Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
Note 1. Summary of Significant Accounting Policies
Note 2. Significant Business Acquisitions
Note 3. Fair Values of Financial Instruments
Note 4. Income Taxes
Note 5. Receivables
Note 6. Inventories
Note 7. Investments and Other Non-current Assets
Note 8. Property, Plant and Equipment
Note 9. Goodwill and Intangible Assets
Note 10. Restructuring and Unusual items
Note 11. Debt and Credit Agreements
Note 12. Shareholders' Equity
Note 13. Supplemental Cash Flow Information
Note 14. Stock Incentive Plan
Note 15. Contingent Liabilities
Note 16. Lease Commitments
Note 17. Retirement Plans
Note 18. Segment Information
Note 19. Quarterly Financial Data (unaudited)
Note 20. Restatement
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Note 1. Summary of Significant Accounting Policies (Back)
Principles of Consolidation The consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and include Autoliv, Inc. and all companies over which Autoliv, Inc., directly or indirectly exercises control, which generally means that Autoliv owns more than 50% of the voting rights (the Company). All intercompany accounts and transactions within the Company have been eliminated from the consolidated financial statements. Investments in affiliated companies in which the Company exercises significant influence over the operations and financial policies, but does not control, are reported according to the equity method of accounting. Generally, the Company owns between 20 and 50 percent of such investments. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting Policies As described in Note 20, the Company changed accounting principle for an insurance arrangement at the end of 2003 and as a result 2001 and 2002 Financial Statements and 2001, 2002 and 2003 quarterly results are restated. New Accounting Policies New accounting policies issued by the Financial Accounting Standards Board (FASB) which have been implemented effective January 1, 2003 are the following: Statement FAS-143 Accounting for Asset Retirement Obligations issued June 2001. It requires the fair value of a liability for asset retirement obligations to be recorded in the period in which it is incurred. The statement applies to a company's legal or contractual obligation associated with the retirement of a tangible long-lived asset that resulted from the acquisition, construction or development or through the normal operation of a long-lived asset. The statement was effective January 1, 2003. The application of FAS-143 had no material impact on the Company's results of operations or financial position. Statement FAS-146 Accounting for Costs Associated with Exit or Disposal activities issued June 2002. It addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and other Costs to Exit an Activity (including Certain Costs Incurred in a restructuring). The principal difference between FAS-146 and EITF 94-3 relates to FAS-146's requirements that a liability for a cost associated with an exit or disposal activity should only be recognized when the liability is incurred. The statement is effective for exit or disposal activities initiated after December 31, 2002. The application of FAS-146 had no material effect on the Company´s earnings or financial position. Statement FAS-148 Accounting for Stock-Based Compensation-Transition and Disclosure of an amendment of FASB Statement No. 123 (FAS-148) issued December 2002. This Statement amends FAS-123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company does not plan to change its accounting for stock-based compensation from APB-25 (intrinsic value method) to FAS-123 (fair value method) and accordingly FAS-148 had no material effect on Autoliv´s earnings or financial position. Interpretation No. 45 Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others issued November 2002. It expands the existing disclosure requirements for most guarantees, including loan quarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions of FIN-45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of these provisions did not have any impact on the Company´s earnings and financial position. Interpretation No. 46 Consolidation of Variable Interest Entities issued January 2003 and revised in December 2003. It addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. FIN-46 requires consolidation of a variable interest entity if the reporting entity is subject to a majority of the risk of loss from the variable interest entity's activities or it is entitled to receive a majority of the variable interest entity's residual returns or both. The consolidation requirements of FIN-46 apply immediately to variable interest entities created after January 31, 2003 and to all other existing structures commonly refered to as special-purpose entities. The consolidation requirements will be effective in the first quarter 2004 to variable interest entities created prior to January 31, 2003. The adoption of FIN-46 did not have, and the application of the revised FIN-46 is not expected to have, a significant impact on earnings and financial position. Statement No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (FAS-149) issued April 2003. It requires that contracts with comparable characteristics be accounted for similarly. In particular, FAS-149 clarifies under what circumstances under which a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN-45, and amends certain other existing pronouncements. FAS-149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, provisions of FAS-149 should be applied prospectively. The application of FAS-149 had no effect on the Company's earnings and financial position. Statement No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (FAS-150) issued May 2003. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. FAS-150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The application of FAS-150 had no effect on Autoliv´s earnings and financial position. Statement No.132 Employers' Disclosures about Pensions and Other Postretirement Benefits issued December 2003. It has been revised to improve financial statement disclosures for defined-benefit plans. FAS-132 is effective for financial statements issued for fiscal years or interim periods ending after December 15, 2003. Disclosure of information about foreign plans and estimated future benefit payments is effective for fiscal years ending after June 15, 2004. Translation of non-U.S. Subsidiaries The balance sheets of non-U.S. subsidiaries are translated into U.S. dollars using year-end rates of exchange. Income statements are translated into U.S. dollars at the average rates of exchange for the year. Translation differences are reflected in other comprehensive income as a separate component of shareholders' equity. Revenue Recognition Revenues are recognized when there is evidence of a sales agreement, delivery of goods has occurred, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. The Company records revenue from the sale of manufactured products upon shipment. Net sales include the sales value exclusive of added tax. Cost of Sales Shipping and handling costs are included in cost of sales. Contracts to supply products which extend for periods in excess of one year are reviewed when conditions indicate that costs may exceed selling prices, resulting in losses. Losses on long-term supply contracts are recognized when estimable. Warranties and Recalls The Company records liabilities for product recalls when probable claims are identified and 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 defect. Product recall costs typically include the cost of the product being replaced as well as the customer cost of the recall, including labor to remove and replace the defective part. Provisions for warranty claims are estimated based on prior experience and likely changes in performance of newer products and the mix and volume of products sold. The provisions are recorded on an accrual basis. Certain insurance arrangements for recall liabilities have been accounted for using the deposit accounting method. Research, Development and Engineering (R,D&E) Research and development expenses are charged to income as incurred. Engineering expenses are normally charged to income as incurred. These expenses are reported net of royalty income and income from contracts to perform engineering design and product development services. Such income is not significant in any period presented. In addition, certain engineering expenses related to long-term supply arrangements are capitalized when the defined criteria, such as the existence of a contractual guarantee for reimbursement, are met. The aggregate amount of such assets is not significant in any period presented. Property, Plant and Equipment Property, plant and equipment are recorded at historical cost. Construction in progress generally involves short-term projects for which capitalized interest is not significant. The Company provides for depreciation of property, plant and equipment by annual charges to income, computed under the straight- line method over the assets estimated useful lives, ranging from 3 to 40 years. Repairs and maintenance are expensed as incurred. Goodwill and Other Intangible Assets Intangible assets are recorded at historical cost. Until the end of the financial year ended December 31, 2001, goodwill was amortized on a straight- line basis over periods ranging from 5 to 40 years. Since January 2002, in accordance with FAS-142, goodwill is no longer amortized. Other intangible assets, principally related to acquired technology, are amortized over their useful lives which range from 5 to 25 years. Impairment of Goodwill and Long-lived Assets The Company evaluates the carrying value of goodwill and long-lived assets for potential impairment on an ongoing basis. The fair value of impaired assets is primarily determined by the discounted cash flow method. The Company discounts projected operating cash flows using its weighted average cost of capital. The impairment testing of goodwill is based on four different product groups i.e. Electronics, Textiles, Seat Sub-Systems and Other. The product group Other includes Airbags, Initiators, Inflators, Seat belts and Steering wheels. Income Taxes Current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current year. Deferred tax liabilities or assets are recognized for the estimated future tax effects attributable to temporary differences and carry-forwards that result from events that have been recognized in either the financial statements or the tax returns, but not both. The measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax laws. Deferred tax assets are reduced by the amount of any tax benefits that are not expected to be realized. Tax assets and liabilities are not offset unless attributable to the same tax jurisdiction and netting is possible according to law and expected to take place in the same period. Earnings per Share The Company calculates earnings per share (EPS) by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period (net of treasury shares). The EPS also reflects the potential dilution that could occur if common stock were issued. There is no material difference between basic and diluted earnings per share in 2003, 2002 and 2001. The dilutive effect of stock options was immaterial in all periods presented. Cash Equivalents The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. Financial