36.7

)

Less: Net loss attributable to non-controlling interest

 

 

 

 

 

(4.7

)

Net loss from discontinued operations

 

$

 

 

$

(32.0

)

 

The Company incurred $20 million in separation costs related to the spin-off of Veoneer for the three month period ended March 31, 2018 and was reported in Other income (expense), net. These costs were primarily related to professional fees associated with planning the spin-off, as well as spin-off activities within finance, tax, legal and information system functions and certain investment banking fees incurred upon the completion of the spin-off.

In connection with the spin-off, Autoliv entered into definitive agreements with Veoneer that, among other matters, set forth the terms and conditions of the spin-off and provide a framework for Autoliv’s relationship with Veoneer after the spin-off (the “Spin-Off Agreements”). For more detailed information concerning the Spin-off Agreements, see Note 3 to the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019. No changes have been made to any of the agreements as of March 31, 2019.

Veoneer Capital Contribution

In connection with the spin-off, Autoliv capitalized Veoneer with approximately $1 billion of cash. Net assets of $2,129 million, including approximately $1 billion of cash, were transferred to Veoneer on or prior to the Distribution Date, including $13 million of accumulated other comprehensive loss (primarily related to pension and cumulative translation adjustment) and the non-controlling interest of $112 million. This resulted in a $2,030 million reduction to retained earnings. In the second half of 2018 an adjustment to the cash contribution amount of $5 million was made reducing the net assets contributed to Veoneer to $2,123 million. In the first quarter of 2019 an additional contribution of $2.5 million was made to Veoneer due to an adjustment of deferred tax assets related to Veoneer.

10


The following table presents depreciation, amortization, capital expenditures, acquisition of businesses and significant non-cash items of the discontinued operations related to Veoneer (dollars in millions).

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Depreciation

 

$

 

 

$

22.6

 

Amortization of intangible assets

 

 

 

 

 

5.3

 

Capital expenditures

 

 

 

 

 

30.9

 

Acquisition in affiliate, net

 

 

 

 

 

71.0

 

M/A-COM earn-out adjustment

 

 

 

 

 

(14.0

)

Undistributed loss from equity method investment

 

 

 

 

 

14.0

 

 

4. LEASES

The Company has operating leases for offices, manufacturing and research buildings, machinery, automobiles, data processing and other equipment. The Company’s leases have remaining lease terms of 1-47 years, some of which include options to extend the leases for up to 25 years, and some of which include options to terminate the leases within 1 year(s).

The Company has not identified any material finance leases as of March 31, 2019.

As of March 31, 2019, the Company has additional operating leases, primarily for Warehousing, Cars and Other equipment that have not yet commenced of $5 million. These operating leases will commence during 2019 with lease terms of 1-8 years.

The Company has elected the practical expedient of not separating lease components from non-lease components for all its classes of underlying assets. The Company has also elected to recognize the lease payments for short-term leases in its consolidated statement of income on a straight-line basis over the lease term and recognize the variable lease payments in the period in which the obligation for those payments is incurred.

If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgement when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.

The following tables provide information about the Company’s leases:

 

Lease cost

 

 

 

 

(in millions)

 

Three months ended

 

 

 

March 31, 2019

 

Operating lease cost

 

$

12

 

Short-term lease cost

 

 

2

 

Variable lease cost

 

 

1

 

Sublease income

 

 

(1

)

Total lease cost

 

$

14

 

 

Other information

 

 

 

 

(in millions)

 

Three months ended

or as of

 

 

 

March 31, 2019

 

Cash paid for amounts included in the

  measurement of operating lease liabilities

 

$

11

 

Right-of-use assets obtained in exchange

  for new operating lease liabilities

 

3

 

Weighted-average remaining lease term:

  - operating leases

 

7 years

 

Weighted-average discount rate:

  - operating leases

 

 

2.7

%

11


 

Maturities of operating lease liabilities (undiscounted cash flows) are as follows:

 

 

 

 

(in millions)

 

 

 

 

 

 

As of

March 31, 2019

 

2019 (excluding the three months ended March 31, 2019)

 

$

32

 

2020

 

 

33

 

2021

 

 

22

 

2022

 

 

17

 

2023

 

 

15

 

Thereafter

 

 

45

 

Total operating lease payments

 

 

164

 

Less imputed interest

 

 

(16

)

Total operating lease liabilities

 

$

148

 

 

5. REVENUE

Disaggregation of revenue

In the following tables, revenue from the Company’s continuing operations is disaggregated by primary region and products.

