AUTOLIV, INC. Important Trends
The discussions and analysis in this section are focused on our continuing operations. For more information on our discontinued operations, see Note 3 to the Consolidated Financial Statements in this Annual Report. Discussions of our results of operations for the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 that have been omitted under this item can be found in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year endedDecember 31, 2018 , which was filed with theUnited States Securities and Exchange Commission onFebruary 21, 2019 .Autoliv, Inc. (the "Company") provides automotive safety systems to the automotive industry with a broad range of product offerings, primarily passive safety systems. In the two-year period endedDecember 31, 2019 , a number of factors have influenced the Company's results of operations. The most notable factors have been: • Substantial decline in global light vehicle production • Growth of safety content per vehicle • High order intake share maintained • Operational initiatives • Continued focus on operational excellence and quality • Changes in competitive environment 20191) 20181) YEARS ENDEDDEC. 31 (DOLLARS IN MILLIONS, EXCEPT EPS) Reported change Reported change Global light vehicle production (in thousands) 85,862 (6 ) % 91,344 (1 ) % Consolidated net sales$ 8,548 (1 ) %$ 8,678 7 % Operating income3) 726 6 % 686 (20 ) % Operating margin, %3) 8.5 0.6 pp 7.9 (2.7 ) pp Net income attributable to controlling interest from Continuing Operations3) 462 23 % 376 (36 ) % Earnings per share Continuing Operations2, 3) 5.29 23 % 4.31 (35 ) % Net cash provided by operating activities4) 641 8 % 591 (37 ) % Return on capital employed, %5) 19.7 2.9 pp 16.8 n/a pp
1) Reported figures impacted by costs for capacity alignments, antitrust related
matters and by separation costs. See section Items affecting comparability
and Notes 3, 12 and 18 to the Consolidated Financial Statements included
herein.
2) Assuming dilution and net of treasury shares.
3) Including antitrust provision expense of
4) Including Discontinued Operations in 2018. Including EC antitrust payment of
$203 million in 2019. 5) The Company has decided not to recalculate prior periods since the
distribution of
the comparison less meaningful.
GROWTH IN LIGHT VEHICLE PRODUCTION AND SAFETY CONTENT PER VEHICLE
The most important driver forAutoliv's sales is the light vehicle production (LVP). During the past ten years LVP has shown year-over-year growth with the exception of 2019 and 2018. During 2019 we experienced deterioration of market conditions resulting in declines of LVP in all regions. The most significant decline in LVP, came inChina due to lower consumer demand for vehicles and new emission regulations, and inEurope from uncertainty around drivetrain choices, public policy changes and declining consumer sentiments. As a result, full-year 2019 global LVP declined by 6%. This came after a 1% decline in 2018. Light Vehicle Production 2019 2018 Change '19 vs ´18 (000´) (000´) (000´) units % global units % global units % Americas 18,343 21 % 19,124 21 % (781 ) (4 )% North America 15,085 18 % 15,751 17 % (666 ) (4 )% South America 3,258 4 % 3,373 4 % (115 ) (3 )% Europe 20,994 24 % 21,887 24 % (893 ) (4 )% Asia 44,550 52 % 47,811 52 % (3,261 ) (7 )% China 23,292 27 % 25,696 28 % (2,404 ) (9 )% Japan 9,024 11 % 9,052 10 % (28 ) (0 )% South Korea 3,879 5 % 3,951 4 % (72 ) (2 )% India 4,168 5 % 4,712 5 % (544 ) (12 )% Other Asia 4,187 5 % 4,400 5 % (213 ) (5 )% Other 1,975 2 % 2,522 3 % (547 ) (22 )% Global Total 85,862 91,344 (5,482 ) (6 )% 30
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Chinese LVP, the world's largest automotive market, declined by 2.4 million units or by 9% from 2018 to 2019. InEurope , an important market for automotive safety systems, LVP decreased by 4% or by approximately 0.9 million light vehicles during the same period. InNorth America , LVP declined by 4% or 0.7 million light vehicles. Affected by political and macro-economic factors, LVP inIndia decreased by 12%, to 4.2 million light vehicles in 2019.Europe's and theAmericas share of global LVP has remained unchanged at 24% and 21%, respectively, whileChina's share declined from 28% to 27%.Japan's share increased from 10% to 11% as LVP remained steady. Due to more stringent crash ratings, by institutes such as EuroNCAP; and increasing consumer demand for more safety in emerging markets, we see vehicle manufacturers installing more airbags and more advanced seatbelt systems in vehicles. This generally takes place when new models are introduced. The safety standards of vehicles are increasing inChina ,India and other growth markets such asBrazil , partially due to new regulations and crash test rating programs. For example, the Indian government has decided on a new traffic regulation that mandates more rigid crash test standards for light vehicles. This should eventually lead to a higher installation rate of airbags and more advanced seatbelts. In 2019, the decline in LVP was pronounced in markets with lower average safety content per vehicle (CPV) such asChina ,India and Other Asia, where the CPV is approximately$180 ,$80 and$160 , respectively. These positive trends were in 2019 offset by negative currency translation effects. The average global safety CPV (airbags, seatbelts and steering wheels) was therefore unchanged at around$225 . In addition, there is a negative effect from continued pricing pressure from vehicle manufacturers.
The more stringent crash ratings and consumer demand for more safety should enable the global automotive safety market to grow faster than the global LVP during the next three years.
WELL BALANCED GLOBAL FOOTPRINT
Autoliv's regional sales mix continues to be balanced with 29% of sales inEurope , 34% in theAmericas and 37% inAsia in 2019, compared to 32%, 31% and 37%, respectively, in 2018. InAsia , our sales in the important Chinese market remained at 18% of total sales in 2019. Regardless of the weakness in the Chinese market, we remain well positioned in that market, which is the world's largest automotive producing market. The balanced regional sales mix has been achieved through timely investments and strengthening of technical and support capabilities in growth markets and early introduction and execution of our restructuring and capacity alignment activities. To further improve our competitiveness, we have also made substantial investments to increase manufacturing capacity for vertical integration inChina andThailand .
For
The fastest growing customer from 2018 to 2019 was Honda. Its share of our sales has increased from 8% to 10%. The second largest customer based inAsia is Hyundai/Kia, accounting for 8% ofAutoliv sales. The local Chinese OEMs as a group accounted for around 4% of our sales in 2019, with Great Wall representing 2%. Our sales to premium brand OEMs accounted for around 17% of total sales in 2019, while their share of global LVP is approximately 12%. Our strong position with premium OEMs reflects the higher safety content in their vehicles along with our position as a technology leader in the automotive safety market. TheU.S. based OEMs (including Tesla) account for 21% of our global sales, down from 29% in 2014. This is in part due to the sale ofGM's European operations, Opel, to PSA. Tesla now accounts for more than 1% of our 2019 sales.
CONTINUED STRONG ORDER INTAKE SHARE
Building on a strong base, including supplying products to nearly 1,300 vehicle models and 100 car brands,Autoliv recorded its highest order intake share ever during the past five-year period, winning around 50% of available orders. Our share of order intake in prior years is significantly above our current sales market share of more than 41% in 2019. The order intake is broad based and we have improved our market position in three dimensions - regional, customer and product category. The lead time from order intake to start of production is typically 18-36 months. During this period the products are engineered into the vehicle to provide the expected protection for occupants in case of a crash and to meet legal and regulatory requirements, as well as other requirements from the vehicle manufacturer. This investment in new products is the main reason for the high level of RD&E expenses, net. Additionally, we have to build up production capacity, in the form of new lines, to meet future product launches. Our order intake share for 2019 continued on the same high level as in 2018, supporting our growth opportunities also beyond 2020. We estimate that we booked about 50% of available order value in 2019, making 2019 the fifth consecutive year of booking around or more than 50% of available order value. The estimated life-time sales for all orders booked in 2019 is$11.0 billion , compared to$15.1 billion in 2018. 2018 was an exceptional year with sourcing of several large vehicle platforms with a life-time longer than the typical 4 to 6 years. New order intake is defined as the sales value of awards for future business, received within that year. The life time value is calculated using detailed assumptions of price and volumes over the years of production and the exchange rates prevailing at the time of receiving the order. 31
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Due to the lead time from order to start of production, 2017 was the first year that the increased level of order intake began to impact our sales. Over the last two years, sales have substantially outperformed the change in global LVP. In 2019 and 2018 the outperformance was around 7 pp and 6 pp, respectively. During 2019, growth was positively affected through recent launches of several new models, including Honda CR-V, Tesla Model 3, Audi Q3,Ram Trucks and Volkswagen T-Cross.