Instruments The Company uses derivative financial instruments, (derivatives), to mitigate the market risk that occurs from its exposure to changes in interest and foreign exchange rates. The Company does not utilize financial instruments for trading or other speculative purposes. The use of such derivatives is in accordance with the strategies contained in the Company's overall financial policy. With respect to derivatives, the policy states that a 1% interest increase in floating rates should not increase the annual net interest expense by more than $5 million in the following year and not more than $10 million in the second year. The Company adopted FAS-133, as amended by FAS-138, effective January 1, 2001. The cumulative transition adjustment was not significant. The Company's criteria for a derivative to be accounted for as a hedge include the following four elements: 1) The hedge transaction is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, 2) the effectiveness of the hedge can be reliably measured, 3) adequate documentation of the hedging relationships has been prepared at the inception of the hedge and 4) for cash flow hedges, the forecasted transaction that is subject to the hedge must be highly probable. The changes in the fair values of the hedges are recorded at each balance sheet date. The fair value of the Company's derivatives are estimated based on dealer quotes or on pricing models using current assumptions. When an anticipated future cash flow is hedged and the underlying position has not been recognized in the financial statements, any change in the fair value of the hedge is not recognized in the income statement for the period but recorded directly in equity as a component of Other Comprehensive Income, (OCI). No material reclassifications are expected from OCI to the income statement in 2004. When a hedge is classified as a fair value hedge, the change in the fair value of the hedge is recognized in the income statement along with the offsetting change in the fair value of the hedged item. The Company previously entered into foreign exchange contracts to hedge the transaction exposure that arises because the cost of a product originates in one currency and the product is sold in another currency. The financial policy has been changed and this hedging activity has discontinued as of June 2003. The contracts had terms of up to twelve months and hedged anticipated cash flows denominated in foreign currencies. At December 31, 2003, contracts with maturity up to three months were still outstanding. The counterparty exposure expressed as gross positive mark-to-market value on these contracts was $3 million at year-end. These contracts are designated as cash flow hedges. The ineffective part of these contracts has effected operating income in 2003 negatively by $2 million. The Company also uses interest rate swaps to protect against interest rate risk, as well as currency swaps to hedge against currency risk arising as a part of debt management. These hedges are designated either as cash flow hedges or fair value hedges with certain exceptions. Some hedge transactions, although entered into applying the same rationale concerning mitigating market risk that occurs from changes in interest and foreign exchange rates, do not qualify for hedge accounting under US GAAP. The mark-to-market value of these derivatives was immaterial at year-end. To the extent these derivatives relate to financing, any amount recognized in the income statement is recorded as "Interest expense". All swaps principally match the terms and maturity of the underlying debt. For further details on the Company's debt, see Note 11. Prior to September 30, 2003, the Company reported the fair market value, ("FMV") adjustments associated with hedging instruments as adjustments to the carrying value of the underlying debt. The Company has, as from the third quarter, reclassified these adjustments, so called debt related derivatives, ("DRD"), from the debt caption. Accordingly, short-term debt was decreased by $2 million and long-term debt was increased by $119 million at year-end. The FMV adjustments are now reported in "Investments and other non- current assets", "Other current liabilities" and "Other non-current liabilities" depending on the nature of the revaluation and the type of instrument. Receivables and Liabilities in Non-functional Currencies Receivables and liabilities not denominated in functional currencies are converted at year-end rates of exchange. Transaction gains (losses), net reflected in income amounted to $(15.7) million in 2003, $(3.2) million in 2002 and $1.0 million in 2001. Inventories Inventories are valued at the lower of cost or market. Cost is computed according to the first-in, first-out method (FIFO). Reclassifications Certain prior-year amounts have been reclassified to conform to current year presentation. Note 2. Significant Business Acquisitions (Back) As of July 1, 2003 Autoliv acquired 100% of the shares in the German company Protektor which specializes in seat belts for buses, heavy trucks, forklifts and other special-purpose vehicles. The Protektor operations have approximately $10 million in annual sales and have been consolidated since July 1, 2003. In June, 2003 Autoliv acquired the net assets of Nippon Steering Industries (NSI), a joint venture between the privately-held Japanese automotive parts company KIW and Autoliv's own steering wheel company in Japan, Autoliv-Izumi. Autoliv also acquired KIW's assets in steering wheels. The operations have been consolidated since June 2003 and had nearly $20 million in annual sales. In April 2003, Autoliv exercised its options to acquire the remaining 60% of the shares in NSK's Asian seat belt operations. The Company accounted for its initial 40% investment in the NSK operations under the equity method. As a result of the exercise of the options, operations, which have annual sales of approximately $150 million, have been consolidated since April 1, 2003. In March 2003, Autoliv exercised its option and acquired the remaining 17% of the shares in Livbag, Europe's leading producer of inflators and initiators for automotive safety systems. Livbag and its initiator subsidiary NCS S.A. have approximately $400 million in annual sales mainly to other Autoliv companies. In September 2002, Autoliv acquired the 10% stake in Autoliv QB Inc., a Philippine company, formerly held by one of two local shareholders. Autoliv has thereby increased its ownership in the company from 75% to 85%. In addition, Autoliv agreed to inject 18 million Philippine Pesos ($0.3 million) into the company as new share capital. The remaining local shareholder did not participate in the equity increase. Thus, Autoliv effectively increased its interest in Autoliv QB, Inc. to 91%. In April, 2002 the acquisition of the Restraint Electronics Business of Visteon Corporation was completed. The operations that Autoliv acquired had $150 million in annual sales. The Company also sold its French steel component company Autoliv Composants S.A.S in the beginning of 2002. The sale of Autoliv Composants did not have a material impact on Autoliv's consolidated sales or earnings. In 2001, a venture was established with Mando Corporation, a leading Korean auto parts supplier. In this new venture, Autoliv Mando Corporation, Autoliv holds 65% of the shares. The annual sales were approximately $35 million. Also in 2001, effective January 1, the Company exercised its option to increase its holding from 66% to 83% in Livbag and its subsidiary NCS S.A. In June 2001, the Company made Autoliv Romania S.A. a wholly-owned subsidiary by acquiring the remaining 10% of the shares. In August 2001, the Company acquired the remaining 10% minority interest in Autoliv Thailand. The above acquisitions have been accounted for using the purchase method of accounting, and accordingly, the results of operations of the entities have been consolidated since the respective dates of acquisition. Investments in which the Company previously exercised significant influence, but did not control prior to these acquisitions, were accounted for using the equity method. The purchase price of the acquisitions amounted to $33 million in 2003, $25 million in 2002 and $16 million in 2001. Goodwill of $15 million, $7 million and $9 million, respectively, was associated with these acquisitions. Prior to 2002, such goodwill was being amortized over 5 to 40 years. The pro- forma effects of the acquisitions would not be materially different from reported results. Note 3. Fair Values of Financial Instruments (Back) The following methods were used by the Company to estimate its fair value disclosures for financial instruments. Current Financial Assets and Liabilities The carrying amounts reported in the balance sheet for current financial assets and liabilities approximate their fair values because of the short maturity of these items. Long-Term Debt and Other Non-Current Financial Assets and Liabilities The carrying amounts reported in the balance sheet for long-term debt and other non-current financial assets and liabilities, including their respective short-term portion, represent their fair values if they are the hedged item in a fair value hedge or a derivative. For hedged liabilities in cash flow hedges, the fair value exceeds the carrying value with $17 million. The fair value of unhedged items does not deviate materially from the carrying value. The fair value of these debt instruments and related swaps are specified in Note 11. Prior to September 30, 2003, the Company reported the fair market value adjustments associated with hedging instruments as adjustments to the carrying value of the underlying debt. Note 4. Income Taxes (Back) |
| Income before income taxes | 2003 | 2002 | 2001 |
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| U.S. | $55.3 | $71.6 | $4.8 |
| Non-U.S. | 341.7 | 207.6 | 119.8 |
| Total | $397.0 | $279.2 | $124.6 |
| Provision for income taxes | 2003 | 2002 | 2001 |
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| Current |
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| U.S. federal | $18.5 | $19.5 | - |
| Non-U.S. | 78.9 | 59.1 | $50.9 |
| U.S. state and local | 7.0 | 6.8 | 0.2 |
| Deferred | |||
| U.S. federal | (10.4) | (1.3) | 13.8 |
| Non-U.S. | 28.5 | 7.2 | (5.3) |
| U.S. state and local | (2.3) | (1.8) | 2.9 |
| Total income taxes | $120.2 | $92.1 | $62.5 |
| Effective income tax rate | 2003 | 2002 | 2001 |
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| U.S. federal income tax rate | 35.0% | 35.0% | 35.0% |
| Goodwill amortization | - | - | 15.2 |
| Net operating loss carry-forwards | (3.1) | (1.9) | (0.9) |
| Non-utilized operating losses | 1.0 | 4.6 | 5.9 |
| Foreign tax rate variances | (0.9) | (2.5) | (0.2) |
| State taxes, net of federal benefit | 0.8 | 1.2 | 1.6 |
| Earnings of equity investments | (1.0) | (0.5) | (1.6) |
| Export sales incentives | (1.3) | (1.1) | (2.4) |
| Tax credits | (3.6) | (2.7) | (4.7) |
| Other, net | 3.4 | 0.9 | 2.3 |
| Effective income tax rate | 30.3% | 33.0% | 50.2% |
| Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. On December 31,
2003, the Company had net operating loss carry-forwards ("NOL's") of approximately
$100 million, of which approximately $50 million have no expiration date.
The balance expires on various dates through 2019. Valuation allowances
have been established which partially offset the related deferred assets.