 

Net Sales by Products

 

 

 

 

 

 

 

 

(Dollars in millions)

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Airbag Products and Other1)

 

$

1,447.7

 

 

$

1,439.6

 

Seatbelt Products1)

 

 

726.3

 

 

 

801.3

 

Total net sales

 

$

2,174.0

 

 

$

2,240.9

 

1) Including Corporate and other sales.

 

 

 

 

 

 

 

 

 

 

Net Sales by Region

 

 

 

 

 

 

 

 

(Dollars in millions)

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

China

 

$

330.4

 

 

$

366.4

 

Japan

 

 

208.1

 

 

 

214.7

 

Rest of Asia

 

 

212.2

 

 

 

211.1

 

Americas

 

 

743.1

 

 

 

667.2

 

Europe

 

 

680.2

 

 

 

781.5

 

Total net sales

 

$

2,174.0

 

 

$

2,240.9

 

 

Contract balances

The contract assets relate to the Company's rights to consideration for work completed but not billed (generally in conjunction with contracts for which revenue is recognized over time) at the reporting date on production parts and is included in Other current assets on the Condensed Consolidated Balance Sheet. The contract assets are reclassified into the receivables balance when the rights to receive payments become unconditional. The net change in the contract assets balance, reflecting the adjustments needed to align revenue recognition for work completed but not billed, for the three months period ended March 31, 2019 is not material.

Certain contracts have resulted in consideration in advance of fulfilling the performance obligations and the amounts received have been classified as contract liabilities within Other current liabilities and Other non-current liabilities on the Condensed Consolidated Balance Sheet. The portion of the contract liabilities recognized as revenue for the three months period ended March 31, 2019 is not material.

 

12


6. FAIR VALUE MEASUREMENTS

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 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 policy. 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.

The Company’s derivatives are all classified as Level 2 of the fair value hierarchy and there were no transfers between the levels during this or comparable periods (for further information about the hierarchy levels, see the Company’s Annual Report on Form 10-K).

The tables below present information about the Company’s derivative financial assets and liabilities measured at fair value on a recurring basis for the continuing operations. 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 (ISDA agreements) with all derivative counterparties, the fair values in the tables below, in the Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018, have been presented on a gross basis. 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. The amounts subject to netting agreements that the Company chose not to offset are presented below.

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

Fair Value

Measurements

 

 

 

Description

 

Nominal

volume

 

 

Derivative

asset

 

 

Derivative

liability

 

 

Balance sheet location

Derivatives not designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange swaps, less than

   6 months

 

$

805.9

 

1)

$

1.2

 

2)

$

3.6

 

3)

Other current assets/ Other

current liabilities

Total derivatives not designated as

   hedging instruments

 

$

805.9

 

 

$

1.2

 

 

$

3.6

 

 

 

 

1)

Net nominal amount after deducting for offsetting swaps under ISDA agreements is $801.3 million.

2)

Net amount after deducting for offsetting swaps under ISDA agreements is $1.2 million.

3)

Net amount after deducting for offsetting swaps under ISDA agreements is $3.6 million.

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

Fair Value

Measurements

 

 

 

Description

 

Nominal

volume

 

 

Derivative

asset

 

 

Derivative

liability

 

 

Balance sheet location

Derivatives not designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange swaps, less than

   6 months

 

$

659.1

 

1)

$

1.9

 

2)

$

1.1

 

3)

Other current assets/ Other

current liabilities

Total derivatives not designated as

   hedging instruments

 

$

659.1

 

 

$

1.9

 

 

$

1.1

 

 

 

 

1)

Net nominal amount after deducting for offsetting swaps under ISDA agreements is $659.1 million.

2)

Net amount after deducting for offsetting swaps under ISDA agreements is $1.9 million.

3)

Net amount after deducting for offsetting swaps under ISDA agreements is $1.1 million.