OPERATIONAL INITIATIVES
As market weakness has continued in 2019, we have stepped up the cost improvement actions, launching a Structural Efficiency Program, including targeting a reduction of our indirect workforce by approximately 800. The cost for the program is estimated to be approximately$52 million and it is expected to be fully implemented by mid-2020. Annualized savings is estimated to be around$60 million which is equal to about 5% of indirect labor costs.
The costs for restructuring activities in 2019 amounted to
The current restructuring activities are expected to have a payback period of around 1 year, after cash-out. The cash payments in 2019 were$30 million compared to$14 million in 2018. As ofDecember 31, 2019 , we have$56 million reserved in our balance sheet related to restructuring (see Note 12 to the Consolidated Financial Statements included herein). We continue to actively manage the business cycle downturn as we reduced the total direct workforce by 1,500 in 2019, despite growing our sales organically (see section Non-U.S. GAAP Performance Measures) by 1.2% compared to 2018. With more than 100 improvement projects being evaluated, we have set a high pace in the planning and implementation of strategic initiatives and structural improvements. These initiatives are key drivers to our medium-term target and building the foundation to continue to create shareholder value.
IMPROVED EFFICIENCIES THROUGH OPERATIONAL EXCELLENCE
Pricing pressure is an inherent part of the automotive supplier business. Price reductions are generally higher on newer products with strong volume growth compared to older products, where both the possibilities to re-design the product to reduce costs and market growth are less. Price reductions can also depend on the business cycle. For the period 2018-2019, we estimate the average reduction of our market prices to have been in the range of 2-4% annually. As described below, to meet these price reductions, we have implemented several programs and taken actions to address our cost structure. Additionally, during the period 2018-2019, we have experienced accumulated raw material commodity costs increase of more than$80 million . Our productivity improvement target is to achieve at least 5% savings per year. To meet this target,Autoliv has developed a set of strategies to reduce costs in manufacturing:
•
which aims to continuously increase output with less resources. APS
provides the target conditions and tools to achieve the delivery of goods
and services at the right time, in the right amount, at the required
quality and at the lowest cost possible to all our customers.
• Our One Product One Process (1P1P) strategy focuses on product and process
standardization and reducing cost and complexity. The 1P1P strategy,
combined with initiatives to reduce costs for components from external
suppliers, ensures that we continuously optimize our supply base
footprint, consolidate purchase volumes to fewer suppliers, improve
productivity in our supply chain, standardize components and redesign our
products.
• Strategic Initiatives including Automation, Digitalization, Supply Chain
Management Effectiveness and RD&E Effectiveness.
Our Continuous improvement strategies have enabled productivity improvement above our target of 5% over the last years, except 2018 due to a sharp increase in launch activities. Excluding impact from Force Majeure situation in our plant inMexico , we have come back to around historical performance during 2019. This is achieved despite the increased launch activities also impacted us during 2019. Reducing labor costs to offset the price erosion on our products is achieved through continuously implementing productivity improvement programs, expanding production in Best Cost Countries (BCCs) and instituting restructuring and capacity alignment activities. The number of employees in the BCCs in relation to total number of associates remains over 80% in 2019. These initiatives, in combination with our restructuring activities, investment in vertical integration and several other actions, are in place to offset the market price erosion. We foresee opportunities for further productivity on gains from increasing use of automation in our assembly for lean manufacturing processes. Additionally, automated cells typically perform the manufacturing process with reduced variability. This results in greater control and consistency of product quality. 32
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FOCUS ON QUALITY The number of vehicle recalls in the automotive industry has risen sharply in recent years. From 2015 to 2019, Takata's airbag inflators recall generated a record number of recalls in the automotive industry. We expect overall recall numbers to remain high for years to come and, although we strive for the highest quality in our processes, it cannot be ruled out that we may also be adversely impacted by a future recall. Quality has been and always will be our number one priority, and we continue to sharpen our focus in this area. We now hold a market share of more than 41% in passive safety while we have been involved in less than 2% of passive safety recalls in the industry in the past ten years; an important indicator that we are delivering on our quality strategy. For more information see product warranty and recalls in Note 13 to the Consolidated Financial Statements in this Annual Report.
CHANGES IN COMPETITIVE LANDSCAPE
During the past five years, we experienced significant changes in our competitive landscape. In 2015, TRW, a key competitor in passive safety, was acquired by German groupZF Friedrichshafen . Combined, the new company is the third-largest passive safety supplier globally. In 2016,Key Safety Systems ("KSS") was acquired by Ningbo Joyson Electronic Corp. Beginning in 2014, Takata, our largest competitor at the time, experienced severe issues and recalls related to malfunctioning airbag inflators, leading the company to file for bankruptcy protection in theU.S. andJapan . In 2018, Joyson substantially acquired all of Takata's global assets and operations and combined it with KSS, forming the new company JSS.
European Commission AntitruSt Investigation
Since 2011,Autoliv was subject to an investigation of anti-competitive behavior among suppliers of occupant safety systems by theEuropean Commission (EC). OnMarch 5, 2019 , the EC completed the remaining portion of the investigation and imposed a fine on the Company of €179 million (approximately$203 million ). In the fourth quarter of 2018, the Company had previously accrued €184 million (approximately$210 million ) with respect to the remaining portion of the investigation. The difference between the actual fine and the accrual is reported in Other income (expense), net in the Consolidated statements of net income. The final payment of the actual fine was made inJune 2019 .
CAPITAL STRUCTURE
The Company's net debt stood at$1,650 million onDecember 31, 2019 . This was an increase of$31 million compared toDecember 31, 2018 . Total interest bearing debt atDecember 31, 2019 amounted to$2,094 million , a decrease of$136 million compared toDecember 31, 2018 . Cash flow from operations was$641 million in 2019 and$591 million in 2018, including discontinued operations. Capital expenditures, net amounted to$476 million in 2019 and$555 million in 2018. During the two-year period 2018-2019, the Company paid dividends of$431 million . After the latest declared dividend of62 cents per share, the annualized run rate is$216 million , based on the number of shares outstanding atDecember 31, 2019 . It is the Company's policy to maintain a financial leverage commensurate with a "strong investment grade credit rating". The long-term target is to have a leverage ratio (see section Non-U.S. GAAP Performance Measures) of around 1.0 and to be within the range of 0.5 to 1.5. AtDecember 31, 2019 , the current leverage ratio is 1.7. The Company monitors its capital structure and the financial markets closely and intends to maintain a high level of financial flexibility while being shareholder friendly. As part of the adjustment of the capital structure, the Company historically has repurchased shares of its common stock. During 2019 and 2018, the Company did not repurchase any shares. AtDecember 31, 2019 , the remaining number of shares authorized by the board of directors for repurchase is approximately 3.0 million shares. CURRENCY IMPACTS The Company is exposed to around 50 currency pairs, with exposures in excess of$1 million each. We are monitoring our currency exposure but do not hedge currency flows. Rather we strive to have sales and costs in the same currency to reduce the transaction exposure risk. The total net transaction exposure in 2019 was approximately$2.1 billion or 25% of sales. Approximately three quarters of our sales are denominated in currencies other thanU.S. dollars, which is leading to currency translation effects. 33
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Outlook for 2020 Our organic sales growth and adjusted operating margin outlook indications for 2020 reflect the continuing high level of uncertainty in the automotive markets and assume that global light vehicle production declines by 2-3% in full year 2020 compared to full year 2019. Financial measure Full year indication Net sales growth 3-4% Organic sales growth 3-4% Adjusted operating margin 1) At least 9.5% R,D&E, net % of sales Below 2019 level Tax rate 2) Around 28% Operating cash flow2) Above 2019 level
Capital expenditures, net % of sales Below 2019 level Leverage ratio at year end
Within target range
1) Excluding costs for capacity alignments and anti-trust related matters.
2) Excluding unusual items.
The forward-looking non-U.S. GAAP financial measures above are provided on a non-U.S. GAAP basis.Autoliv has not provided aU.S. GAAP reconciliation of these measures because items that impact these measures, such as costs related to capacity alignments and antitrust matters cannot be reasonably predicted or determined. As a result, such reconciliation is not available without unreasonable efforts andAutoliv is unable to determine the probable significance of the unavailable information.
