10-Q 1 alv-10q_20180930.htm 10-Q alv-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018

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 October 19, 2018, there were 87,142,872 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, 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, 2017 filed with the SEC on February 22, 2018.

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

 

11

4.       

Revenue

 

13

5.       

Fair Value Measurements

 

15

6.       

Income Taxes

 

17

7.        

Inventories

 

18

8.       

Restructuring

 

18

9.     

Product-Related Liabilities

 

19

10.     

Retirement Plans

 

19

11.     

Equity

 

20

12.     

Contingent Liabilities

 

21

13.     

Stock Incentive Plan

 

24

14.     

Earnings Per Share

 

25

15.     

Related Party Transactions

 

26

16.     

Subsequent Events

 

26

 

 

 

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

 

27

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

38

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

38

 

 

 

PART II - OTHER INFORMATION

 

39

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

39

 

 

 

ITEM 1A. RISK FACTORS

 

39

 

 

 

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

 

39

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

39

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

39

 

 

 

ITEM 5. OTHER INFORMATION

 

39

 

 

 

ITEM 6. EXHIBITS

 

40

 

3


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in millions, except per share data)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Net sales

 

$

2,033.0

 

 

$

1,952.6

 

 

$

6,485.4

 

 

$

5,978.1

 

Cost of sales

 

 

(1,646.9

)

 

 

(1,557.7

)

 

 

(5,199.3

)

 

 

(4,739.2

)

Gross profit

 

 

386.1

 

 

 

394.9

 

 

 

1,286.1

 

 

 

1,238.9

 

Selling, general and administrative expenses

 

 

(90.0

)

 

 

(96.8

)

 

 

(290.9

)

 

 

(297.0

)

Research, development and engineering expenses, net

 

 

(101.9

)

 

 

(93.1

)

 

 

(327.9

)

 

 

(295.0

)

Amortization of intangibles

 

 

(2.8

)

 

 

(2.7

)

 

 

(8.5

)

 

 

(8.3

)

Other income (expense), net

 

 

1.1

 

 

 

(35.1

)

 

 

6.2

 

 

 

(29.3

)

Operating income

 

 

192.5

 

 

 

167.2

 

 

 

665.0

 

 

 

609.3

 

Income from equity method investments

 

 

0.2

 

 

 

0.5

 

 

 

2.8

 

 

 

1.2

 

Interest income

 

 

1.3

 

 

 

1.8

 

 

 

4.1

 

 

 

5.6

 

Interest expense

 

 

(18.9

)

 

 

(15.4

)

 

 

(46.2

)

 

 

(46.6

)

Other non-operating items, net

 

 

(3.8

)

 

 

(3.4

)

 

 

(15.4

)

 

 

(17.9

)

Income from continuing operations before income taxes

 

 

171.3

 

 

 

150.7

 

 

 

610.3

 

 

 

551.6

 

Income tax expense

 

 

(53.3

)

 

 

(44.5

)

 

 

(140.0

)

 

 

(161.0

)

Income from continuing operations

 

 

118.0

 

 

 

106.2

 

 

 

470.3

 

 

 

390.6

 

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

 

 

 

 

 

(18.0

)

 

 

(195.8

)

 

 

(32.0

)

Net income

 

 

118.0

 

 

 

88.2

 

 

 

274.5

 

 

 

358.6

 

Less: Net income from continuing operations attributable to

   non-controlling interest

 

 

0.5

 

 

 

0.5

 

 

 

1.4

 

 

 

1.3

 

Less: Net loss from discontinued operations attributable to

   non-controlling interest

 

 

 

 

 

(3.1

)

 

 

(8.3

)

 

 

(7.2

)

Net income attributable to controlling interest

 

$

117.5

 

 

$

90.8

 

 

$

281.4

 

 

$

364.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to controlling interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income from continuing operations

 

$

117.5

 

 

$

105.7

 

 

$

468.9

 

 

$

389.3

 

Net Loss from discontinued operations (Note 3)

 

 

 

 

 

(14.9

)

 

 

(187.5

)

 

 

(24.8

)

Net income attributable to controlling interest

 

$

117.5

 

 

$

90.8

 

 

$

281.4

 

 

$

364.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share continuing operations – basic 1)

 

$

1.35

 

 

$

1.22

 

 

$

5.38

 

 

$

4.44

 