The Company provides valuation allowances against potential future tax
benefits when, in the opinion of management, based on the weight of available
evidence, it is more likely than not that some portion of the deferred
tax assets will not be realized. Such allowances are primarily provided
against NOL's of companies that have perennially incurred losses, as well
as the NOL's of companies that are start-up operations and have not established
a pattern of profitability. The Company has, principally in deferred tax liabilities, reserves for taxes that may become payable in future periods as a result of tax audits. It is the Company's policy to establish reserves for taxes that may become payable in future years as a result of an examination by tax authorities. The Company establishes the reserves based upon management's assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary difference adjustments. The tax reserves are analyzed periodically (at least annually) and adjustments are made as events occur to warrant adjustment to the reserves. At any given time, the Company is undergoing tax audits in several tax jurisdictions and covering multiple years. The tax reserves were increased by $9.4 million for the year ended December 31, 2003. There was no change in the reserves in 2002 while the tax reserves were decreased by $2.3 million for the year ended December 31, 2001. Deferred taxes |
| December 31 | 2003 | 2002 |
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| Assets | ||
| Provisions | $65.9 | $59.0 |
| Costs capitalized for tax | 5.5 | 2.5 |
| Pensions | 31.2 | 27.0 |
| Tax receivables, principally NOL´s | 57.3 | 81.3 |
| Other | 8.5 | 12.8 |
| Deferred tax assets before allowances | 168.4 | 182.6 |
| Valuation allowances | (23.2) | (50.2) |
| Total | $145.2 | $132.4 |
| Liabilities | ||
| Acquired intagibles | $(58.3) | $(66.4) |
| Statutory tax allowances | (11.9) | (8.6) |
| Property, plant and equipment | (1.9) | (3.5) |
| Insurance Deposit | (7.8) | (6.7) |
| Other | (106.6) | (79.8) |
| Total | $(186.5) | $(165.0) |
| Net deferred tax (liability) | $(41.3) | $(32.6) |
| Valuation allowances against tax receivables |
| December 31 | 2003 | 2002 | 2001 |
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| Allowances at | |||
| beginning of year | $50.2 | $52.1 | $45.9 |
| Benefits reserved current year | 3.2 | 12.4 | 10.3 |
| Benefits recognized current year | (19.9) | (5.0) | (1.1) |
| Write-offs and other changes | (13.3) | (7.8) | (2.1) |
| Translation difference | 3.0 | (1.5) | (0.9) |
| Allowances at end of year | $23.2 | $50.2 | $52.1 |
Deferred income taxes have not been provided on approximately $980 million of undistributed earnings of non-U.S. subsidiary companies, which are considered to be permanently reinvested. These earnings generally would not be subject to withholding taxes, either upon distribution to intermediate holding companies or upon distribution to the U.S. In addition, U.S. income taxes on non-U.S. earnings which might be remitted would be substantially offset by foreign tax credits. Note 5. Receivables (Back) |
| December 31 | 2003 | 2002 | 2001 |
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| Receivables | $1,206.6 | $1,018.5 | $849.8 |
| Allowance at | |||
| beginning of year | (9.9) | (12.6) | (13.6) |
| Reversal of allowance | 6.1 | 5.9 | 3.2 |
| Addition to allowance | (17.8) | (14.5) | (7.1) |
| Write-off against allowance | 11.3 | 11.8 | 4.7 |
| Translation difference | (1.0) | (0.5) | 0.2 |
| Allowance at end of year | (11.3) | (9.9) | (12.6) |
| Total receivables | |||
| net of allowance | $1,195.3 | $1,008.6 | $837.2 |
| Note 6. Inventories (Back) |
| December 31 | 2003 | 2002 | 2001 |
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| Raw material | $199.3 | $176.6 | $148.9 |
| Finished products | 117.7 | 92.7 | 67.9 |
| Work in progress | 167.1 | 130.9 | 125.2 |
| Inventories | $484.1 | $400.2 | $342.0 |
| Inventory reserve at | |||
| beginning of year | (18.7) | (12.5) | (11.1) |
| Reversal of reserve | 2.6 | 1.6 | 1.9 |
| Addition to reserve | (18.6) | (13.4) | (9.3) |
| Write-off against reserve | 5.7 | 7.1 | 5.5 |
| Translation difference | (3.1) | (1.5) | 0.5 |
| Inventory reserve at end of year | (32.1) | (18.7) | (12.5) |
| Total inventories | |||
| net of reserve | $452.0 | $381.5 | $329.5 |
Note 7. Investments and Other Non-current Assets (Back) The Company has invested in nine affiliated companies which it does not control, but in which it exercises significant influence over operations and financial position. These investments are accounted for under the equity method. The total investment was $41 million and $32 million at December 31, 2003 and 2002, respectively. Other non-current assets include deferred income tax receivables of $90 million and $77 million at December 31, 2003 and 2002, respectively, and a derivative asset of $125 million at December 31, 2003. Prior to September 30, 2003 debt related derivatives were reported as adjustments to the carrying value of the underlying debt, therefore there is no corresponding derivative asset at December 2002. For further description of the reclassification of debt related derivatives, see the Financial Instruments section of Note 1 and Note 11. As described in Note 20 the Company changed accounting principle for an insurance arrangement and previous years are restated. The amount recorded under the insurance arrangement as long-term interest bearing deposit was $24 million and $20 million at December 31, 2003 and 2002. Note 8. Property, Plant and Equipment (Back) |
| December 31 | 2003 | 2002 | |
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| Land and land improvements | $76.2 | $49.1 | |
| Machinery and equipment | 1,909.2 | 1,551.9 | |
| Buildings | 516.8 | 452.2 | |
| Construction in progress | 102.9 | 104.1 | |
| Property, plant and equipment | 2,605.1 | 2,157.3 | |
| Less accumulated depreciation | (1,552.9) | (1,240.4) | |
| Net of depreciation | $1,052.2 | $916.9 | |
| Depreciation included in | 2003 | 2002 | 2001 |
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| Cost of sales | $224.1 | $199.2 | $203.5 |
| Selling, general and administrative expenses | 11.8 | 11.2 | 10.2 |
| Research, development and engineering expenses | 21.8 | 18.7 | 17.2 |
| Total | $257.7 | $229.1 | $230.9 |
No significant impairments were recognized during 2003. During 2002, impairment provisions of totaling $8 million were recognized. They were principally related to the plant closures in Indianapolis and Denver and further asset write-offs in the Seat Sub-System division. In the third quarter of 2001, an impairment provision of $18 million was recognized. The provisions were included in cost of sales. The net book value of Machinery and equipment under capital lease contracts recorded as of December 31, 2003 and 2002, amounted to $1.4 and $4.9 million, respectively. The net book value of Buildings under capital lease contracts recorded as of December 31, 2003 and 2002, amounted to $8.1 and $6.1 million, respectively. Note 9. Goodwill and Intangible Assets (Back) |
| Unamortized intangibles | 2003 | 2002 |
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| Goodwill | ||
| Carrying amount at beginning of year | $1,498.2 | $1,472.3 |
| Goodwill aquired during year | 15.1 | 7.1 |
| Reclassification 1) | - | 5.8 |
| Translation differences | 18.1 | 13.0 |
| Carrying amount at end of year | $1,531.4 | $1,498.2 |
| 1) Upon adoption of FAS-141 "Assembled workforce" of net $5.8 million
was reclassified to goodwill. |
| Amortized intangibles | 2003 | 2002 |
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| Intellectual property | ||
| Gross carrying amount | $304.1 | $297.0 |
| Accumulated amortization | (125.2) | (104.9) |
| Carrying value | $178.9 | $192.1 |
| During 2003, $2 million of intellectual property was acquired as part
of the Protektor acquisition. The property is amortized over 5 - 10 years
and had at December 31, 2003 a residual value of $2 million. Another $5
million of intellectual property was acquired as part of the Livbag acquisition.