Significant Legal Matters
See Item 3. Legal Proceedings and Note 18 Contingent Liabilities to the Consolidated Financial Statements in this Annual Report.
Year Ended
Sales by Product
Components of Change in Net Sales
2019 2018 Reported
(MUSD) (MUSD) change Currency effects1) Organic
Airbags products and Other2) $ 5,676 $ 5,698 (0.4 )% (2.4 )% 2.0 %
Seatbelt products2) 2,872 2,980 (3.6 )% (3.4 )% (0.2 )%
Total $ 8,548 $ 8,678 (1.5 )% (2.7 )% 1.2 %
1) Effects from currency translations.
2) Including Corporate and Other sales.
Consolidated net sales decreased by 1.5% compared to full year 2018. Excluding negative currency translation effects of 2.7% the organic growth (see section Non-U.S. GAAP Performance Measures) was 1.2%. Airbag sales grew organically (see section Non-U.S. GAAP Performance Measures) by 2.0%, mainly driven by strong performance for steering wheels, particularly inAmericas , with slight net growth contribution coming from airbags, as a result of growth inAmericas andChina and a decline inEurope . Inflator sales declined inNorth America ,Japan andChina . Seatbelt sales declined organically (see section Non-U.S. GAAP Performance Measures) by 0.2%, with main growth contributors beingChina and to a lesser degreeAmericas , offset by a decline inEurope . The trend of higher sales of more advanced and higher value-added seatbelt systems continued. Sales by Region Components of Change in Net Sales 2019 2018 Reported (MUSD) (MUSD) change Currency effects1) Organic Asia$ 3,177 $ 3,195 (0.6 )% (2.3 )% 1.7 % Whereof: China 1,525 1,522 0.2 % (4.3 )% 4.5 % Japan 811 828 (2.1 )% 1.3 % (3.4 )% Rest of Asia 841 845 (0.4 )% (2.3 )% 1.9 % Americas 2,907 2,735 6.3 % (0.5 )% 6.8 % Europe 2,464 2,748 (10.3 )% (5.5 )% (4.8 )% Global$ 8,548 $ 8,678 (1.5 )% (2.7 )% 1.2 %
1) Effects from currency translations.
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For the full year 2019,Autoliv's sales grew organically (see section Non-U.S. GAAP Performance Measures) by 1.2% compared to full year 2018, more than 7pp higher than LVP growth according to IHS. The largest contributor to overall growth wasNorth America , followed byChina andSouth America . The largest organic sales decline was inEurope followed byJapan .
Our organic sales growth outperformed LVP by more than 13pp in
2019 Organic growth1) Americas Europe China Japan Rest of Asia Global
Autoliv 6.8 % (4.8) % 4.5 % (3.4) % 1.9 % 1.2 %
Main growth drivers Honda, Nissan, FCA, VW, PSA Honda, VW, GM Subaru, Mazda, Suzuki, Renault, Honda, VW,
Tesla Honda Mitsubishi Nissan
Daimler, JLR, Ford, PSA, Great Mitsubishi, Daimler, Ford,
Main decline drivers Daimler, Inflators BMW Wall Toyota, Ford, Isuzu, GM Mitsubishi
Inflators
1)Non-U.S. GAAP measure
Years ended December 31
(Dollars in millions, except per share data) 2019 2018 Change
Net Sales $ 8,548 $ 8,678 (1.5 )%
Gross profit 1,584 1,711 (7.4 )%
% of sales 18.5 % 19.7 % (1.2 )pp
S,G&A (399 ) (390 ) 2.3 %
% of sales (4.7 )% (4.5 )% 0.2 pp
R,D&E net (406 ) (413 ) (1.7 )%
% of sales (4.7 )% (4.8 )% (0.1 )pp
Other income (expense), net (43 ) (211 ) (79.6 )%
Operating income 726 686 5.8 %
% of sales 8.5 % 7.9 % 0.6 pp
Adjusted operating income1) 774 908 (14.8 )%
% of sales 9.1 % 10.5 % (1.4 )pp
Financial and non-operating items, net (77 ) (74 ) 4.1 %
Income before taxes 648 612 5.9 %
Tax rate 28.6 % 38.4 % (9.8 )pp
Net income from continuing operations 463 378 22.5 %
Earnings per share Continuing Operations, diluted2) 5.29 4.31 22.7 %
Adjusted earnings per share, diluted1, 2) 5.72 6.83 (16.3 )%
1) Assuming dilution and net of treasury shares.
2) Participating share awards with right to receive dividend equivalents are
(under the two-class method) excluded from the EPS calculation.
GROSS PROFIT
The gross profit for the full year 2019 declined by $127 million and the gross
margin declined by 1.2pp compared to 2018. The gross margin was adversely
impacted by the decline in global light vehicle production, resulting in a lower
utilization of our production assets, raw material headwinds and the social
unrest in Matamoros, Mexico . This was offset to some degree by organic growth
(see section Non-U.S. GAAP Performance Measures) from launches of new products,
which have a lower contribution margin in the early phase of the ramp-up.
OPERATING INCOME
Operating income increased by around$40 million to$726 million . The reported operating margin was 8.5% of sales, compared to 7.9% of sales in the prior year. The increase of 0.6pp of sales was mainly due to lower costs for antitrust related matters, reported as Other income (expense), net, partly offset by the lower gross profit. Selling, General and Administrative (S,G&A) expenses increased by$9 million or 0.2pp of sales driven mainly by investments in digitalization and slightly higher legal fees, partly offset by slightly lower personnel costs. Research, Development & Engineering (R,D&E) expenses, net declined by$7 million , mainly due to higher engineering income. In relation to sales, it improved to 4.7% in 2019 from 4.8% in 2018.
FINANCIAL AND NON-OPERTING ITEMS, NET
Financial and non-operating items, net in full year 2019 was$77 million . The increase of$3 million compared to$74 million in full year 2018 was mainly due to higher net interest costs due to higher average net interest bearing debt in 2019. 35
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INCOME TAXES
The effective tax rate of 28.6% was 9.8pp lower than last year primarily due to the 2018 unfavorable tax impact from the antitrust accrual in 2018.
NET INCOME AND EARNINGS PER SHARE
Net income attributable to controlling interest from Continuing Operations
increased by
Earnings per share (EPS), diluted increased by98 cents where the main drivers were209 cents from lower costs for capacity alignment, the separation of our business segments and antitrust matters,108 cents from lower tax partially offset by213 cents from lower adjusted operating income (see section Non-U.S. GAAP Performance Measures).
The weighted average number of shares outstanding assuming dilution in 2019 was 87.4 million compared to 87.3 million in 2018.
Non-
In this annual report we sometimes refer to non-
We believe that these measures assist investors and management in analyzing
trends in the Company's business for the reasons given below. Investors should
not consider these non-
These non-
It should be noted that these measures, as defined, may not be comparable to similarly titled measures used by other companies.
ORGANIC SALES
We analyze the Company's sales trends and performance as changes in "organic sales growth", because the Company currently generates approximately three quarters of net sales in currencies other than the reporting currency (i.e.U.S. dollars) and currency rates have proven to be rather volatile. We also use organic sales to reflect the fact that the Company has made several acquisitions and divestitures.
Organic sales present the increase or decrease in the overall
The following tabular reconciliation presents changes in "organic sales growth"
as reconciled to the change in total
COMPONENTS IN SALES INCREASE/DECREASE (DOLLARS IN MILLIONS)
China Japan RoA1) Americas Europe Total
2019 VS. 2018 % $ % $ % $ % $ % $ % $
Reported change 0.2 $ 3.1 (2.1 ) $ (17.6 ) (0.4 ) $ (3.8 ) 6.3 $ 172.1 (10.3 ) $ (284.4 ) (1.5 ) $ (130.6 )
Currency effects2) (4.3 ) (65.0 ) 1.3 10.8 (2.3 ) (19.9 ) (0.5 ) (12.9 ) (5.5 ) (151.7 ) (2.7 ) (238.7 )
Organic change 4.5 68.1 (3.4 ) (28.4 ) 1.9 16.1 6.8 185.0 (4.8 ) (132.7 ) 1.2 108.1
1) Rest of Asia.
2) Effects from currency translations.