Earnings per share discontinued operations – basic 1)

 

 

 

 

 

(0.17

)

 

 

(2.15

)

 

 

(0.28

)

Basic earnings per share

 

$

1.35

 

 

$

1.05

 

 

$

3.23

 

 

$

4.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share continuing operations – diluted 1)

 

$

1.34

 

 

$

1.21

 

 

$

5.37

 

 

$

4.43

 

Earnings per share discontinued operations – diluted 1)

 

 

 

 

 

(0.17

)

 

 

(2.15

)

 

 

(0.28

)

Diluted earnings per share

 

$

1.34

 

 

$

1.04

 

 

$

3.22

 

 

$

4.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, net of

   treasury shares (in millions)

 

 

87.1

 

 

 

86.9

 

 

 

87.1

 

 

 

87.7

 

Weighted average number of shares outstanding, assuming

   dilution and net of treasury shares (in millions)

 

 

87.4

 

 

 

87.2

 

 

 

87.3

 

 

 

87.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividend per share – declared

 

$

0.62

 

 

$

0.60

 

 

$

1.86

 

 

$

1.80

 

Cash dividend per share – paid

 

$

0.62

 

 

$

0.60

 

 

$

1.84

 

 

$

1.78

 

 

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

 

 

Nine months ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Net income

 

$

118.0

 

 

$

88.2

 

 

$

274.5

 

 

$

358.6

 

Other comprehensive income before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in cumulative translation adjustments

 

 

(30.0

)

 

 

57.9

 

 

 

(134.8

)

 

 

231.9

 

Net change in cash flow hedges

 

 

 

 

 

(3.9

)

 

 

1.1

 

 

 

(10.5

)

Net change in unrealized components of defined benefit plans

 

 

0.5

 

 

 

1.9

 

 

 

8.0

 

 

 

5.4

 

Other comprehensive (loss) income, before tax

 

 

(29.5

)

 

 

55.9

 

 

 

(125.7

)

 

 

226.8

 

Tax effect allocated to other comprehensive income

 

 

(0.1

)

 

 

(0.6

)

 

 

(1.9

)

 

 

(1.6

)

Other comprehensive (loss) income, net of tax

 

 

(29.6

)

 

 

55.3

 

 

 

(127.6

)

 

 

225.2

 

Comprehensive income

 

$

88.4

 

 

$

143.5

 

 

$

146.9

 

 

$

583.8

 

Less: Comprehensive income (loss) attributable to

   non-controlling interest

 

 

(0.5

)

 

 

(1.8

)

 

 

(7.6

)

 

 

1.6

 

Comprehensive income attributable to controlling interest

 

$

88.9

 

 

$

145.3

 

 

$

154.5

 

 

$

582.2

 

 

See “Notes to unaudited condensed consolidated financial statements.”

5


CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in millions)

 

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

533.7

 

 

$

959.5

 

Receivables, net

 

 

1,784.5

 

 

 

1,696.7

 

Inventories, net

 

 

758.7

 

 

 

704.3

 

Other current assets

 

 

258.3

 

 

 

197.0

 

Related party receivables (Note 15)

 

 

12.9

 

 

 

 

Current assets, discontinued operations (Note 3)

 

 

 

 

 

647.2

 

Total current assets

 

 

3,348.1

 

 

 

4,204.7

 

Property, plant and equipment, net

 

 

1,654.8

 

 

 

1,608.9

 

Investments and other non-current assets

 

 

331.3

 

 

 

341.0

 

Goodwill

 

 

1,391.0

 

 

 

1,397.0

 

Intangible assets, net

 

 

35.3

 

 

 

42.6

 

Non-current assets, discontinued operations (Note 3)

 

 

 

 

 

955.7

 

Total assets

 

$

6,760.5

 

 

$

8,549.9

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Short-term debt

 

$

573.0

 

 

$

19.7

 

Accounts payable

 

 

992.4

 

 

 

957.3

 

Accrued expenses

 

 

863.6

 

 

 

829.5

 

Other current liabilities

 

 

194.2

 

 

 

279.9

 

Related party liabilities (Note 15)

 

 

60.6

 

 

 

 

Current liabilities, discontinued operations (Note 3)

 

 

 

 

 

568.2

 

Total current liabilities

 

 

2,683.8

 

 

 

2,654.6

 

Long-term debt

 

 

1,677.5

 

