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Decelerating Vehicle Production Causes Autoliv Inc. to Miss Earnings Expectations

Autoliv (NYSE: ALV) didn't like what it spied on the horizon when it reported first-quarter results a few months ago. At that time, CEO Jan Carlson stated that the company saw "some uncertainties relating to light vehicle production growth, including high inventory levels and slower sales momentum, especially in North America and China." Those worrisome trends for slowing light vehicle production didn't go away during the second quarter, causing Autoliv's results to come in below expectations. Furthermore, the company anticipates that those headwinds will persist during the third quarter, which led it to reduce its full-year organic sales growth guidance.

Autoliv results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$2.5 billion

$2.6 billion

(1.3%)

Operating income

$216.4 million

$212.7 million

1.7%

Adjusted EPS

$1.44

$1.75

(18.6%)

Data source: Autoliv.  

Image source: Getty Images.

What happened with Autoliv this quarter?

Light-vehicle production growth slowed during the quarter.

  • Autoliv anticipated that organic sales would grow by around 2% this quarter. However, after adjusting for the impact of currencies, organic sales only increased 0.2% due to lower-than-expected light-vehicle sales in China and North America. Overall, light-vehicle production was flat during the quarter as a 1.2% decline in China and a 0.4% decrease the Americas overwhelmed a double-digit jump from Japan.
  • Hardest hit by the flattening out of production was the company's electronics segment, where reported revenue fell 3.2% (and was still down 1.2% after adjusting for the negative impact of currencies). Sales of restraint control and sensing products dropped 5.8%, while revenue from brake systems was down 8.3%. The lone bright spot was active safety sales, which rose 6% on an organic basis thanks to strong sales of radar and camera systems.
  • Autoliv's passive safety segment was also under pressure during the quarter. Sales slipped 0.6%, though they were up 0.8% after adjusting for the impact of currencies thanks to a 1.4% organic rise in airbag sales, primarily on strength in China and Japan.
  • The weaker organic sales growth caused margins to come in a bit below expectations. The company anticipated that its adjusted operating margin would be around 8.5%, but it came in at 8.4%.
  • Several items caused earnings per share to fall despite a slight rise in operating income, including tax items, currencies, and the impact of equity accounting on investments.
  • On a more positive note, operating cash flow surged 74.9% to $179.4 million due to changes in working capital, which is the money it needs to run its day-to-day operations.

What management had to say

Autoliv CEO Jan Carlson commented on what drove its results during the second quarter:

I am pleased that we continue to execute well in Passive Safety and that proactive adjustments to a weaker market in China and North America helped the segment generate another quarter of double digit operating margin, despite continued elevated investments for growth. We managed another quarter with good operating efficiency, and our strong gross margin performance enabled us to meet our adjusted operating margin expectation although the organic sales growth was slightly below our expectation due to lower light vehicle production in China and North America. Order intake continued on a high level in Passive Safety in the quarter.

As Carlson points out, the company operated well in a less-than-ideal environment. Automakers had hoped that their strong sales momentum from last year would continue in 2017, but that hasn't been the case. GM (NYSE: GM), for example, recently reduced its forecast for 2017 U.S. vehicle sales. The U.S. automaker now foresees sales in the low 17 million range, down from an initial expectation that sales would match last year's peak of 17.55 million. One of the culprits is a glut of cars on the market, which is causing GM to slow production. 

Looking forward

Autoliv expects higher light-vehicle inventory in the U.S. and elsewhere as well as slow sales momentum and uncertainty in China and North America to continue to impact its sales in the near term. Because of that, the company only expects organic sales growth in the range of 0% to 2% during the third quarter with an operating margin in the 7.5% to 8% range.

Given the weakness in the second quarter and the outlook for the third, Autoliv is reducing its full-year expectations. The company now sees organic sales growth of around 2% for the full year, down from its initial expectation of a 4% increase. That said, the company does still expect its operating margin to be around 8.5% for the year.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Autoliv. The Motley Fool has a disclosure policy.