RECONCILIATION OF
DECEMBER 31 2019 2018 Total current assets Continuing Operations$ 3,002.1 $ 3,285.4 Total current liabilities Continuing Operations (2,410.2 ) (2,865.5 ) Working capital 591.9 419.9 Cash and cash equivalents (444.7 ) (615.8 ) Short-term debt 368.1 620.7 Derivative (asset) and liability, current (4.2 ) (0.8 ) Dividends payable 54.1 54.0 Operating working capital$ 565.2 $ 478.0 36
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RECONCILIATION OF
DECEMBER 31 2019 2018 2017 2016 2015 Short-term debt$ 368.1 $ 620.7 $ 19.7 $ 216.3 $ 39.6 Long-term debt 1,726.1 1,609.0 1,310.7 1,312.5 1,499.4 Total debt 2,094.2 2,229.7 1,330.4 1,528.8 1,539.0 Cash and cash equivalents (444.7 ) (615.8 ) (959.5 ) (1,226.7 ) (1,333.5 ) Debt issuance cost/Debt-related derivatives, net 0.3 4.9 (2.5 ) (3.4 ) (3.9 ) Net debt$ 1,649.8 $ 1,618.8 $ 368.4 $ 298.7 $ 201.6 OPERATING WORKING CAPITAL
Due to the need to optimize cash generation to create value for our shareholders, management focuses on operationally derived working capital as defined in the table above.
The reconciling items used to derive this measure are, by contrast, managed as part of our overall management of cash and debt, but they are not part of the responsibilities of day-to-day operations management.
NET DEBT
As part of efficiently managing the Company's overall cost of funds, we routinely enter into "debt-related derivatives" (DRD) as part of our debt management.
Creditors and credit rating agencies use net debt adjusted for DRD in their analyses of the Company's debt and therefore we provide this non-U.S. GAAP measure. DRD are fair value adjustments to the carrying value of the underlying debt. Also included in the DRD is the unamortized fair value adjustment related to discontinued fair value hedges, which will be amortized over the remaining life of the debt. By adjusting for DRD, the total financial liability of net debt is disclosed without grossing debt up with currency or interest fair values.
ADJUSTED OPERATING INCOME AND OPERATING MARGIN AND ADJUSTED EPS
Adjusted operating margin and adjusted EPS are non-GAAP measures our management uses to evaluate our business, because we believe they assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that are non-operational or non-recurring in nature (such as costs related to capacity alignments, costs related to antitrust matters, separation costs, impairment charges and for EPS unusual tax items) and that we do not believe are indicative of our core operating performance and underlying business trends. Adjusted operating margin and adjusted EPS should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance withU.S. GAAP, including operating margin and EPS.
ITEMS AFFECTING COMPARABILITY
2019 2018
Non- Non-
Adjust- U.S. Adjust- U.S.(DOLLARS IN MILLIONS, EXCEPT EPS) Reported ments1) GAAP
Reported ments1) GAAP Operating income$ 726 $ 49 $ 775 $ 686 $ 222 $ 908 Operating margin, % 8.5 0.6 9.1 7.9 2.6 10.5 Income before taxes from Continuing Operations$ 648 $ 49 $ 697 $ 612 $ 222 $ 834 Net income attributable to controlling interest from Continuing Operations$ 462 $ 38 $ 500 $ 376 $ 220 $ 596 Capital employed$ 3,772 $ 38 $ 3,810 $ 3,516 $ 220 $ 3,736 Return on capital employed, % 2) 19.7 1.2 20.9 16.8 5.2 22.0 Return on total equity, % 3) 23.1 1.7 24.8 13.0 7.3 20.3
Earnings per share Continuing
Operations, diluted 4, 5)
$ 4.31 $ 2.52 $ 6.83 Total parent shareholders' equity per share$ 24.19 $ 0.43 $ 24.62 $ 21.63 $ 2.52 $ 24.15
1) Adjustments for capacity alignments, antitrust matters and separation of our
business segments. See table below for a disaggregation of these costs.
2) Operating income and income from equity method investments Continuing
Operations, relative to average capital employed.
3) Income from Continuing Operations relative to average total equity.
4) Assuming dilution and net of treasury shares.
5) Participating share awards with right to receive dividend equivalents are
(under the two-class method) excluded from the EPS calculation.
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Items included in Non-GAAP adjustments
Full Year 2019 Full Year 2018
Adjustment Adjustment Adjustment Adjustment
Millions Per share Millions Per share
Capacity alignment $ 54 $ 0.61 $ 5 $ 0.05
Antitrust related matters (6 ) (0.07 ) 212 2.43
Separation costs 1 0.01 5 0.06
Total adjustments to operating income $ 49 $ 0.55 $ 222 $ 2.54
Tax on non-U.S. GAAP adjustments1) (11 ) (0.12 ) (2 ) (0.02 )
Total adjustments to Income from Continuing
operations $ 38 $
0.43 $ 220
Weighted average number of shares outstanding
- diluted 87.4 87.3 Return on capital employed2, 3) $ 49 $ 222 Adjustment Return on Capital employed, % 1.2 % 5.2 % Return on total equity4, 5) $ 38 $ 220 Adjustment Return on Total equity, % 1.7 % 7.3 %
1) The tax is calculated based on the tax laws in the respective jurisdiction(s)
of the adjustment(s).
2) After adjustment for annualized non-
3) Operating income and income from equity method investments Continuing
Operations, relative to average capital employed.
4) Income from Continuing Operations relative to average total equity.
5) After adjustment for annualized non-
QUARTERLY 2019 RECONCILIATION OF ADJUSTED "OPERATING MARGIN" AND ADJUSTED "EPS"
First quarter 2019 Second quarter 2019 Third quarter 2019 Fourth quarter 2019
Adjust- Non- Adjust- Non- Adjust- Non- Adjust- Non-
Reported ments1) U.S. GAAP Reported ments1) U.S. GAAP Reported ments1) U.S. GAAP Reported ments1) U.S. GAAP
Operating margin, % 8.0 (0.3 ) 7.7 7.9 0.6 8.5 7.6 1.4 9.0 10.5 0.6 11.1
EPS Continuing
operations, diluted2,3) $ 1.27 $ (0.07 ) $ 1.20 $ 1.25 $ 0.13 $ 1.38 $ 0.98 $ 0.32 $ 1.30 $ 1.78 $ 0.06 $ 1.84 1) Adjustments for capacity alignments, antitrust matters and separation of our
business segments.
2) Assuming dilution and net of treasury shares.
3) Participating share awards with right to receive dividend equivalents are
(under the two-class method) excluded from the EPS calculation.
Liquidity, Capital Resources and Financial Position
Years ended December 31
(DOLLARS IN MILLIONS) 2019 2018
Net cash provided by operating activities $ 641 $ 591
Net cash used in investing activities (476 ) (628 )
Net cash used in financing activities (338 ) (245 )
Effect of exchange rate changes on cash and cash
equivalents 2 (62 )
Decrease in cash and cash equivalents (171 ) (344 )
Cash and cash equivalents at beginning of year 616 960
Cash and cash equivalents at end of year $ 445 $ 616
NET CASH PROVIDED BY OPERATING ACTIVITIES
Cash flow from operations, together with available financial resources and credit facilities, are expected to be sufficient to fundAutoliv's anticipated working capital requirements, capital expenditures and future dividend payments. Cash flow items are presented on a consolidated basis, for 2018 including both Continuing and Discontinued Operations. Cash provided by operating activities was$641 million in 2019 compared to$591 million in 2018. The net increase compared to previous year was primarily due to higher contribution from changes in operating assets and liabilities offset by the$203 million EU antitrust payment in 2019. 38
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While management of cash and debt is important to the overall business, it is not part of the operational management's day-to-day responsibilities. We therefore focus on operationally derived working capital (see section Non-U.S. GAAP Performance Measures) and have set a policy that the operating working capital should not exceed 10% of the last 12-month net sales. AtDecember 31, 2019 , operating working capital for Continuing Operations (see section Non-U.S. GAAP Performance Measures) amounted to$565 million corresponding to 6.6% of net sales compared to$478 million and 5.5%, respectively, atDecember 31, 2018 . Operating working capital excluding the EC antitrust provision, atDecember 31, 2018 , amounted to$688 million , corresponding to 7.9% of net sales. Days receivables outstanding (see Glossary and Definitions for definition) were 70 atDecember 31, 2019 , compared to 71 in 2018. Factoring agreements did not have any material effect on days receivables outstanding for 2019 or 2018.