 

 

1,310.7

 

Pension liability

 

 

204.3

 

 

 

206.8

 

Other non-current liabilities

 

 

141.5

 

 

 

144.3

 

Non-current liabilities, discontinued operations (Note 3)

 

 

 

 

 

64.1

 

Total non-current liabilities

 

 

2,023.3

 

 

 

1,725.9

 

Common stock

 

 

102.8

 

 

 

102.8

 

Additional paid-in capital

 

 

1,329.3

 

 

 

1,329.3

 

Retained earnings (Note 11)

 

 

2,189.7

 

 

 

4,079.2

 

Accumulated other comprehensive loss (Note 11)

 

 

(411.6

)

 

 

(287.5

)

Treasury stock (Note 11)

 

 

(1,169.8

)

 

 

(1,188.7

)

Total controlling interest

 

 

2,040.4

 

 

 

4,035.1

 

Non-controlling interest (Note 11)

 

 

13.0

 

 

 

134.3

 

Total equity

 

 

2,053.4

 

 

 

4,169.4

 

Total liabilities and equity

 

$

6,760.5

 

 

$

8,549.9

 

 

See “Notes to unaudited condensed consolidated financial statements.”

6


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in millions)

 

 

 

Nine months ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income continuing operations

 

$

470.3

 

 

$

390.6

 

Net income discontinued operations

 

 

(195.8

)

 

 

(32.0

)

Depreciation and amortization

 

 

308.4

 

 

 

318.6

 

Separation costs

 

 

11.5

 

 

 

 

Other, net

 

 

19.7

 

 

 

(22.7

)

Changes in operating assets and liabilities

 

 

(312.9

)

 

 

(108.0

)

Net cash provided by operating activities (Note 3)

 

 

301.2

 

 

 

546.5

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(425.2

)

 

 

(414.4

)

Proceeds from sale of property, plant and equipment

 

 

3.8

 

 

 

12.6

 

Acquisitions of businesses and interest in/additional contributions to affiliates, net of

   cash acquired

 

 

(72.9

)

 

 

(113.1

)

Net cash used in investing activities (Note 3)

 

 

(494.3

)

 

 

(514.9

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Net increase (decrease) in short-term debt

 

 

374.9

 

 

 

(46.1

)

Issuance of long-term debt, net of discount

 

 

582.2

 

 

 

 

Debt issuance costs

 

 

(2.6

)

 

 

 

Dividends paid

 

 

(160.7

)

 

 

(156.4

)

Dividends paid to non-controlling interest

 

 

(2.0

)

 

 

 

Shares repurchased

 

 

 

 

 

(157.0

)

Common stock options exercised

 

 

8.2

 

 

 

5.2

 

Capital contribution to Veoneer

 

 

(971.8

)

 

 

 

Net cash used in financing activities

 

 

(171.8

)

 

 

(354.3

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(60.9

)

 

 

54.3

 

Decrease in cash and cash equivalents

 

 

(425.8

)

 

 

(268.4

)

Cash and cash equivalents at beginning of period

 

 

959.5

 

 

 

1,226.7

 

Cash and cash equivalents at end of period

 

$

533.7

 

 

$

958.3

 

 

See “Notes to unaudited condensed consolidated financial statements.”

7


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2018

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, 2018.

The Condensed Consolidated Balance Sheet at December 31, 2017 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.

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 of Veoneer.

Upon completion of the spin-off, Autoliv has concluded at June 30, 2018 that it has one reportable segment, based on the way the Company evaluates its financial performance and manages its operations. Prior to the completion of the spin-off, the Company had two reportable segments, Electronics and Passive Safety. The Company’s Passive Safety 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, 2017, filed with the SEC on February 22, 2018.

8


2. NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”). Consequently, the amendments in ASU 2018-02 eliminate the stranded tax effects resulting from the Act. The amendments in ASU 2018-02 are effective for all entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. The Company early adopted ASU 2018-02 as of January 1, 2018 and made a reclassification from AOCI to Retained earnings of approximately $10 million.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. In the first quarter of 2018, the Company elected to treat any potential GILTI inclusions as a period cost.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the service cost component to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the consolidated statements of income separately from the service cost component and outside operating income. The amendments in ASU 2017-07 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the consolidated statements of income. The Company adopted ASU 2017-07 in the first quarter of 2018. Prior comparative periods have not been adjusted since the impact of ASU 2017-07 is not material for any consolidated financial statements periods presented (see Note 10. Retirement Plans).