That property is amortized over 5 years and had at December 31, 2003 a
residual value of $4 million. During the second quarter of 2002, $7 million of intellectual property was acquired as part of the Visteon Restraint Electronics acquisition. The property is amortized over 7 years and had at December 31, 2003 a residual value of $5 million. At December 31, 2003, goodwill assets net include $1,208 million associated with the 1997 merger of Autoliv AB and the Automotive Safety Products Division of Morton International, Inc. The aggregate amortization expense was $21.1 million in 2003 and $19.4 million in 2002. The estimated amortization expense is as follows (in millions): 2004: $20.0; 2005: $12.2; 2006: $12.4; 2007: $12.4 and 2008: $12.4 |
Note 10. Restructuring and Unusual items (Back) Restructuring items 2001 During October 2001, a restructuring package was introduced to improve profitability and offset the effects of expected downturn in light vehicle production. The costs and provisions for this package, totaling $65 million, were charged to the third quarter 2001 results and was referred to as "Unusual Items". The Unusual Items also included provisions for contractual, warranty and liability issues related to ongoing litigation. The litigation is still ongoing. The restructuring package mainly included restructuring costs and asset write-offs of the Seat Sub-System division, severance costs related to the U.S. and the Swedish textile operations and additional costs incurred for the partial integration of a former OEA plant into the main U.S. inflator operation. The table below summarizes the provisions made in the third quarter 2001 by type of charge: |
| Amorti- | Other | |||
| Cost of | zation of | (income)/ | ||
| Total | sales | intangibles | expense | |
| |
||||
| Fixed Asset impairment | $18.2 | $18.2 | - | - |
| Goodwill impairment | 5.7 | - | $5.7 | - |
| Subtotal impairment | $23.9 | |||
| Restructuring- | ||||
| employee related | $11.9 | 0.9 | - | $11.0 |
| Contractual losses | 7.0 | 7.0 | - | - |
| Warranty | 10.0 | 10.0 | - | - |
| Liability | 12.5 | 10.0 | - | 2.5 |
| Subtotal provisions | $41.4 | |||
| Total | $65.3 | $46.1 | $5.7 | $13.5 |
| The table below summarizes the changes in restructuring reserves from the provisions made in the third quarter 2001 to December 31, 2001. |
| Reserve balance | |||||
| Provision | Cash | Change in | Translation | December 31 | |
| Q3 2001 | payments | reserve | difference | 2001 | |
| |
|||||
| Restructuring- | |||||
| employee related | $11.9 | $(4.7) | - | $(0.1) | $7.1 |
| Contractual losses | 7.0 | - | $(1.0) | (0.2) | 5.8 |
| Warranty | 10.0 | - | (10.0) | - | - |
| Liability | 12.5 | - | 10.0 | (0.1) | 22.4 |
| Subtotal reserve | $41.4 | $(4.7) | $(1.0) | $(0.4) | $35.3 |
| Fixed asset impairment | $18.2 | ||||
| Goodwill impairment | 5.7 | ||||
| Subtotal impairment | $23.9 | ||||
| Total | $65.3 | ||||
| 2002 In 2002, restructuring provisions of $9 million were made for severance costs associated with plant consolidations in the U.S. These severance provisions have been charged against "Other income and expense" in the income statement in the fourth quarter of 2002. The table below summarizes the change in the balance sheet position of the restructuring reserves from December 31, 2001 to December 31, 2002. |
|||||
| December 31 | Cash | Change in | Translation | December 31 | |
| 2001 | payments | reserve | difference | 2002 | |
| |
|||||
| Restructuring-employee related | $7.1 | $(3.4) | $8.5 | $0.3 | $12.5 |
| Contractual losses | 5.8 | (5.8) | (0.2) | 0.5 | 0.3 |
| Liability | 22.4 | (4.5) | - | 0.5 | 18.4 |
| Total reserve | $35.3 | $(13.7) | $8.3 | $1.3 | $31.2 |
| 2003 In 2003, employee-related restructuring provisions of $5.9 million were made for severance costs related to plant consolidation in Europe. The provision has been charged against "Other income and expense" in the income statement in the fourth quarter of 2003. The table below summarizes the change in the balance sheet position of the restructuring reserves from December 31, 2002 to December 31, 2003. |
|||||
| December 31 | Cash | Change in | Translation | December 31 | |
| 2002 | payments | reserve | difference | 2003 | |
| |
|||||
| Restructuring-employee related | $12.5 | $(10.2) | $3.2 | $0.6 | $6.1 |
| Contractual losses | 0.3 | - | (0.3) | - | - |
| Liability | 18.4 | - | 0.5 | 0.5 | 19.4 |
| Total reserve | $31.2 | $(10.2) | $3.4 | $1.1 | $25.5 |
| The decrease in number of employees expected as part of the restructuring
activities when the provisions were made in the third quarter 2001, was
521. At December 31, 2001, 104 employees were terminated or had left voluntarily
and 417 employees remained to be severed. During 2002, 265 employees were
terminated or left voluntarily. As part of the restructuring activities
in North America in 2002, for which provisions were made in the fourth
quarter of 2002, a decrease of 888 employees was expected. Therefore,
at December 31, 2002, 1,040 employees remained to be terminated as part
of the restructuring activities covered by the reserves. During 2003,
1,038 employees were terminated or left voluntarily. As part of the restructuring
activities in Europe, for which provisions were made in the fourth quarter
of 2003, 110 employees are expected to be severed. Therefore, at December
31, 2003, a decrease of 112 employees remains as part of the restructuring
activities covered by the reserves. Recall, Product Liability and Warranty At December 31, 2003 the reserve for product related performance issues (recall, product liability and warranty) amounted to $52.0 million. At December 31, 2002 the corresponding reserve was $47.5 million. Note 11. Debt and Credit Agreements (Back) |
| Average net debt and | |||
| interest net | 2003 | 2002 | 2001 |
| |
|||
| Average net debt1) | $873 | $940 | $1,032 |
| Interest, net | 43.8 | 48.9 | 60.1 |
| Average interest on net debt | 5.0% | 5.2% | 5.8% |
| 1) Short- and long-term interest bearing liabilities and related derivatives, less cash and cash equivalents. | |||
| Short-term debt The Company has two commercial paper programs: one $1,000 million U.S. program, which at December 31, 2003, had notes of $194 million outstanding at a weighted average interest rate of 1.2%, and one €485 million Swedish program, which at December 31, 2003 was unutilized. All of the notes outstanding were reclassified as long-term debt since they are backed with a committed facility maturing in 2008. The Company also has credit facilities with a number of banks that manage the subsidiaries' cash pools. In addition, the Company's subsidiaries have credit agreements, principally in the form of overdraft facilities, with a number of local banks. Excluding the commercial paper programs, total available facilities as of December 31, 2003, amounted to $416 million, of which $114 million was utilized. The aggregate amount of unused short-term lines of credit at December 31, 2003, was $302 million. Furthermore, $38 million represents the short-term portion of long-term loans, primarily notes under the Swedish medium- term note program; as described below. The weighted average interest rate on total short-term debt outstanding at December 31, 2003 and 2002, was 3.0% and 4.0%, respectively. Prior to September 30, 2003, the Company reported the fair market value, ("FMV") adjustments associated with hedging instruments as adjustments to the carrying value of the underlying debt. The Company has decided to reclassify these adjustments, so called debt related derivatives, ("DRD"), from the debt caption. Accordingly, short-term debt was decreased by $2 million and long-term debt was increased by $119 million at year-end. The FMV adjustments are now reported in "Investments and other non-current assets", "Other current liabilities" and "Other non-current liabilities", depending on the nature of the revaluation and the type of instrument. In the following tables short-term debt and long-term debt are shown both including DRD, i.e. debt including cash flow from hedges, and excluding DRD, i.e. debt as reported in the balance sheet. |
| 2003 | 2002 | |||
| |
||||
| December 31 | Amount | %1) | Amount | %1) |
| Overdrafts and other | ||||
| short-term debt | $113.6 | 1.9 | $46.8 | 3.5 |
| Short-term portion of long- | ||||
| term loan (incl. DRD2)) | 37.6 | 6.2 | 76.1 | 4.2 |
| Short-term debt (incl. DRD) | 151.2 | 3.0 | 122.9 | 4.0 |
| DRD adjustment | (1.8) | n/a | n/a | n/a |
| Short-term debt as reported | $149.4 | n/a | $122.9 | 4.0 |
1) Weighted average interest rate at December 31 2) Debt Related Derivatives, (DRD), i.e. the fair market value adjustments associated with hedging instruments as adjustments to the carrying value of the underlying debt. Long-term debt The Company issued a €300 million Eurobond in 2001 which matures in May 2006. All proceeds of the issue were swapped into USD, totaling $265 million. Under the Swedish medium-term note program of SEK 4 billion (approximately $550 million), 3- to 7-year notes have been issued in Euro at interest rates of 2.7% to 6.4% and in SEK at interest rates of 3.9% to 6.8%. In total $234 million of notes, with a remaining maturity of more than one year, were outstanding at year-end. Commercial paper borrowings, in the amount of $194 million outstanding at December 31, 2003, are classified as long-term because the Company intends to refinance these borrowings on a long-term basis either through continued commercial paper borrowings or utilization of available credit facilities. The remaining other long-term debt, $33 million, consisted primarily of fixed rate loans and capital leasing. |
| 2003 | 2002 | |||
| |
||||