Days inventory outstanding (see Glossary and Definitions for definition) were 35
at
In 2019 and 2018 cash used in investing activities amounted to$476 million and$628 million , respectively. In 2019 all cash used for investing activities was attributable to Continuing Operations compared to$486 million of the$628 million in 2018. Our investing activities primarily consists of investments in property, plant and equipment and acquisition of businesses, net of cash. For further information, see Note 3 to the Consolidated Financial Statements included herein.
CAPITAL EXPENDITURES
Cash generated by operating activities continued to sufficiently cover capital expenditures for property, plant and equipment.
Capital expenditures, net for Continuing Operations was
Depreciation and amortization in Continuing Operations totaled
During the years 2018 and 2019, a majority of our investments were for
production capacity to support the high level of new product launches. Major
investments were mainly made in
In 2019, expansion of facilities inEurope was commenced for manufacturing of seatbelts and airbags to meet increased demand. InNorth America , the higher investments were mainly related to production equipment to increase capacity for new program launches and a new technical center. In addition,Asia made large investments to increase manufacturing capacity to support new product launches.
Cash used in financing activities amounted to$338 million and$245 million for the years 2019 and 2018, respectively. In 2019, the net issuance of debt amounted to$31 million ; whereas, in 2018 the net issuance of debt amounted to$938 million . In 2019, the Company paid dividends of$217 million , compared to dividends paid of$214 million in 2018. In 2019, the Company made a$203 million payment relating to the EC antitrust investigation. In 2018, the Company capitalizedVeoneer with$972 million prior to the spin-off.
INCOME TAXES
The Company has reserves for taxes that may become payable in future periods as a result of tax audits. At any given time, the Company is undergoing tax audits covering multiple years in several tax jurisdictions. Ultimate outcomes are uncertain but could, in future periods, have a significant impact on the Company's cash flows. See discussions of income taxes under Significant Accounting Policies in this section, Note 2 and Note 6 to the Consolidated Financial Statements included herein.
PENSION ARRANGEMENTS
The Company has defined benefit pension plans covering nearly half of theU.S. employees. In a prior year, the Company froze participation in theU.S. plans to exclude employees hired afterDecember 31, 2003 . Many of the Company's non-U.S. employees are also covered by pension arrangements. AtDecember 31, 2019 , the Company's pension liability (i.e. the actual funded status) for itsU.S. and non-U.S. plans was$240 million compared to$198 million one year earlier. The plans had a net unamortized actuarial loss of$115 million recorded in Accumulated Other Comprehensive (Loss) Income in the Consolidated Statement of Equity atDecember 31, 2019 , compared to$82 million atDecember 31, 2018 . The increase in the actuarial loss was mainly due to a decrease in the discount rate for theU.S. plans. The amortization of this loss is expected to be$5 million in 2020. The liability increase in 2019 of$42 million was mainly due to the decrease in discount rates. The liability decrease in 2018 of$9 million was mainly due to the increase in discount rates, partly offset by lower than expected plan assets return. 39
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Pension expense associated with the defined benefit plans was$27 million in 2019,$20 million in 2018 and$29 million in 2017 and is expected to be$27 million in 2020. The increase in pension expense in 2019 of$7 million was mainly due to a prior year decrease in discount rates. The decrease in pension expense in 2018 of$9 million was mainly due to lower amortization of the unrecognized losses resulting from the amendment of theU.S. defined benefit plan. The Company contributed$17 million to its defined benefit plans in 2019,$16 million in 2018 and$13 million in 2017. The Company expects to contribute$19 million to these plans in 2020 and is currently projecting a yearly funding at approximately the same level in the subsequent years.
For further information about retirement plans see Note 19 to the Consolidated Financial Statements included herein.
SHAREHOLDER RETURNS
Total cash dividends paid were$217 million in 2019 and$214 million in 2018. The Company has raised the dividend from60 cents per share for the first quarter of 2018 to62 cents per share in 2019 (see following table). The Board of Directors has declared a dividend of62 cents per share for both the first and second quarter of 2020. The annualized dividend amount of$217 million , is based on62 cents per share and the number of shares outstanding atDecember 31, 2019 . The Company did not repurchase any shares during 2019 and 2018. During the second quarter of 2017, the Company repurchased 1.4 million shares for cash of$157 million , including commissions. In total,Autoliv has repurchased 44.5 million shares betweenMay 2000 andDecember 2019 for cash of$2,498 million , including commissions. The maximum number of shares that are available to be purchased under the stock repurchase program atDecember 31, 2019 is 3.0 million. There is no expiration date for the share repurchase authorization in order to provide management flexibility in the Company's share repurchases. For further information see Note 15 to the Consolidated Financial Statements included herein. DIVIDENDS PAID 2016 2017 2018 2019 2020 1st Quarter$ 0.56 $ 0.58 $ 0.60 $ 0.62 $ 0.62 1) 2nd Quarter 0.58 0.60 0.62 0.62 0.62 1) 3rd Quarter 0.58 0.60 0.62 0.62 4th Quarter 0.58 0.60 0.62 0.62 1) Declared. EQUITY
During 2019, total equity increased by 11.9% or
During 2018, total equity decreased by 54.5% or$2,273 million to$1,897 million . This was mainly due to$2,123 million related to the spin-off ofVeoneer ,$214 million in dividends to shareholders and$150 million currency translation effects. The decrease was partly offset by$184 million from net income.
IMPACT OF INFLATION AND RAW MATERIAL PRICES
Inflation has generally not had a significant impact on the Company's financial position or results of operations. In many growth markets, inflation is relatively high, especially labor inflation. We have managed to offset this negative effect mainly by labor productivity improvements. However, no assurance can be given that this will continue to be possible going forward. The Company has experienced headwind from raw material prices in both 2018 and 2019. During 2018, the headwinds were mainly form high cost for steel. The headwinds in 2019 were mainly coming from higher cost for steel and Nylon 66, used in airbag cushions. PERSONNEL During the past two years, total headcount (permanent employees and temporary personnel) has risen by 1.0% from the beginning of 2018 to 65,200 at the end of 2019. This reflects the strong order intake we have recognized in past quarters, which drive the need for additional manufacturing and R,D&E personnel.
During 2019, headcount decreased by 1,500 people, compared to the 2,200 people increase during 2018.
At the end of 2019, 81% of total headcount was in BCC compared to 80% at the beginning of 2018. Furthermore, 71% of total headcount atDecember 31, 2019 was direct workers in manufacturing compared to 71% at the beginning of 2018, while 10% of total headcount atDecember 31, 2019 were temporary employees, compared to 12% at the beginning of 2018. Compensation to directors and executive officers is reported, as is customary forU.S. public companies, inAutoliv's proxy statement, which will be available to shareholders inMarch 2020 . 40
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Treasury Activities CREDIT ARRANGEMENTS
In
In
In
InJuly 2016 , the Company refinanced its existing revolving credit facility (RCF) of$1,100 million . The facility, syndicated among 14 banks, originally maturing inJuly 2021 with two extension options, each for an additional year. The extension options have been used by the Company and the maturity date for the facility has been extended toJuly 2023 . The Company pays a commitment fee on the undrawn amount of 0.1%, representing 35% of the applicable margin, which is 0.275% (given the Company's rating of "BBB+" from S&P Global Ratings atDecember 31, 2018 ). Borrowings under the facility are unsecured and bear interest based on the relevant LIBOR or IBOR rate. AtDecember 31, 2019 , the Company's unutilized long-term credit facilities were$1.1 billion , represented by the RCF. This facility is not subject to any financial covenants nor is any other substantial financing ofAutoliv . The Company had a net debt position (see section Non-U.S. GAAP Performance Measures) at year end 2019 and 2018 of$1,650 million and$1,619 million , respectively. In 2014, the Company issued and sold long-term debt securities in aU.S. Private Placement pursuant to a Note Purchase and Guaranty Agreement datedApril 23, 2014 , by and amongAutoliv ASP Inc. , the Company and the purchasers listed therein. As ofDecember 31, 2019 ,$1,042 million remains outstanding from the 2014 issuance. See Note 12 to the Consolidated Financial Statements included herein for additional information. During 2019 and 2018, the Company sold receivables and discounted notes related to selected customers. These factoring arrangements increase cash while reducing accounts receivable and customer risks. AtDecember 31, 2019 , the Company had received$163 million for sold receivables without recourse and discounted notes with a discount cost of$3 million during the year, compared to$193 million at year-end 2018 with a discount cost of$6 million recorded in Other non-operating items, net. InSeptember 2019 ,Autoliv's long-term credit rating was downgraded from A- to BBB+ by S&P Global Ratings while maintaining negative outlook on the rating. The company aims to maintain a strong investment grade credit rating.