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Consequently, the amendments in this ASU 2016-16 eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of ASU 2016-16 are intellectual property and property, plant, and equipment. The amendments in ASU 2016-16 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in ASU 2016-16 should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of ASU 2016-16 effective January 1, 2018 did not have a material impact on the consolidated financial statements for any periods presented.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. In 2016, the FASB issued accounting standard updates to address implementation issues and to clarify guidance in certain areas. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to receive in exchange for those goods or services. In addition, ASU 2014-09 requires certain additional disclosure around the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASU 2014-09 effective January 1, 2018 and utilized the modified retrospective (cumulative effect) transition method to all contracts not completed at the date of initial application. The Company applied the modified retrospective transition method through a cumulative adjustment to retained earnings. The adoption of the new revenue standard did not have a material impact on net sales, net income, or balance sheet.

 

Balance Sheet

(Dollars in millions)

 

Balance at

December 31, 2017

 

 

Adjustments due

to ASC 606

 

 

Balance at

January 1, 2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Inventories, net1)

 

$

859.1

 

 

$

(17.3

)

 

$

841.8

 

Other current assets1)

 

 

228.9

 

 

 

22.0

 

 

 

250.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings1)

 

 

4,079.2

 

 

 

3.3

 

 

 

4,082.5

 

1) Impact at adoption which included both continuing and discontinued operations.

 

 

 

 

 

 

 

 

 

 

9


 

 

Three months period ended September 30, 2018

 

 

Nine months period ended September 30, 2018

 

Income Statement

(Dollars in millions)

 

As Reported

 

 

Balances

without

adoption of

ASC 606

 

 

Effect of Changes

 

 

As Reported

 

 

Balances

without

adoption of

ASC 606

 

 

Effect of Changes

 

Net sales

 

$

2,033.0

 

 

$

2,032.4

 

 

$

0.6

 

 

$

6,485.4

 

 

$

6,481.2

 

 

$

4.2

 

Cost of sales

 

 

(1,646.9

)

 

 

(1,646.5

)

 

 

(0.4

)

 

 

(5,199.3

)

 

 

(5,195.7

)

 

 

(3.6

)

Operating income

 

 

192.5

 

 

 

192.5

 

 

 

0.0

 

 

 

665.0

 

 

 

664.3

 

 

 

0.7

 

 

 

 

As of September 30, 2018

 

Balance Sheet

(Dollars in millions)

 

As Reported

 

 

Balances without

adoption of

ASC 606

 

 

Effect of Changes

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Inventories, net

 

$

758.7

 

 

$

774.1

 

 

$

(15.4

)

Other current assets

 

 

271.2

 

 

 

251.9

 

 

 

19.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

2,189.7

 

 

 

2,187.0

 

 

 

2.7

 

 

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.

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 period 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 Company believes that the pending adoption of ASU 2017-12 will not have a material impact on the consolidated financial statements since the Company terminated its existing cash flow hedges in the first quarter of 2018.

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.

10


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 intends to adopt ASU 2016-02 in the annual period beginning January 1, 2019. The Company intends to apply the modified retrospective transition method and elect the transition option to use the effective date January 1, 2019, as the date of initial application. The Company will not adjust its comparative period financial statements for effects of the ASU 2016-02, or make the new required lease disclosures for periods before the effective date. The Company will recognize its cumulative effect transition adjustment as of the effective date. In addition, we intend to elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow us to carry forward the historical lease classification. During the third quarter, the Company continued its process to identify leasing arrangements and to compare its accounting policies and practices to the requirements of the new standard. Further, the Company is assessing if there are any “embedded leases” in arrangements with its suppliers and customers that may result in right to use assets. In addition, the Company has continued its implementation of a new system to assist with lease accounting. The Company regularly enters into operating leases, for which current GAAP does not require recognition on the balance sheet. The Company anticipates that the adoption of ASU 2016-02 will primarily result in the recognition of most operating leases on its balance sheet resulting in an increase in reported right-of-use assets and leasing liabilities. The Company will continue to assess the impact from the new standard, including consideration of control and process changes to capture lease data necessary to apply ASU 2016-02.