| December 31 | Amount | %1) | Amount | %1) |
| Commercial paper (reclass.) | $194.5 | 1.2 | $368.8 | 2.4 |
| Eurobond (incl. DRD 2)) | 265.3 | 6.5 | 265.3 | 6.5 |
| Medium-term notes (incl. DRD 2)) | 234.0 | 4.8 | 190.8 | 5.9 |
| Other long-term debt | 33.4 | 2.7 | 17.8 | 4.8 |
| Long-term debt (incl. DRD) | 727.2 | 4.4 | 842.7 | 4.5 |
| DRD adjustment | 119.0 | n/a | n/a | n/a |
| Long-term debt as reported | $846.2 | n/a | $842.7 | 4.5 |
1) Weighted average interest rate at December 31. 2) Debt Related Derivatives, (DRD), i.e. the fair market value adjustments associated with hedging instruments as adjustments to the carrying value of the underlying debt. In 2003, the Company refinanced its revolving credit facility, ("RCF"). The new RCF of $850 million was syndicated among 16 banks. The agreement is divided in two facilities, one of $570 million, maturing in March 2008, and one $280 million 364 day facility, which may - but is not guaranteed - to be renewed each March. The overall commitment of $850 million supports the Company's commercial paper borrowings as well as being available for general corporate purposes. Borrowings are unsecured and bear interest based on the relevant LIBOR rate. The Company pays a facility fee based on the unused amount of the RCF. Borrowings are prepayable at any time and are due at expiration. The facility is subject to financial covenants requiring the Company to maintain a certain level of debt to earnings and a certain interest coverage ratio. The Company was in compliance with these covenants at December 31, 2003. These covenants do not impair the ability of Autoliv, Inc. to make regular quarterly dividend payments or to meet other expected cash commitments. The RCF was not utilized at year-end. In the Company's financial operations, risk arises in connection with the investment of liquid assets and when entering forward exchange agreements, swap contracts or other financial instruments. In order to reduce this risk, deposits and financial instruments can only be entered with a limited number of banks and in limited amounts, as approved by the Company's Board of Directors. The policy of the Company is to work with banks that have a high credit rating and that participate in the Company's financing. For a description of hedging instruments used as part of debt management, see the Financial Instruments section of Note 1. The first table on the next page shows debt maturity as cash flow in the upper part which is reconciled with reported debt in the last row. The third table on the next page shows the fair value of derivatives excluding related debt and will therefore not reconcile with the Fair value of debt table. Prior to September 30, 2003, the Company reported the fair market value adjustments associated with hedging instruments as adjustments to the carrying value of the underlying debt, therefore there is no corresponding data for December 2002. Fair Value of debt, December 31, 2003 |
| Long-term debt |
Carrying value1) |
Fair value |
|
| |
|||
| Commercial paper (reclassified) | $194.5 | $194.5 | |
| Eurobond | 386.3 | 400.4 | |
| Medium term notes | 232.0 | 237.3 | |
| Other long-term debt | 33.4 | 33.4 | |
| Total | $846.2 | $865.6 | |
| Short-term debt | |||
| |
|||
| Overdrafts and other | |||
| Short-term debt | $113.6 | $113.6 | |
| Short-term portion of long-term debt | 35.8 | 35.8 | |
| Total | $149.4 | $149.4 | |
| 1) Debt as reported in balance sheet. | |||
| Fair value of derivates December 31, 2003 | |||
| Total | Fair | ||
| In relation to Eurobond | nominal | value | |
| |
|||
| Interest rate swaps: | |||
| Cash flow treatment | $165.2 | $(10.2) | |
| Cash currency interest rate swaps: | |||
| Cash flow treatment | 100.1 | 40.3 | |
| Fair value treatment | 165.2 | 79.7 | |
| Total | $430.5 | $109.8 | |
| In relation to Medium-term notes | |||
| |
|||
| Interest rate swaps: | |||
| Cash flow treatment | $26.2 | $(0.8) | |
| Fair value treatment | 27.5 | 1.2 | |
| Cross currency interest rate swaps: | |||
| Cash flow treatment | 2.8 | 0.6 | |
| Without hedge accounting | 119.6 | (5.7) | |
| Total | $176.1 | $(4.7) | |
| In relation to Commercial paper | |||
| |
|||
| Interest rate swaps: | |||
| Cash flow treatment | $50.0 | $1.6 | |
| Total | $50.0 | $1.6 | |
| In relation to Transaction exposure | |||
| |
|||
| Forward outrights: | |||
| Cash flow treatment | $101.9 | $0.6 | |
| Total | $101.9 | $0.6 | |
Debt Profile - Cash Flow Including Hedge |
| Principal (notional) amount by expected maturity Weighted average interest rate |
2004 | 2005 | 2006 | 2007 | 2008 | There after |
Total |
| |
|||||||
| Overdraft/Other short-term debt (Weighted average interest rate 1.9%) |
$113.6 | $113.6 | |||||
| Commercial paper (Weighted average interest rate 1.2%) 1) |
$194.5 | 194.5 | |||||
| Eurobond (incl. DRD 2)) (Weighted average interest rate 6.5%) |
$265.3 | 265.3 | |||||
| Medium-term notes (incl. DRD2)) (Weighted average interest rate 4.9%) |
35.0 | $133.4 | 27.5 | 34.3 | $38.8 | 269.0 | |
| Other long-term loans, incl. current portion 3) (Primarily fixed rates) |
2.6 | 6.1 | 1.4 | $1.4 | 20.1 | 4.4 | 36.0 |
| Total debt incl. DRD | 151.2 | 139.5 | 294.2 | 1.4 | 248.9 | 43.2 | 878.4 |
| DRD adjustment | (1.8) | (4.3) | 122.2 | 0 | 0 | 1.1 | 117.2 |
| Total debt | $149.4 | $135.2 | $416.4 | $1.4 | $248.9 | $44.3 | $995.6 |
1) Interest rates will change as rollovers occur prior to final maturity. 2) Debt Related Derivatives, (DRD), i.e. the fair market value adjustments associated with hedging instruments as adjustments to the carrying value of the underlying debt. 3) Primarily denominated in JPY and Euro. |
| Note 12. Shareholders' Equity (Back) Dividends Dividend declared per share was $.56 and dividend paid per share was $.54 in 2003. Corresponding amounts in 2002 were $.46 and $.44. Other comprehensive income The components of other comprehensive income are net of any related income tax effects. The beginning balance in 2003 of other comprehensive income consisted of a negative cumulative translation adjustments of $71.4 million and a net loss on cash flow hedge derivatives of $20.6 million. The ending balance of other comprehensive income consisted of positive cumulative translation adjustments of $75.9 million,a net loss on cash flow hedge derivatives of $5.5 million and a net loss for minimum pension liability of $4.6 million. The ending balance of the loss on cash flow hedge derivatives was net of $3.8 million of deferred taxes. The corresponding amount of deferred taxes in 2002 was $11.3 million. The ending balance of the minimum pension liability was net of $2.0 million of deferred taxes. Share Repurchase Program Autoliv, Inc. has since October 21, 2002 reactivated its stock-repurchase program under an existing authorization from May 2000, which authorized management to repurchase up to 10 million Autoliv shares. The Board of Directors has approved an expansion of the Company's stock repurchase program and authorized the repurchase of an additional 10 million shares in Autoliv Inc. The decision was taken on April 29, 2003. During 2003, the company repurchased 2.1 million shares for cash of $43.0 million. During 2002, approximately 1.6 million shares were repurchased for cash of $30.4 million. In total, Autoliv has repurchased approximately 8.1 million shares since May 2000 for cash of $176.4 million. Of the total amount of repurchased shares, 0.2 million shares have been utilized in the stock incentive plans during 2003. Shareholder Rights Plan Autoliv, Inc., has a shareholder rights plan under which each shareholder of record as of November 6, 1997, received one right for each share of Autoliv, Inc., common stock held. Each right entitles the registered holder, upon the occurrence of certain events, to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock with a par value of $1 at a price of $150, subject to adjustment. Initially the rights will be attached to all Common Stock Certificates representing shares then outstanding and upon the occurrence of certain events the rights will separate from the Common Stock, and each holder of a right will have the right to receive, upon exercise, common stock (or in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the right. Autoliv, Inc., may redeem the rights in whole at a price of one cent per right. |
| Note 13. Supplemental Cash Flow Information (Back)
The Company's non-cash investing and financing activities were as follows: |
| 2003 | 2002 | 2001 | |
| |
|||
| Acquisitions/Divestitures: Fair value of assets acquired |
$105.4 | $30.3 | $16.2 |
| Cash Paid | (32.9) | (27.1) | (15.9) |
| Liabilities assumed | $72.5 | $3.2 | $0.3 |
| Payments for interest and income taxes were as follows: | |||
| 2003 | 2002 | 2001 | |
| |
|||
| Interest | $49 | $54 | $58 |
| Income taxes | $116 | $54 | $52 |
| Note 14. Stock Incentive Plan (Back)