Derivatives designated as hedging instruments

There were no derivatives designated as hedging instruments as of March 31, 2019 and December 31, 2018 related to the continuing operations.

13


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 Income. The derivatives not designated as hedging instruments outstanding at March 31, 2019 and December 31, 2018 related to the continuing operations were foreign exchange swaps.

For the three months ended March 31, 2019 and March 31, 2018, the gains and losses recognized in other non-operating items, net were a loss of $3.2 million and a loss of $0.9 million, respectively, for derivative instruments not designated as hedging instruments.

For the three months ended March 31, 2019 and March 31, 2018, 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, estimated using a discounted cash flow method based on the Company’s current borrowing rates for similar types of financing. The Company has determined that each of these fair value measurements of debt reside within Level 2 of the fair value hierarchy.

The fair value and carrying value of debt for the continuing operations is summarized in the table below (dollars in millions).

 

 

 

March 31,

 

 

March 31,

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2019

 

 

2018

 

 

2018

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

value1)

 

 

value

 

 

value1)

 

 

value

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Private placement

 

$

1,041.0

 

 

$

1,096.6

 

 

$

1,041.0

 

 

$

1,061.1

 

Eurobond

 

 

557.1

 

 

 

561.0

 

 

 

568.0

 

 

 

567.8

 

Total

 

$

1,598.1

 

 

$

1,657.6

 

 

$

1,609.0

 

 

$

1,628.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

118.5

 

 

$

118.5

 

 

$

342.6

 

 

$

342.6

 

Short-term portion of long-term debt

 

 

268.0

 

 

 

272.9

 

 

 

268.1

 

 

 

270.4

 

Overdrafts and other short-term debt

 

 

51.1

 

 

 

51.1

 

 

 

10.0

 

 

 

10.0

 

Total

 

$

437.6

 

 

$

442.5

 

 

$

620.7

 

 

$

623.0

 

 

1)

Debt as reported in balance sheet.

Assets and liabilities measured at fair value on a nonrecurring 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 nonrecurring basis including certain long-lived assets, including equity method investments, goodwill and other intangible assets, typically as it relates to impairment.

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 months ended March 31, 2019 and March 31, 2018, the Company did not record any impairment charges on its long-lived assets for its continuing operations.

 

7. INCOME TAXES

The effective tax rate in the first quarter of 2019 was 27.4% compared to 30.5% in the same quarter of 2018. Discrete tax items, net in the first quarter of 2019 had an unfavorable impact of 0.5%. In the first quarter of 2018, discrete tax items, net had an unfavorable impact of 3.3%.

The Company files income tax returns in the United States federal jurisdiction, and various states and non-U.S. 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 2015. 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 before 2010.

14


As of March 31, 2019, 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 first quarter of 2019, the Company recorded a net increase of $1.7 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. Of the total unrecognized tax benefits of $56.1 million recorded at March 31, 2019, $5.6 million is classified as current tax payable within Other current liabilities and $50.5 million is classified as non-current tax payable within Other non-current liabilities on the Condensed Consolidated Balance Sheet.

8. INVENTORIES

Inventories are stated at the lower of cost (principally FIFO) and net realizable value. The components of inventories for the continuing operations were as follows (dollars in millions):

 

 

 

As of

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Raw materials

 

$

359.4

 

 

$

370.9

 

Work in progress

 

 

282.7

 

 

 

277.4

 

Finished products

 

 

184.0

 

 

 

194.7

 

Inventories

 

 

826.1

 

 

 

843.0

 

Inventory valuation reserve

 

 

(85.0

)

 

 

(85.1

)

Total inventories, net of reserve

 

$

741.1

 

 

$

757.9

 

 

9. 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 changes in the employee-related reserves have been charged against Other income (expense), net in the Consolidated Statements of Income.

The majority of the reserve balance as of March 31, 2019 pertains to restructuring activities initiated in Western Europe over the past few years. The Company anticipates that its restructuring initiatives in Western Europe for a number of plants, none of which are individually or in the aggregate material as of March 31, 2019, will continue through dates ranging from 2019 through 2021. The total amount of costs expected to be incurred in connection with these restructuring activities ranges from approximately $10 million to $30 million for each individual activity. In the aggregate, the cost for these Western European restructuring initiatives is approximately $107 million and the remaining restructuring liability as of March 31, 2019 is approximately $25 million out of the $29 million total reserve balance.