 

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

 

 

Nine months ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Net sales

 

$

 

 

$

547.9

 

 

$

1,122.9

 

 

$

1,675.3

 

Cost of sales

 

 

 

 

 

(438.5

)

 

 

(898.4

)

 

 

(1,331.9

)

Gross profit

 

 

 

 

 

109.4

 

 

 

224.5

 

 

 

343.4

 

Selling, general and administrative expenses

 

 

 

 

 

(22.3

)

 

 

(59.7

)

 

 

(67.1

)

Research, development and engineering expenses, net

 

 

 

 

 

(89.4

)

 

 

(224.0

)

 

 

(275.7

)

Amortization of intangibles

 

 

 

 

 

(6.1

)

 

 

(10.5

)

 

 

(29.7

)

Other income (expense), net

 

 

 

 

 

(0.1

)

 

 

(53.4

)

 

 

12.5

 

Operating loss

 

 

 

 

 

(8.5

)

 

 

(123.1

)

 

 

(16.6

)

Loss from equity method investments

 

 

 

 

 

(9.9

)

 

 

(29.9

)

 

 

(17.7

)

Interest income

 

 

 

 

 

 

 

 

0.7

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

(0.4

)

 

 

(0.1

)

Other non-operating items, net

 

 

 

 

 

0.2

 

 

 

0.5

 

 

 

(0.1

)

Loss before income taxes

 

 

 

 

 

(18.2

)

 

 

(152.2

)

 

 

(34.5

)

Income tax (expense) benefit

 

 

 

 

 

0.2

 

 

 

(43.6

)

 

 

2.5

 

Loss from discontinued operations, net of income taxes

 

 

 

 

 

(18.0

)

 

 

(195.8

)

 

 

(32.0

)

Less: Net loss attributable to non-controlling interest

 

 

 

 

 

(3.1

)

 

 

(8.3

)

 

 

(7.2

)

Net loss from discontinued operations

 

$

 

 

$

(14.9

)

 

$

(187.5

)

 

$

(24.8

)

 

The Company has incurred $79.4 million in separation costs related to the spin-off of Veoneer, of which $70.9 million has been incurred 2018 year to date and is reported in Other income (expense), net. These costs are 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.

11


The following table summarizes the carrying value of major classes of assets and liabilities of Veoneer, reclassified as assets and liabilities of discontinued operations at December 31, 2017 (dollars in millions).

 

 

 

December 31, 2017

 

ASSETS

 

 

 

 

Receivables, net

 

$

460.5

 

Inventories, net

 

 

154.8

 

Other current assets

 

 

31.9

 

Total current assets, discontinued operations

 

 

647.2

 

 

 

 

 

 

Property, plant and equipment, net

 

 

364.2

 

Investments and other non-current assets

 

 

177.5

 

Goodwill

 

 

291.8

 

Intangible assets, net

 

 

122.2

 

Total non-current assets, discontinued operations

 

$

955.7

 

 

 

 

 

 

LIABILITIES

 

 

 

 

Accounts payable

 

$

323.5

 

Accrued expenses

 

 

199.1

 

Other current liabilities

 

 

45.6

 

Total current liabilities, discontinued operations

 

 

568.2

 

 

 

 

 

 

Long-term debt

 

 

11.0

 

Pension liability

 

 

19.1

 

Other non-current liabilities

 

 

34.0

 

Total non-current liabilities, discontinued operations

 

$

64.1

 

 

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, including the following (collectively, the “Spin-off Agreements”):

Distribution Agreement

The Distribution Agreement sets forth the principal transactions taken by Veoneer and by Autoliv in connection with the spin-off and the terms to govern certain aspects of the parties’ relationship following the spin-off. The Distribution Agreement also provides for cross-indemnities that, except as otherwise provided in the Distribution Agreement, are principally designed to place financial responsibility for the obligations and liabilities of Veoneer’s business with Veoneer and financial responsibility for the obligations and liabilities of Autoliv’s business with Autoliv. However, Autoliv has agreed to indemnify Veoneer for certain warranty, recall and product liabilities for Electronics products manufactured prior to April 1, 2018, and has retained an indemnification liability.

Amended and Restated Transition Services Agreement

Pursuant to the Amended and Restated Transition Services Agreement, Autoliv or one of its subsidiaries will provide various services to Veoneer and its subsidiaries and Veoneer or one of its subsidiaries agreed to provide various services to Autoliv and subsidiaries of Autoliv for a limited time to help ensure an orderly transition following the spin-off. The services will terminate no later than March 31, 2020.