Under the Autoliv, Inc. 1997 Stock Incentive Plan (the "Plan") adopted by the Shareholders, and amended in 1999, awards have been made to selected executive officers of the Company and other key employees in the form of stock options and Restricted Stock Units ("RSU's"). All options are granted for 10 year terms, have an exercise price equal to the stock market price on the date of grant, and become exercisable after one year of continued employment following the grant date. Each RSU represents a promise to transfer one of the Company's shares to the employee after three years of service following the date of grant or upon retirement. The Plan provides for the issuance of up to 3,085,055 common shares for awards under the Plan. In December 2000, the Compensation Committee of the Board of Directors of the Company made an offer (the "Offer") to the recipients of all outstanding stock option grants made under the Plan in 1997, 1998 and 1999. In exchange for the irrevocable cancellation of these outstanding options a promise was made to: (a) grant RSU's representing 30% of the number of options canceled and; (b) grant to the optionees on June 18, 2001, in accordance with normal terms and conditions of the Plan, a number of stock options equal to 20% of the number of options canceled. Under the Offer, 920,165 options were canceled, RSU's representing 276,050 of the Company's shares were issued and 151,626 options were granted in June 2001. The RSU's were granted on December 15, 2000 and had a fair value of $14.94 each. The Compensation Committee in 2003 decided to reduce the number of stock options granted to executive officers and key employees and replace them with RSU's of equivalent value. Additional grants of 130,887 RSU's, each with a fair value of $21.36, were made on January 2, 2003. The Company applies APB Opinion 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost for stock option grants has been recognized in the Company's financial statements. The Company is, however, recording compensation expense for the RSU's over the service lives of the employees during the three year vesting period. The total compensation expense for the December 15, 2000 RSU's was approximately $4 million. The total compensation expense for the January 2, 2003 RSU's is expected to be approximately $3 million. Had compensation cost for all of the Company's stock-based compensation awards been determined based on the fair value of such awards at the grant date, consistent with the methods of FAS-123 "Accounting for Stock- Based Compensation", the Company's total and per share net income would have been as follows: |
| 2003 | 2002 | 2001 | |
| |
|||
| Net income as reported | $268.4 | $175.5 | $53.0 |
| Add: Compensation under fair value method included in Net income, net of tax |
1.2 | 0.8 | 1.2 |
| Deduct: Compensation under fair value method for all awards, net of tax |
(3.3) | (4.9) | (2.8) |
| Net income pro-forma | $266.3 | $171.4 | $51.4 |
| Earnings per share: | |||
| As reported | $2.81 | $1.79 | $.54 |
| Pro-forma | $2.79 | $1.75 | $.52 |
| The weighted average fair value of options granted during 2003, 2002 and 2001 was estimated at $5.55, $5.23 and $4.79, respectively using the Black-Scholes model based on the following assumptions: |
| 2003 | 2002 | 2001 | |
| |
|||
| Risk-free interest rate | 2.8% | 4.5% | 4.7% |
| Dividend yield | 2.5% | 2.5% | 2.0% |
| Expected life in years | 5 | 5 | 5 |
| Expected volatility | 33.0% | 30.0% | 30.0% |
| Information related to the Plan during the period 2001 to 2003 is as follows: |
| RSU's | 2003 | 2002 | 2001 |
| |
|||
| Outstanding at beginning of year | 212,285 | 224,288 | 276,050 |
| Granted | 130,887 | - | - |
| Shares issued | (203,210) | (7,977) | (45,130) |
| Canceled | (13,249) | (4,026) | (6,632) |
| Outstanding at end of year | 126,713 | 212,285 | 224,288 |
| Weighted | |||
| Number of | average | ||
| Stock options | shares | exercise price | |
| |
|||
| Outstanding at Dec. 31, 2000 | 172,386 | $30.30 | |
| Granted | 661,946 | 17.00 | |
| Exercised | (1,237) | 15.58 | |
| Canceled | (73,120) | 33.77 | |
| Outstanding at Dec. 31, 2001 | 759,975 | $18.41 | |
| Granted | 552,050 | 19.96 | |
| Exercised | (47,826) | 16.66 | |
| Canceled | (64,817) | 20.26 | |
| Outstanding at Dec. 31, 2002 | 1,199,382 | $19.09 | |
| Granted | 386,250 | 21.36 | |
| Exercised | (391,496) | 18.21 | |
| Canceled | (16,505) | 19.06 | |
| Outstanding at Dec. 31, 2003 | 1,177,631 | $20.13 | |
| Options exercisable Dec. 31, 2001 | 99,229 | $27.77 | |
| Options exercisable Dec. 31, 2002 | 655,832 | $18.37 | |
| Options exercisable Dec. 31, 2003 | 794,956 | $19.54 | |
The following summarizes information about stock options outstanding on December 31, 2003 |
| Range of exercise prices | Number outstanding |
Remaining contract life (in years) |
Weighted average exercise price |
Number exercisable |
Weighted average exercise price |
| |
|||||
| $16.99 - $19.96 | 729,893 | 7.76 | $18.65 | 729,893 | $18.65 |
| $21.36 - $29.37 | 420,157 | 8.35 | 21.85 | 37,482 | 26.82 |
| $31.07 - $38.25 | 27,581 | 3.34 | 33.03 | 27,581 | 33.03 |
| 1,177,631 | 7.87 | $20.13 | 794,956 | $19.54 | |
| Note 15. Contingent Liabilities (Back) Legal Proceedings 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 and other matters. Litigation is subject to many uncertainties, and the outcome of any litigation cannot be assured. After discussions with counsel, it is the opinion of management that the litigations to which the Company is currently a party will not have a material adverse impact on the consolidated financial position of Autoliv, but the Company cannot provide assurance that Autoliv will not experience any material product liability or other losses in the future. In December 2003, a U.S. Federal District Court awarded a supplier of Autoliv ASP, Inc. approximately $27 million plus interest in connection with a commercial dispute. Autoliv intends to appeal the verdict as soon as possible. While legal proceedings are subject to inherent uncertainty, Autoliv believes that it has valid grounds for appeal which would result in a new trial and that it is possible that the judgment could be eliminated or substantially altered. Consequently, in the opinion of the Company's management, it is not possible to determine the final outcome of this litigation at this time. It cannot be assured that the final outcome of this litigation will not result in a loss that will have to be recorded by the Company. The Company believes that it is currently adequately insured against product and other liability risks, at levels sufficient to cover potential claims, but Autoliv cannot be assured that the level of coverage will be sufficient in the future or that such coverage will be available on the market. Product Warranty and Recalls Autoliv is exposed to product liability and warranty claims in the event that our products fail to perform as expected and such failure results, or is alleged to result, in bodily injury and/or property damage. The Company cannot assure that it will not experience any material warranty or product liability losses in the future or that it will not incur significant costs to defend such claims. In addition, if any of our products are or are alleged to be defective, Autoliv may be required to participate in a recall involving such products. Each vehicle manufacturer has its own practices regarding product recalls and other product liability actions relating to its suppliers. 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. A recall claim or a product liability claim brought against Autoliv in excess of available insurance, may have a material adverse effect on the Company´s business. Vehicle manufacturers are also increasingly requiring their outside 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 us 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. Accordingly the future costs of warranty claims by our customers may be material, however, we believe our established reserves are adequate to cover potential warranty settlements. Autoliv´s warranty reserves are based upon our best estimates of amounts necessary to settle future and existing claims. The Company regularly evaluates the appropriateness of these reserves, and adjust them when appropriate. However, the final amounts determined to be due related to these matters could differ materially from our recorded estimates. Note 16. Lease Commitments (Back) Operating Lease The Company leases certain offices, manufacturing and research buildings, machinery, automobiles and data processing and other equipment. Such operating leases, some of which are non-cancelable and include renewals, expire at various dates through 2024. The Company pays most maintenance, insurance and tax expenses relating to leased assets. Rental expense for operating leases was $120.0 million for 2002, $17.5 million for 2002 and $17.1 million for 2001. At December 31, 2003, future minimum lease payments for non-cancelable operating leases total $89.1 million and are payable as follows (in millions): 2004: $2.9; 2005: $1.4; 2006: $1.0; 2007: $1.0; 2008: $0.9; 2009 and thereafter: $2.3. Capital Lease The Company leases certain property, plans and equipment under capital lease contracts. The capital leases expire at various dates through 2015. At December 31, 2003, future minimum lease payments for non-cancelable capital leases total $9,5 million and are payable as follows (in millions): 2004 $2.9; 2005 $1.4; 2006: $1.0; 2007: $1.0; 2008: $0.9; 2009 and thereafter: $2.3. Note 17. Retirement Plans (Back) Defined Contribution Plans Many of the Company's employees are covered by government sponsored pension and welfare programs. Under the terms of the programs, the Company makes periodic payments to various government agencies. In addition, in some countries the Company sponsors or participates in certain non-governmental defined contribution plans. Contributions to multi-employer plans for the year ended December 31, 2003, 2002 and 2001 were $3.6 million, $2.6 million and $2.2 million. Contributions to defined contribution plans for the years ended December 31, 2003, 2002, and 2001 were $13.1 million, $7.4 million and $9.0 million, respectively. Defined Benefit Plans U.S. Defined Benefit Pension Plans The Company has non-contributory defined benefit pension plans covering most U.S. employees. Benefits are based on an average of the employee's earnings in the years preceding retirement and on credited service. Certain supplemental unfunded plan arrangements also provide retirement benefits to specified groups of participants. The funding policy for U.S. plans is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended, plus any additional amounts which may be determined to be appropriate. The Company has frozen participation in the ASP, Inc., non- contributory defined benefit pension plan for all employees hired after December 31, 2003. Consequently the Company amended the Autoliv ASP, Inc., defined contribution plan to provide an additional Company contribution on behalf of participants of the plan. Each participant who is excluded from participation in the Autoliv ASP, Inc., non-contributory defined benefit pension plan will receive an additional employer contribution to the Autoliv ASP, Inc., defined contribution plan equal to two percent of such participants defined compensation for the plan year. The measurement date used to determine benefit measurements corresponds with the fiscal year end, December 31. The components of net benefit cost associated with U.S. non- contributory defined benefit retirement plans are as follows: |
