Autoliv Inc. Hit Its Targets

Autoliv (ALV 0.34%) bounced back from a disappointing second quarter to deliver results in line with its expectations. However, as solid as the third quarter was, the company's focus remains on what it sees ahead, which is accelerating growth in 2018 and beyond. One of the initiatives it's exploring to drive this growth is splitting into two separate public companies, with one focused on passive safety and the other on electronics and self-driving cars.

Autoliv results: The raw numbers

Data source: Autoliv.  

Autoliv is gearing up to sharpen its focus on self-driving cars. Image source: Getty Images.

What happened with Autoliv this quarter?

Results came in as expected.

• While net sales rose 1.6%, after adjusting for the impact of currency fluctuations, organic sales rose 0.5%. However, that was still within Autoliv's guidance range that organic sales would increase "in the range of 0% to 2%" during the third quarter.
• Its adjusted operating margin was 7.9% for the quarter, which was toward the high end of its 7.5% to 8% range.
• The company's passive safety segment drove growth during the quarter, with sales rising 2.8% to nearly $2 billion. That said, on an organic basis, sales were only up 1.3% after adjusting for the positive impact from foreign currency fluctuations. Seatbelt sales led the way, increasing 4.7% organically as sales in Europe and Asia offset softness in the Americas. That more than offset weaker airbag sales, which declined 0.4% on an organic basis to due in part to lower sales in North America.
• Sales in Autoliv's electronics segment slipped 1.8% to $566.9 million and were down 1.9% organically after adjusting for currencies. A 12.1% organic revenue decline from its brake systems segment was the prime culprit, mostly because the company reclassified certain revenue, though sales to Honda (HMC 0.65%) in North America and Japan declined. Revenue from restraint control systems, which are mainly airbag control modules and remote sensing units, also declined during the quarter, falling 3.3% on an organic basis due to weaker sales to car companies in North America and Japan. Finally, active safety sales partially offset those weak spots after revenue climbed 6.2% organically. Driving this growth were radars and camera systems to Honda and other automakers.
• Despite hitting the mark on organic revenue growth and delivering operating margins toward the high end of its guidance range, Autoliv's earnings slumped versus the year-ago quarter. That's because margins declined year over year, going from 8.1% to 7.9%, while the company's tax rate was much higher during 2017's third quarter.

What management had to say

Autoliv CEO Jan Carlson commented on the quarter and what lies ahead, saying:

The third quarter turned out essentially as we had expected. We are in the midst of an intense period of preparing for our future growth, while delivering at the high end of our guided margin range for the quarter.

As Carlson noted, Autoliv reported an in-line quarter, driven in part by the fact that worldwide light vehicle production increased 2.1% as strong sales in Europe and Asia offset a 5.9% decline in the Americas. That said, the company continues focusing on gearing up for the growth it sees on the horizon. Several automakers are in the process of launching new products, including Honda's latest Accord, which features Autoliv's products. Meanwhile, Autoliv has plans to launch 340 new products in its passive safety segment alone next year, up from 285 this year. Those products and others to follow position the company for significant future growth.

Looking forward

To best capture this growth, Autoliv announced last month that it would undertake a strategic review with the intent on splitting into two companies. One would focus on passive safety systems like airbags and the other on electronics, including components for self-driving cars. The company estimates that its investments in new products can grow the sales of the passive safety entity to more than $10 billion by 2020, with it achieving an adjusted operating margin of around 13%. Meanwhile, the electronics-focused company could hit $3 billion in sales by 2020, including more than $1 billion from active safety products like radars, night vision systems, and cameras with driver-assist systems.

That said, this growth won't start materializing until early next year, which led the company to guide for virtually flat organic sales in the fourth quarter. Though, it does anticipate that its adjusted operating margin will be more than 9%.