Employee Matters Agreement

The Employee Matters Agreement governs Autoliv’s and Veoneer’s compensation and employee benefit obligations with respect to the employees and non-employee directors of each company.

Pursuant to the Agreement, the Company transferred to Veoneer pension benefits and postretirement benefits other than pension related to Veoneer employees. The transfer of assets and obligations to Veoneer resulted in a net decrease in the underfunded status of the sponsored pension and postretirement benefits other than pension of $22.8 million and the transfer of unrecognized losses in accumulated other comprehensive income of $6.3 million on the Distribution Date.  

Tax Matters Agreement

Pursuant to the Tax Matters Agreement, Autoliv and Veoneer allocated the liability for taxes and certain tax assets between the two companies.  The Tax Matters Agreement also governs the parties’ respective rights, responsibilities, and obligations with respect to U.S. federal, state, local and foreign taxes (including taxes arising in the ordinary course of business and taxes, if any,

12


incurred as a result of any failure of the spin-off and certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and assistance and cooperation in respect of tax matters.

Pursuant to the Tax Matters Agreement, Autoliv is the primary obligor on all taxes which relate to any period prior to April 1, 2018. Consequently, the Company is liable for any transition taxes under the Tax Cuts and Jobs Act of 2017.

Reseller Agreements

Reseller agreements are primarily comprised of arrangements between Veoneer and Autoliv business units in Japan, the U. S., India and Sweden to address situations in which customers have not yet been able to update their systems to reflect Veoneer as the supplier. Under the terms of these agreements and based on the substance of the relationships with the customers, Veoneer has the responsibility to provide the products to the customers although orders may be placed with Autoliv and Autoliv may collect the cash for the associated invoices which is then remitted to Veoneer.

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 third quarter an adjustment to the cash contribution amount of $8 million was made reducing the net assets contributed to Veoneer to $2,121 million.

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).

 

 

 

Nine months ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

Depreciation

 

$

44.8

 

 

$

61.0

 

Amortization of intangible assets

 

 

10.5

 

 

 

29.7

 

Capital expenditures

 

 

71.1

 

 

 

69.9

 

Acquisition in affiliate, net

 

 

71.0

 

 

 

110.1

 

M/A-COM earn-out adjustment

 

 

(14.0

)

 

 

(12.7

)

Undistributed loss from equity method investment

 

 

29.9

 

 

 

17.7

 

 

 

4. REVENUE

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 or annual price adjustments) and estimated at contract inception. 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, Autoliv 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 certain criteria are met warranting capitalization. The Company considers qualitative factors such as the maturity of the product and technology involved in a potential transaction as well as how current the customer relationship is, when evaluating if a payment(s) warrant capitalization. If the payments are capitalized, the amounts are amortized to revenue as the related goods are transferred.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.

 

13


Nature of goods and services

The following is a description of principal activities from which the Company generates its revenue. The Company has after the spin-off of its Electronics business one operating segment, Passive Safety, which includes airbag and seatbelt products and components. The Company generates revenue from the sale of production parts to original equipment manufacturers (“OEMs”).

The Company accounts for individual products separately if they are distinct (i.e., if a product is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration, including any price concessions or annual price adjustments, is based on their stand-alone selling prices for each of the products. The stand-alone selling prices are determined based on the cost-plus margin approach.

The Company recognizes revenue for production parts primarily at a point in time.

For production parts with revenue recognized at a point in time, the Company recognizes revenue upon shipment to the customers and transfer of title and risk of loss under standard commercial terms (typically FOB shipping point). There are certain contracts where the criteria to recognize revenue over time have been met (e.g., there is no alternative use to the Company and the Company has an enforceable right to payment). In such cases, at period end, the Company recognizes revenue and a related asset and associated cost of goods sold and inventory. However, the financial impact of these contracts is immaterial considering the very short production cycles and limited inventory days on hand, which is typical for the automotive industry.

The amount of revenue recognized is based on the purchase order price and adjusted for variable consideration (i.e. price concessions or annual price adjustments). Customers typically pay for the production parts based on customary business practices with stated payment terms averaging 30 days.

 

Disaggregation of revenue

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

 

Net Sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

Three months ended

 

 

Nine months ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018