| 2003 | 2002 | 2001 | ||
| |
||||
| Service cost | $11.0 | $10.0 | $8.4 | |
| Interest cost | 6.4 | 5.8 | 5.4 | |
| Expected return on plan assets | (3.7) | (4.1) | (4.4) | |
| Amortization of prior service costs |
0.4 | 0.3 | 0.3 | |
| Amortization of actuarial loss | 0.9 | - | - | |
| Benefit cost | $15.0 | $12.0 | $9.7 | |
| The amortization of the net actuarial loss is expected to increase pension
expense by $0.6 million per year over the ten year estimated remaining
service lives of the plan participants. Pension expense associated with
these plans was $15 million in 2003 and is expected to be around $15.0
million in 2004. The changes in benefit obligations and plan assets for the U.S. non-contributory defined benefit plans for the periods ended December 31, are as follows: |
| 2003 | 2002 | ||
| |
|||
| Projected benefit obligation at beginning of year |
$100.0 | $83.9 | |
| Service cost | 11.0 | 10.0 | |
| Interest cost | 6.4 | 5.8 | |
| Actuarial (gain) loss | 5.6 | (2.5) | |
| Plan amendments | - | 0.1 | |
| Change in discount rate | 7.5 | 6.4 | |
| Assumption changes | (7.3) | - | |
| Benefit payments | (6.0) | (3.7) | |
| Project benefit obligation at year end | $117.2 | $100.0 | |
| Fair value of plan assets at beginning of year |
$40.2 | $42.8 | |
| Actual return on plan assets | 12.4 | (6.8) | |
| Company contributions | 19.9 | 7.9 | |
| Benefit payments | (6.0) | (3.7) | |
| Fair value of plan assets at year end | $66.5 | $40.2 | |
| Funded status of the plan | $(50.7) | $(59.8) | |
| Unrecognized net actuarial loss | 17.2 | 23.3 | |
| Unrecognized prior service cost | 4.0 | 2.6 | |
| Accrued retirement benefit cost recognized in the balance sheet |
$(29.5) | $(33.9) | |
| The accumulated benefit obligation for all U.S. non-contributory defined
benefit pension plans was $82.3 million and $70.2 million at December
31, 2003 and 2002, respectively. The Company will contribute $13.7 million to the plans in 2004 and is currently projecting a funding level of $14 million in the years thereafter. The weighted averages of assumptions used by the non-contributory defined benefit plans as per December 31, are as follows: |
| % | 2003 | 2002 | |
| |
|||
| Discount rate | 6.25 | 6.75 | |
| Rate of increases in compensation level | 3.50 | 5.00 | |
| The weighted averages of assumptions used by the U.S. non-contributory defined benefit plans to determine the net periodic benefit cost for years ended December 31, are as follows: |
| 2003 | 2002 | 2001 | |
| |
|||
| Discount rate | 6.75 | 7.25 | 7.25 |
| Rate of increases in compensation level | 4.00 | 5.25 | 5.25 |
| Expected long-term rate of return on assets | 8.50 | 9.50 | 9.50 |
| 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. The discount rate has been set based on the rates of return on high-quality fixed- income investments currently available at the measurement date and expected to be available during the period the benefits will be paid. In particular, the yields on bonds rated AA or better on the measurement date have been used to set the discount rate. The U.S. Plans have, for a number of years, invested approximately 85% of plan assets in equities and 15% in debt securities. The investment objective is to provide an attractive risk-adjusted return that will insure the payment of benefits while protecting against the risk of substantial investment losses. Correlations among the asset classes are used to identify an asset mix that Autoliv believes will provide the most attractive returns. Long- term return forecasts for each assets class using historical data and other qualitative considerations to adjust for projected economic forecasts are used to set the expected rate of return for the entire portfolio. The Company has assumed a long-term rate of return on plan assets of 8.5%. The major categories of plan assets as a weighted average percentage of the fair value of total plan assets for years ended December 31, are as follows: |
| Assets category in % | Target allocation |
2003 | 2002 |
| |
|||
| Equity securities | 85.0 | 87.3 | 87.2 |
| Debt securities | 15.0 | 12.7 | 12.8 |
| Total | 100.0 | 100.0 | 100.0 |
U.S. Postretirement Benefits Other Than Pensions The Company currently provides postretirement health care and life insurance benefits to most of its U.S. retirees. In general, the terms of the plans provide that U.S. employees who retire after attaining age 55, with five years of service, are eligible for continued health care and life insurance coverage. Dependent health care and life insurance coverage are also available. Most retirees contribute toward the cost of health care coverage with the contributions generally varying based on service. In June 1993, a provision was adopted which caps the level of the Company's subsidy at the amount in effect as of the year 2000 for most U.S. employees who retire after December 31, 1992. Additionally the plan was further amended in 2003 to restrict participation to retirees who were eligible retirees or active participants in the Autoliv ASP, Inc., Pension Plan as of December 31, 2003. No plan assets have been provided to this benefit plan. At present, there is no prefunding of the postretirement benefits recognized under FAS-106. The Company has reviewed the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 on its financial statements under FAS-106 and have determined that there is no impact since the prescription portion of the benefit is not segregated and the Company subsidy of the program is fixed and frozen. The changes in benefit obligations and plan assets for the U.S. postretirement benefit plan as of December 31 are as follows: |
| 2003 | 2002 | |
| |
||
| Projected benefit obligation at beginning pf year |
$13.1 | $12.3 |
| Service cost | 1.3 | 1.1 |
| Inerest cost | 0.9 | 0.8 |
| Actuarial (gain) loss | - | (1.2) |
| Change in discount rate | 1.1 | 0.4 |
| Assumption changes | 0.6 | - |
| Benefit payments | (0.4) | (0.3) |
| Project benefit obligation at year end | $16.6 | $13.1 |
| Fair value of plan assets at beginning of year |
$ - | $ - |
| Company contributions | 0.4 | 0.3 |
| Benefit payments | (0.4) | (0.3) |
| Fair value of plan assets at year end | $ - | $ - |
| Funded status of the plan | $(16.6) | $(13.1) |
| Unrecognized net actuarial (gain) loss | (0.6) | (2.4) |
| Accrued postretirement benefit cost recognized in the balance sheet |
$(17.2) | $(15.5) |
| The measurement date used to determine postretirement benefit measurements
corresponds with the fiscal year end, December 31. For measurement purposes, the assumed annual rate of increase of per capita cost of health care benefits was 9.5% for 2003 and assumed to grade to 5% in 2012 and remain constant thereafter. As noted above, for U.S. employees retiring after December 31, 1992, the Company's policy is to increase retiree contributions so that the annual per capita cost contribution remains constant at the level incurred in the year 2000. The weighted average discount rate to determine postretirement benefit obligation was 6.25% at December 31, 2003 and 6.75% at December 31, 2002. The weighted average discount rate used in determining the postretirement benefit cost was 6.75% in 2003, 7.25% in 2002 and 7.25% in 2001. A 1% increase in the annual health care cost trend rates would have had no significant impact on the Company's net periodic postretirement health care benefit cost for the current period or on the accumulated postretirement benefit obligation at December 31, 2003. The components of net benefit cost associated with the postretirement benefit plan are as follows: |
| Period ended December 31 | 2003 | 2002 | 2001 | |||
| |
||||||
| Service cost | $1.3 | $1.1 | $0.9 | |||
| Interest cost | 0.9 | 0.8 | 0.7 | |||
| Actuarial gain | (0.1) | (0.1) | (0.1) | |||
| Benefit cost | $2.1 | $1.8 | $1.5 | |||
| Non-U.S. Defined Benefit Pension Plans The Company has a number of non-contributory defined benefit pension plans mainly in France, Germany, Japan, Sweden and the United Kingdom. The Company's main non-U.S. defined benefit plan is the U.K. plan. The Company has frozen participation in the U.K. defined benefit plan for all employees hired after April 30, 2003. The measurement date used to determine postretirement benefit measurements is September 30 for the years 2002 and 2003. The measurement date for year 2001 was December 31. Benefits are based on an average of the employee's earnings in the last three years preceding retirement and on credited service. Members contribute to the plan at the rate 7% of pensionable salaries. The rate will increase to 9% as from April, 2004. The components of net benefit cost associated with the U.K. defined benefit retirement plans are as follows: |