NUMBER OF SHARES
At
The number of shares outstanding is expected to increase by 0.4 million when all Restricted Stock Units (RSU) and Performance Shares (PSs) vest and if all stock options (SOs) to key employees are exercised, see Note 17 to the Consolidated Financial Statements included herein. In total,Autoliv has repurchased 44.5 million shares under its stock repurchase program betweenMay 2000 andDecember 2019 for cash of$2,498 million , including commissions. The average cost per share for all repurchased shares to date is$56.13 . Purchases can be made from time to time as market and business conditions warrant in open market, negotiated or block transactions. There is no expiration date for the repurchase program in order to provide management flexibility in the Company's share repurchases. No stock repurchases were made in 2019.
Contractual Obligations and Commitments
AGGREGATE CONTRACTUAL OBLIGATIONS1) Payments due by Period (DOLLARS IN MILLIONS) Total Less than 1 year 1-3 years 3-5 years More than 5 years Debt obligations$ 2,099 $ 368$ 404 $ 857 $ 470 Fixed-interest obligations 234 47 77 59 51 Operating lease obligations 172 41 51 33 47 Pension contribution requirements2) 19 19 - - - Other non-current liabilities reflected on the balance sheet 8 - - - 8 Total$ 2,532 $ 475$ 532 $ 949 $ 576 1) Excludes contingent liabilities arising from litigation, arbitration, regulatory actions or income taxes.
2) Expected contributions for funded and unfunded defined benefit plans exclude
payments beyond 2019.
Contractual obligations include debt, lease and purchase obligations that are
enforceable and legally binding on the Company. Non-controlling interest and
restructuring obligations are not included in this table. The major employee
obligations as a result of restructuring are disclosed in Note 12 to
Consolidated Financial Statements included herein.
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Debt obligations: For material contractual provisions, see Note 14 to the Consolidated Financial Statements included herein.
Fixed-interest obligations: These obligations include interest on debt and credit agreements relating to periods afterDecember 31, 2019 , excluding fees on the revolving credit facility and interest on debts with no defined amortization plan. Operating lease obligations: These obligations represent the payment obligations (undiscounted cash flows) under leases classified as operating leases. The Company leases certain offices, manufacturing and research buildings, machinery, automobiles, data processing and other equipment. Such operating leases, some of which are non-cancelable and include renewals, expire on various dates. Capital lease obligations are not material. See Note 4 to the Consolidated Financial Statements included herein. Unconditional purchase obligations: There are no unconditional purchase obligations other than short-term obligations related to inventory, services, tooling, and property, plant and equipment purchased in the ordinary course of business. Purchase agreements with suppliers entered into in the ordinary course of business do not generally include fixed quantities. Quantities and delivery dates are established in "call off plans" accessible electronically for all customers and suppliers involved. Communicated "call off plans" for production material from suppliers are normally reflected in equivalent commitments fromAutoliv customers. Pension contribution requirements: The Company sponsors defined benefit plans that cover a significant portion of ourU.S. employees and certain non-U.S. employees. The pension plans in theU.S. are funded in conformity with the minimum funding requirements of the Pension Protection Act of 2006. Funding for our pension plans in other countries is based upon plan provisions, actuarial recommendations and/or statutory requirements. In 2020, the expected contribution to all plans, including direct payments to retirees, is$19 million , of which the major contribution is$13 million for ourU.S. pension plans. Due to volatility associated with future changes in interest rates and plan asset returns, the Company cannot predict with reasonable reliability the timing and amounts of future funding requirements, and therefore the above excludes payments beyond 2020. We may elect to make contributions in excess of the minimum funding requirements for theU.S. plans in response to investment performance and changes in interest rates, or when we believe that it is financially advantageous to do so and based on other capital requirements. See Note 19 to the Consolidated Financial Statements included herein.
Other non-current liabilities reflected on the balance sheet: These consist mainly of local governmental liabilities.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on its financial position, results of operations or cash flows.
Risks and Risk Management
The Company is exposed to several categories of risks. They can broadly be categorized as operational risks, strategic risks and financial risks. Some of the major risks in each category are described below. There are also other risks that could have a material effect on the Company's results and financial position, and the description below is not complete but should be read in conjunction with the discussion of risks described in Item 1A above, which contains a description of our material risks. As described below, the Company has taken several mitigating actions, applied numerous strategies, adopted policies, and introduced control and reporting systems to reduce and mitigate these risks. In addition, the Company from time to time identifies and evaluates emerging or changing risks to the Company in order to ensure that identified risks and related risk management are updated in this fast-moving environment.
Operational Risks
LIGHT VEHICLE PRODUCTION
Around 30% of
Global LVP is an indicator of the Company's sales development. Ultimately, however, sales are determined by the production levels for the individual vehicle models for whichAutoliv is a supplier (see Dependence on Customers). The Company's sales are split over several hundred contracts covering almost 1,300 vehicle models. This moderates the effect of changes in vehicle demand of individual countries and regions as well as production issues. The risk of fluctuating sales has also been mitigated byAutoliv's rapid expansion inAsia and other growth markets, which has reduced the Company's former high dependence on sales inEurope to a diversified mix withEurope , theAmericas andAsia each accounting for roughly 30% to 40% of our 2019 total sales. It is the Company's strategy to reduce the risk of fluctuating LVP by using a high number of temporary employees instead of permanent employees in direct production. During 2019 and 2018, the level of temporary employees in relation to total headcount in direct production was 11% and 17%, respectively. To reduce the potential impact of unusual fluctuations in the production of vehicle models supplied by the Company - such as during the financial crisis of 2008 and 2009 - it is also necessary for the Company to be prepared to quickly adapt the level of permanent employees as well as fixed cost production capacity. 42
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PRICING PRESSURE Pricing pressure from customers is an inherent part of the automotive components business. The extent of price reductions varies from year to year and takes the form of one time give backs, reductions in direct sales prices or discounted reimbursements for engineering work. In response,Autoliv is continuously engaged in efforts to reduce costs and to provide customers added value by developing new products. Generally, the speed by which these cost-reduction programs generate results will, to a large extent, determine the future profitability of the Company. The various cost-reduction programs are, to a considerable extent, interrelated. This interrelationship makes it difficult to isolate the impact of costs on any single program, therefore, we monitor key measures such as costs in relation to sales and productivity.
COMPONENT COSTS
The cost of direct materials was approximately 50% of sales in 2019.
The main raw materials being used as input material forAutoliv operations are textiles, plastic, steel and non-ferrous metals. Increased headwinds on raw materials in 2019 were primarily caused by a global shortage of Nylon 66 and the effects coming from the import tariffs imposed bythe United States on steel and aluminum products, impacting the raw material market and creating uncertainty.
We take several actions to mitigate raw material price increases, such as competitive sourcing and exploring alternative materials.
LEGAL
The Company is involved from time to time in regulatory, commercial and
contractual legal proceedings that may be significant, and the Company's
business may suffer as a result of adverse outcomes of current or future legal
proceedings. These claims may include, without limitation, commercial or
contractual disputes, including disputes with the Company's suppliers and
customers, intellectual property matters, alleged violations of laws, rules or
regulations, governmental investigations, personal injury claims, product
liability claims, environmental issues, tax and customs matters, and employment
matters.
A substantial legal liability or adverse regulatory outcome and the substantial
cost to defend the litigation or regulatory proceedings may have an adverse
effect on the Company's business, operating results, financial condition, cash
flows and reputation.
No assurances can be given that such proceedings and claims will not have a
material adverse impact on the Company's profitability and consolidated
financial position, or that reserves or insurance will mitigate such impact. See
Note 18 to the Consolidated Financial Statements included herein and Item 3 -
Legal Proceedings.
PRODUCT WARRANTY AND RECALLS
If our products are alleged to fail to perform as expected or are defective, the
Company may be exposed to various claims for damages and compensation. Such
claims may result in costs and other losses to the Company even where the
relevant product is eventually found to have functioned properly. If a product
(actually or allegedly) fails to perform as expected or is defective, we may
face warranty and recall claims. If such actual or alleged failure or defect
results, or is alleged to result, in bodily injury and/or property damage, we
may also face product liability and other claims. The Company may experience
material warranty, recall, product or other liability claims or losses in the
future, and the Company may incur significant cost to defend against such
claims. The Company may be required to participate in a recall involving its
products. Each vehicle manufacturer has its own practices regarding product
recalls and other product liability actions relating to its suppliers.