The table below summarizes the change in the balance sheet position of the employee related restructuring reserves for the continuing operations (dollars in millions). Restructuring costs other than employee related are immaterial for all periods presented.

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Reserve at beginning of the period

 

$

33.4

 

 

$

39.6

 

Provision - charge

 

 

0.8

 

 

 

3.3

 

Provision - reversal

 

 

(0.1

)

 

 

 

Cash payments

 

 

(5.1

)

 

 

(2.9

)

Translation difference

 

 

(0.5

)

 

 

1.1

 

Reserve at end of the period

 

$

28.5

 

 

$

41.1

 

 

10. PRODUCT-RELATED LIABILITIES

The Company has reserves for product risks. Such reserves are related to product performance issues including recalls, product liability and warranty issues. For further explanation, see Note 13. Contingent Liabilities below.

For the three month periods ended March 31, 2019 and March 31, 2018, provisions and cash paid primarily relate to recall and warranty related issues. The decrease in the reserve balance as of March 31, 2019 compared to the prior year was mainly due to cash payments. 

15


Pursuant to the Spin-Off Agreements, Autoliv is also required to indemnify Veoneer for recalls related to certain qualified Electronics products. At March 31, 2019, the indemnification liabilities are approximately $14 million within Accrued expenses on the Condensed Consolidated Balance Sheets. Insurance receivables are included within Other current assets and Investments and other non-current assets on the Condensed Consolidated Balance Sheets.

The table below summarizes the change in the balance sheet position of the product-related liabilities related to the continuing operations (dollars in millions).

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Reserve at beginning of the period

 

$

62.2

 

 

$

95.6

 

Change in reserve

 

 

2.9

 

 

 

(1.4

)

Cash payments

 

 

(4.4

)

 

 

(14.5

)

Translation difference

 

 

(0.2

)

 

 

0.8

 

Reserve at end of the period

 

$

60.5

 

 

$

80.5

 

 

11. RETIREMENT PLANS

The Company’s most significant defined benefit plan is the Autoliv ASP, Inc. Pension Plan for which the benefits are based on an average of the employee’s earnings in the years preceding retirement and on credited service. This plan is closed for employees hired after December 31, 2003. In December 2017 the Company decided to amend the U.S. defined pension plan, communicating a benefits freeze that will begin on December 31, 2021.

For the Company’s non-U.S. defined benefit plans the most significant individual plan resides in the U.K. The Company has closed participation in the U.K. defined benefit plan to exclude all employees hired after April 30, 2003 with few members accruing benefits.

The Net Periodic Benefit Costs from continuing operations related to Other Post-retirement Benefits were not significant to the condensed consolidated financial statements of the Company for the three month periods ended March 31, 2019 and March 31, 2018 and are not included in the table below.

The components of total Net Periodic Benefit Cost from continuing operations associated with the Company’s defined benefit retirement plans are as follows (dollars in millions):

 

 

 

Three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Service cost

 

$

4.5

 

 

$

4.9

 

Interest cost

 

 

5.2

 

 

 

4.7

 

Expected return on plan assets

 

 

(3.9

)

 

 

(5.6

)

Amortization prior service cost

 

 

0.1

 

 

 

0.1

 

Amortization of actuarial loss

 

 

0.6

 

 

 

0.8

 

Net Periodic Benefit Cost

 

$

6.5

 

 

$

4.9

 

 

The Service cost and Amortization of prior service cost components in the table above are reported among other employee compensation costs in the Consolidated Statements of Income. The remaining components Interest cost, Expected return on plan assets and Amortization of actuarial loss are reported as Other non-operating items, net in the Consolidated Statements of Income.

The decrease in expected return on plan assets for the three months ended March 31, 2019 compared to the same period previous year is due to a lower assumed long-term rate of return on mainly the U.S. plan assets.

16


12. EQUITY

The changes in the equity components for the three month period ended March 31, 2019 were as follows (dollars in millions).

 

 

 

Common

stock

 

 

Additional

paid in

capital

 

 

Retained

earnings

 

 

Accumulated

other

comprehensive

(loss) income

 

 

Treasury

stock