| 2003 | 2002 | 2001 | |
| |
|||
| Service cost | $1.5 | $1.4 | $1.0 |
| Interest cost | 1.1 | 0.9 | 0.7 |
| Expected return on plan assets | (1.0) | (1.0) | (0.8) |
| Amortization of actuarial or loss |
0.2 | 0.1 | - |
| Benefit cost | $1.8 | $1.4 | $0.9 |
| Increase in minimum liability included in other comprehensive income |
6.6 | - | - |
The changes in benefit obligations and plan assets for the U.K. non-contributory defined benefit plans for the periods ended December 31, are as follows: |
| 2003 | 2002 | |
| |
||
| Projected benefit obligation at beginning of year |
$19.5 | $15.0 |
| Service cost | 1.5 | 1.4 |
| Inerest cost | 1.1 | 0.9 |
| Actuarial (gain) loss | 0.5 | 0.6 |
| Plan participants' contributions | 0.5 | 0.4 |
| Translation difference | 2.6 | 1.8 |
| Benefit payments | (0.7) | (0.6) |
| Project benefit obligation at year end | $25.0 | $19.5 |
| Fair value of plan assets at beginning of year |
$9.9 | $11.0 |
| Actual return on plan assets | 1.5 | (3.1) |
| Company contributions | 1.3 | 1.1 |
| Plan participants' contributions | 0.5 | 0.4 |
| Benefit payments | (0.7) | (0.6) |
| Translation difference | 1.3 | 1.1 |
| Fair value of plan assets at year end | $13.8 | $9.9 |
| Funded status of the plan | $(11.2) | $(9.7) |
| Unrecognized net actuarial loss | 9.9 | 9.0 |
| Employer contributions from measurement date to year end |
0.1 | 0.1 |
| Minimum pension liability | (6.6) | - |
| Accrued retirement benefit cost recognized in the balance sheet |
$(7.8) | $(0.6) |
The accumulated benefit obligation for the U.K. non-contributory defined benefit pension plan was $21.9 million and $17.1 million at December 31, 2003 and 2002, respectively. The amortization of the net actuarial loss is expected to increase pension expense by approximately $0.2 million per year over the 16 years estimated remaining service lives of the plan participants. Pension expense associated with these plans was $1.8 million in 2003 and is expected to be the same or lower in 2004. The weighted averages of assumptions used by the U.K. defined benefit plans to determine the benefit obligation as per December 31, are as follows: |
| % | 2003 | 2002 |
| |
||
| Discount rate | 5.30 | 5.40 |
| Rate of increases in compensation level | 4.20 | 4.30 |
The weighted averages of assumptions used by the U.K. defined benefit plans to determine the net periodic benefit cost for years ended December 31, are as follows: |
| % | 2003 | 2002 | 2001 |
| |
|||
| Discount rate | 5.40 | 5.80 | 6.50 |
| Rate of increases in compensation level | 4.30 | 4.50 | 4.50 |
| Expected long-term rate of return on assets | 7.00 | 7.50 | 7.50 |
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. The discount rate is set based on weighted average the yields on long-term high-grade corporate bonds and is determined by reference to financial markets on the measurement date. The expected rate of increase in compensation levels and long-term rate of return on plan assets are determined based on a number of factors and must take into account long-term expectations. The Company has assumed a long-term rate of return on plan assets of 7.0% for 2003. The U.K. Plan have, for a number of years, invested approximately 80% of Plan assets in equities and 20% in debt securities. |
| Note 18. Segment Information (Back) Autoliv, Inc. is a U.S. registered company providing advanced technology products for the automotive market. Airbag modules, seat belts and inflators for airbags are supplied to all major European, U.S. and Asian automobile manufacturers. Seat belts and airbags are considered integrated safety systems that function together under common electronic control systems for the protection of occupants in motor vehicles. The Company's revenues are generated by sales to the automotive industry, which is made up of a relatively small number of customers. A significant disruption in the industry, a significant change in demand or pricing or a dramatic change in technology could have a material adverse effect on the Company. Sales to individual customers representing 10% or more of net sales were: 2003 Ford 24% (incl. Volvo Cars with 8%, Mazda, etc.); Renault 14% (incl. Nissan.) and GM 12% (incl. Opel, Holden, SAAB, etc.) 2002 Ford 23%, GM 15% and Renault 13% 2001 Ford 20%, GM 14% and Renault 12% The Company has concluded that its operating segments meet the criteria, stated in FAS-131 "Disclosures about Segments of an Enterprise and Related Information", for aggregation for reporting purposes into a single operating segment. |
| Net sales | 2003 | 2002 | 2001 |
| |
|||
| United States | $1,542 | $1,598 | $1,464 |
| Europe | 2,950 | 2,344 | 2,121 |
| Other regions | 809 | 501 | 406 |
| Total | $5,301 | $4,443 | $3,991 |
| Long-lived Assets | 2003 | 2002 | 2001 |
| |
|||
| United States | $1,984 | $1,907 | $1,988 |
| Europe | 765 | 651 | 508 |
| Other regions | 306 | 203 | 170 |
| Total | $3,055 | $2,761 | $2,666 |
| The Company's operations are located primarily in Europe and the United States. Exports to other regions amounted to approximately $329 million in 2003. The long-lived assets in the U.S. include $1,567 million of intangible assets, principally from acquisition goodwill. The Company has attributed net sales to the geographic area based on the location of the entity selling the final product. |
| Sales by product | 2003 | 2002 | 2001 | |||
| |
||||||
| Airbags and associated products 1) | $3,608 | $3,160 | $2,817 | |||
| Seat belts and associated products 2) | 1,693 | 1,283 | 1,174 | |||
| Total | $5,301 | $4,443 | $3,991 | |||
| 1) Includes sales of Steering Wheels, Electronics, Inflators and Initiators. 2) Includes sales of Seat components. Note 19. Quarterly Financial Data (unaudited) (Back) |
| Q1 | Q1 | Q2 | Q2 | Q3 | Q3 | Q4 | Q4 | |
| Reported | Restated1) | Reported | Restated1) | Reported | Restated1) | Reported | Restated1) | |
| |
||||||||
| 2003 | ||||||||
| Net sales | $1,245.7 | $1,245.7 | $1,366.5 | $1,366.5 | $1,212.5 | $1,212.5 | $1,476.1 | n/a |
| Gross profit | 228.8 | 229.3 | 264.6 | 267.2 | 221.9 | 222.3 | 283.9 | n/a |
| Income before income taxes | 79.8 | 80.3 | 107.8 | 110.4 | 77.5 | 77.9 | 128.4 | n/a |
| Net income | 51.5 | 51.8 | 71.2 | 73.0 | 51.6 | 51.9 | 91.7 | n/a |
| Earnings per share | $.54 | $.54 | $.75 | $.77 | $.54 | $.55 | $.96 | n/a |
| 2002 | ||||||||
| Net sales | $1,029.0 | $1,029.0 | $1,169.1 | $1,169.1 | $1,066.5 | $1,066.5 | $1,178.8 | $1,178.8 |
| Gross profit | 189.0 | 187.1 | 215.1 | 217.0 | 192.5 | 184.6 | 214.2 | 214.6 |
| Income before income taxes | 62.0 | 60.1 | 82.3 | 84.2 | 65.7 | 57.8 | 76.7 | 77.1 |
| Net income | 39.0 | 37.7 | 52.5 | 53.8 | 41.4 | 36.1 | 47.6 | 47.9 |
| Earnings per share | $.40 | $.38 | $.53 | $.55 | $.42 | $.37 | $.49 | $.49 |
| 2001 | ||||||||
| Net sales | $1,080.6 | $1,080.6 | $1,032.9 | $1,032.9 | $907.7 | $907.7 | $969.8 | $969.8 |
| Gross profit | 185.6 | 187.7 | 182.6 | 184.9 | 116.1 2) | 117.9 2) | 170.5 | 172.1 |
| Income before income taxes | 39.6 | 41.7 | 55.6 | 57.9 | (26.9) 2) | (25.1)2) | 48.5 | 50.1 |
| Net income | 20.8 | 22.2 | 30.0 | 31.5 | (29.5)2) | (28.5)2) | 26.5 | 27.7 |
| Earnings per share | $.21 | $.23 | $.31 | $.32 | $(.30)2) | $(.29)2) | $.27 | $.28 |
| 1) See Note 20 regarding the basis of the above restatement. 2) In the third quarter of 2001, Unusual items reduced gross profit by $46.1 million, income before taxes by $65.3 million, net income by $46.8 million and earnings per share by $.48. See Note 10 for further details. |
| 2001 Pro-Forma | Q1 | Q1 | Q2 | Q2 | Q3 | Q3 | Q4 | Q4 |
| effect of FAS-1421) | Reported | Restated | Reported | Restated | Reported | Restated | Reported | Restated |
| |
||||||||
| Income before income taxes | $52.5 | $54.6 | $68.5 | $70.8 | $(14.0) | $(12.2) | $61.4 | $63.0 |
| Net income | 33.7 | 35.1 | 42.9 | 44.4 | (16.6) | (15.6) | 39.4 | 40.6 |
| Earnings per share | $.34 | $.36 | $.44 | $.45 | $(.17) | $(.16) | $.40 | $.41 |
| 1) See Note 1 for further details Note 20. Restatement (Back) The Company has reviewed the historical accounting for one of its insurance agreements covering potential recalls. Management determined that, based on the existing contractual terms, it was more appropriate to account for the insurance arrangement under the deposit method rather than as a traditional insurance contract. After discussions with the accounting staff of the Securities and Exchange Commission, the Company has concluded that the most appropriate manner to correct this accounting is to restate 2201 and 2002 annual financial statements and 2001, 2002 and 2003 quarterly operating results (see Note 19). The postitive cumulative net effect totaling $13.2 million of applying the deposit method of accounting on a retroactive basis, has been recorded as an adjustment of beginning 2001 retained earnings. See also the Consolidated Statements of Shareholders' Equity for further information. The effects of this restatement on the Company's annual operating results were as follows: |
| 2002 | 2002 | 2001 | 2001 | |
| Reported | Restated | Reported | Restated | |
| |
||||
| Net sales | $4,443.4 | $4,443.4 | $3,991.0 | $3,991.0 |
| Gross profit | 810.8 | 803.3 | 654.8 | 662.6 |
| Income before income taxes | 286.7 | 279.2 | 116.8 | 124.6 |
| Net income | 180.5 | 175.5 | 47.9 | 53.0 |
| Earnings per share | $1.84 | $1.79 | $.49 | $.54 |
| Pro-Forma (adjusted for FAS-142)1) | 2002 | 2002 | 2001 | 2001 |
| |
||||
| Income before income taxes | $286.7 | $279.2 | $168.4 | $176.2 |
| Net income | 180.5 | 175.5 | 99.5 | 104.6 |
| Earnings per share | $1.84 | $1.79 | $1.02 | $1.07 |
1) See Note 1 for further details