Government safety regulators also have policies and practices with respect to
recalls. As suppliers become more integrally involved in the vehicle design
process and assume more of the vehicle assembly functions, vehicle manufacturers
are increasingly looking to their suppliers for contribution when faced with
recalls and product liability claims. In addition, with global platforms and
procedures, vehicle manufacturers are increasingly evaluating our quality
performance on a global basis. Any one or more quality, warranty or other recall
issue(s), including the ones affecting few units and/or having a small financial
impact, may cause a vehicle manufacturer to implement measures which may have a
severe impact on the Company's operations, such as a temporary or prolonged
suspension of new orders or the Company's ability to bid for new business.
In addition, over time, there is a risk that the number of vehicles affected by
a failure or defect will increase significantly (as would the Company's costs),
since our products often use global designs and are increasingly based on or
utilize the same or similar parts, components or solutions.
Although quality has always been a central focus in the automotive industry,
especially for safety products, our customers and regulators have become
increasingly attentive to quality with even less tolerance for any deviations,
which has resulted in an increase in the number of automotive recalls. This
trend is likely to continue as automobile manufacturers introduce even stricter
quality requirements and regulating agencies and other authorities increase the
level of scrutiny given to vehicle safety issues. A warranty recall or a product
liability claim brought against the Company in excess of the Company's insurance
may have a material adverse effect on its business and/or financial results.
Vehicle manufacturers are also increasingly requiring their external suppliers
to guarantee or warrant their products and bear the costs of repair and
replacement of such products under new vehicle warranties. A vehicle
manufacturer may attempt to hold the Company responsible for some or all of the
repair or replacement costs of defective products under new vehicle warranties
when the product supplied did not perform as represented. Additionally, a
customer may not allow us to bid for expiring or new business until certain
remedial steps have been taken. Accordingly, the future costs of warranty claims
by the Company's customers may be material.
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The Company's warranty reserves are based upon management's best estimates of amounts necessary to settle future and existing claims. Management regularly evaluates the appropriateness of these reserves and adjusts them when we believe it is appropriate to do so. However, the final amounts determined to be due could differ materially from the Company's recorded estimates. We believe our established reserves are adequate to cover potential warranty settlements typically seen in our business. The Company's strategy is to follow a stringent procedure when developing new products and technologies and to apply a proactive "zero-defect" quality policy (see section Quality Management). In addition, the Company carries insurance for potential recall and product liability claims at coverage levels that management believes are generally sufficient to cover the risks based on the Company's prior claims experience. However, such insurance may not be sufficient to cover every possible claim that can arise in the Company's businesses, now or in the future, or may not always will be available should the Company, now or in the future, wish to extend, renew, increase or otherwise adjust such insurance. Management's decision regarding what insurance to procure is also impacted by the cost for such insurance. As a result, the Company may face material losses in excess of the insurance coverage procured. A substantial recall or liability in excess of coverage levels could therefore have a material adverse effect on the Company. ENVIRONMENTAL Most of the Company's manufacturing processes consist of the assembly of components. As a result, the environmental impact from the Company's plants is generally modest. While the Company's businesses from time to time are subject to environmental investigations, there are no material environmental-related cases pending against the Company. Therefore,Autoliv does not incur (or expect to incur) any material costs or capital expenditures associated with maintaining facilities compliant withU.S. or non-U.S. environmental requirements. To reduce environmental risk, the Company has implemented an environmental management system in all plants globally and has adopted an environmental policy (see corporate website www.autoliv.com).Autoliv is subject to a number of environmental and occupational health and safety laws and regulations. Such requirements are complex and are generally becoming more stringent over time. There can be no assurance that these requirements will not change in the future, or that we will at all times be in compliance with all such requirements and regulations, despite our intention to be. The Company may also find itself subject, possibly due to changes in legislation or other regulation, to environmental liabilities based on the activities of its predecessor entities or of businesses acquired. Such liability could be based on activities which are not related to the Company's current activities. TRADEAutoliv is subject to various international trade regulations and regimes and changes in these regimes could lead to increased compliance costs and costs of raw materials and other components. In addition, political conditions leading to trade conflicts and the imposition of tariffs or other trade barriers between countries in which we do business could increase our costs of doing business. Strategic Risks REGULATIONS In addition to vehicle production, the Company's market is driven by the safety content per vehicle, which is affected by new regulations and new vehicle rating programs, in addition to consumer demand for new safety technologies. The most important regulations are the seatbelt installation laws that exist in all vehicle-producing countries. Many countries also have strict enforcement laws on the wearing of seatbelts. Another significant vehicle safety regulation is theU.S. federal law that, since 1997, requires frontal airbags for both the driver and the front-seat passenger in all new vehicles sold in theU.S. In 2007, theU.S. adopted new regulations for side-impact protection which now have been fully phased-in.China introduced a vehicle rating program in 2006, andLatin America introduced a similar program in 2010 followed by ASEAN NCAP inSoutheast Asia in 2011.The United States upgraded its vehicle rating program in 2010 andEurope upgraded the Euro NCAP rating system during 2018. Euro NCAP has initiated the next upgrade, which will be fully implemented by 2025.Japan andSouth Korea are continuously upgrading their respective vehicle rating programs, JNCAP and KNCAP respectively.India requires frontal airbags for the driver for all new passenger vehicles (M1) fromJuly 2019 . There are also other plans for improved automotive safety, both in these countries and other countries that could affect the Company's market.
However, there can be no assurance that changes in regulations will not adversely affect the demand for the Company's products or, at least, result in a slower increase in the demand for them.
DEPENDENCE ON CUSTOMERS
In 2019, the five largest vehicle manufacturers accounted for 51% of global LVP and the ten largest manufacturers for 74%.
As a result of this highly consolidated market, the Company is dependent on a relatively small number of customers with strong purchasing power.
In 2019, the Company's five largest customers accounted for 52% of revenues and the ten largest customers for 79% of revenues. For a list of the largest customers, see Note 21 to the Consolidated Financial Statements included herein.
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Our largest customer contract accounted for around 2% of sales in 2019. Although business with every major customer is split into at least several contracts (usually one contract per vehicle platform) and although the customer base has become more balanced and diversified as a result ofAutoliv's significant expansion inChina and other rapidly-growing markets, the loss of all business from a major customer (whether by a cancellation of existing contracts or not awardingAutoliv new business), the consolidation of one or more major customers or a bankruptcy of a major customer could have a material adverse effect on the Company. In addition, a quality issue, shortcomings in our service to a customer or uncompetitive prices or products could result in the customer not awarding us new business, which will gradually have a negative impact on our sales when current contracts start to expire.
CUSTOMER PAYMENT RISK
Another risk related to our customers is the risk that one or more of our customers will be unable to pay their invoices that become due. We seek to limit this customer payment risk by invoicing our major customers through their local subsidiaries in each country, even for global contracts. By invoicing this way, we attempt to avoid having the receivables with a multinational customer group exposed to the risk that a bankruptcy or similar event in one country would put all receivables with such customer group at risk. In each country, we also monitor invoices becoming overdue.
Even so, if a major customer is unable to fulfill its payment obligations, it is likely that we would be forced to record a substantial loss on such receivables.
DEPENDENCE ON SUPPLIERS
Autoliv relies on internal and/or external suppliers in order to meet its delivery commitments to the customers. In some cases, suppliers are dictated by the customers based on very specific qualification requirements. In other areas,Autoliv is dependent on a single supplier for a specific component.Autoliv supply chain organization is reviewing sourcing risks and actively working on mitigating related supply chain risks.
NEW COMPETITION
Increased competition may result in price reductions, reduced margins and our inability to gain or hold market share. OEMs rigorously evaluate suppliers on the basis of product quality, price, reliability and delivery as well as engineering capabilities, technical expertise, product innovation, financial viability, application of lean principles, operational flexibility, customer service and overall management. To maintain our competitiveness and position as a market leader, it is important to focus on all of these aspects of supplier evaluation and selection. Although the market for occupant restraint systems has undergone a significant consolidation during the past ten years, the passive safety market remains very competitive. It cannot be excluded that additional competitors, both global and local, will seek to enter the market or grow beyond their current Keiretsu group or traditional customer base. Particularly inChina ,South Korea andJapan there are numerous small domestic competitors often supplying just one OEM group.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's strategy is to protect its innovations with patents, and to vigorously protect and defend its patents, trademarks and know-how against infringement and unauthorized use. At the end of 2019, the Company held more than 6,000 patents. These patents expire on various dates during the period from 2020 to 2039. The expiration of any single patent is not expected to have a material adverse effect on the Company's financial results. Although the Company believes that its products and technology do not infringe upon the proprietary rights of others, there can be no assurance that third parties will not assert infringement claims against the Company in the future. Also, there can be no assurance that any patent now owned by the Company will afford protection against competitors that develop similar technology. As the Company continues to expand its products and expand into new businesses, it will increase its exposure to intellectual property claims.
Financial Risks
The Company is exposed to financial risks through its operations. To reduce the
financial risks and to take advantage of economies of scale, the Company has a
central treasury department supporting operations and management. The treasury
department handles external financial transactions and functions as the
Company's in-house bank for its subsidiaries.
The Board of Directors monitors compliance with the financial risk policy on an
on-going basis. For information about specific financial risks, see Item 7A -
Quantitative and Qualitative Disclosures about Market Risk.
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Significant Accounting Policies and Critical Accounting Estimates
NEW ACCOUNTING STANDARDS
The Company has considered all applicable recently issued accounting standards. The Company has summarized in Note 2 to the Consolidated Financial Statements each of the recently issued accounting standards and stated the impact or whether management is continuing to assess the impact. The Company adopted the new standard for Leases (ASU 842), which resulted in recording operating lease assets and lease liabilities of$155 million in the Consolidated Balance Sheet as ofJanuary 1, 2019 .
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included herein. Senior management has discussed the development and selection of critical accounting estimates and disclosures with the Audit Committee of the Board of Directors. The application of accounting policies necessarily requires judgments and the use of estimates by a Company's management. Actual results could differ from these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, and management's evaluation of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. The Company considers an accounting estimate to be critical if:
• It requires management to make assumptions about matters that were
uncertain at the time of the estimate, and
• Changes in the estimate or different estimates that could have beenselected would have had a material impact on our financial condition or
results of operations. The accounting estimates that require management's
most significant judgments include the estimation of retroactive price
adjustments, estimations associated with purchase price allocations
regarding business combinations, assessment of recoverability of goodwill
and intangible assets, estimation of pension benefit obligations based on
actuarial assumptions, estimation of accruals for warranty and recalls ,
restructuring charges, uncertain tax positions, valuation allowances and
legal proceedings.
The Company has summarized its critical accounting policies requiring judgment below. These might change over time based on the current facts and circumstances.
REVENUE RECOGNITION
In accordance with ASC 606, Revenue from Contracts with Customers, revenue is measured based on consideration specified in a contract with a customer, adjusted for any variable consideration (i.e. price concessions) and estimated at contract inception. The estimated amount of variable consideration that will be received by the Company are based on historical experience and trends, management´s understanding of the status of negotiations with customers and anticipated future pricing strategies. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. In addition, from time to time, the Company may make payments to customers in connection with ongoing and future business. These payments to customers are generally recognized as a reduction to revenue at the time of the commitment to make these payments unless the payment concession can be clearly linked to the future business award. If the payments are capitalized, the amounts are amortized to revenue as the related goods are transferred.
INVENTORY RESERVES
Inventories are evaluated based on individual or, in some cases, groups of inventory items. Reserves are established to reduce the value of inventories to the lower of cost or 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. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. There can be no assurance that the amount ultimately realized for inventories will not be materially different than that assumed in the calculation of the reserves.GOODWILL The Company performs an annual impairment review of goodwill in the fourth quarter of each year following the Company's annual forecasting process. Management used a qualitative assessment approach for 2019 goodwill impairment testing purposes. When evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity shall assess relevant events and circumstances. Examples of such events and circumstances include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, etc. Management has used the following approach: 1. Determine the starting point 2. Identify the most relevant drivers of fair value 3. Identify events and circumstances 4. Weight the identified factors 46
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The Company had significant head room from its latest fair value assessment performed in 2017, which determined the starting point. The most relevant drivers of fair value for the Company is the expected future cash flows and the discount rate used. Considering the nature of the Company's business with long production cycles and our strong credit rating as well as industry factors, management concluded that goodwill was not impaired.
RECALL PROVISIONS AND WARRANTY OBLIGATIONS
The Company records liabilities for product recalls when probable claims are identified and when it is possible to reasonably estimate costs. Recall costs are costs incurred when the customer decides to formally recall a product due to a known or suspected safety concern. Product recall costs are estimated based on the expected cost of replacing the product and the customer´s cost of carrying out the recall, which is affected by the number of vehicles subject to recall and the cost of labor and materials to remove and replace the defective product. In some cases, portions of the product recall costs are reimbursed by an insurance company. Actual costs incurred could differ from the amounts estimated, requiring adjustments to these reserves in future periods. It is possible that changes in our assumptions or future product recall issues could materially affect our financial position, results of operations or cash flows. Estimating warranty obligations requires the Company to forecast the resolution of existing claims and expected future claims on products sold. The Company bases the estimate on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. These estimates are re-evaluated on an ongoing basis. Actual warranty obligations could differ from the amounts estimated requiring adjustments to existing reserves in future periods. Due to the uncertainty and potential volatility of the factors contributing to developing these estimates, changes in our assumptions could materially affect our results of operations. RESTRUCTURING PROVISIONS The Company defines restructuring expense to include costs directly associated with capacity alignment programs, plus exit or disposal activities. Estimates of restructuring charges are based on information available at the time such charges are recorded. In general, management anticipates that restructuring activities will be completed within a time frame such that significant changes to the exit plan are not likely.
Due to inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated.
DEFINED BENEFIT PENSION PLANS
The Company has defined benefit pension plans in eleven countries. The most significant plans exist in theU.S. These plans represent approximately 61% of the Company's total pension benefit obligation. See Note 19 to the Consolidated Financial Statements included herein. The Company, in consultation with its actuarial advisors, determines certain key assumptions to be used in calculating the projected benefit obligation and annual pension expense. For theU.S. plans, the assumptions used for calculating the 2019 pension expense were a discount rate of 4.35%, expected rate of increase in compensation levels of 2.65%, and an expected long-term rate of return on plan assets of 5.05%. The assumptions used in calculating theU.S. benefit obligations disclosed as ofDecember 31, 2019 were a discount rate of 3.25% and an expected age-based rate of increase in compensation levels of 2.65%. The discount rate for theU.S. plans has been set based on the rates of return of high-quality fixed-income investments currently available at the measurement date and are expected to be available during the period the benefits will be paid. The expected rate of increase in compensation levels and long-term return on plan assets are determined based on a number of factors and must take into account long-term expectations and reflect the financial environment in the respective local markets. AtDecember 31, 2019 , 40% of theU.S. plan assets were invested in equities, which is in-line with the target of 40%. The table below illustrates the sensitivity of theU.S. net periodic benefit cost and projectedU.S. benefit obligation to a 1pp change in the discount rate, decrease in return on plan assets and increase in compensation levels for theU.S. plans (in millions). The use of actuarial assumptions is an area of management's estimate. 2019 net 2019 projected periodic benefit benefit obligation Assumption cost increase increase (in millions) Change (decrease) (decrease) Discount rate 1pp increase $ (2 ) $ (63 ) Discount rate 1pp decrease 6 81 Compensation levels 1pp increase 0 2 Return on plan assets 1pp decrease 3 n/a 47
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INCOME TAXES
Significant judgment is required in determining the worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Many of these uncertainties arise as a consequence of intercompany transactions.
Although the Company believes that its tax return positions are supportable, no assurance can be given that the final outcome of these matters will not be materially different than that which is reflected in the historical income tax provisions and accruals. Such differences could have a material effect on the income tax provisions or benefits in the periods in which such determinations are made. See also the discussion of reserves for uncertain tax positions, and the determinations of valuation allowances on our deferred tax assets in Note 6, Income Taxes. CONTINGENT LIABILITIES Various claims, lawsuits and proceedings are pending or threatened against the Company or its subsidiaries, covering a range of matters that arise in the ordinary course of its business activities with respect to commercial, product liability or other matters.
The Company diligently defends itself in such matters and, in addition, carries insurance coverage to the extent reasonably available against insurable risks.
The Company records liabilities for claims, lawsuits and proceedings when they are probable and it is possible to reasonably estimate the cost of such liabilities. Legal costs expected to be incurred in connection with a loss contingency are expensed as such costs are incurred.
A loss contingency is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.
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