| Component of net sales increase in 2004 | Airbag products | Seat belt products | Total |
| Organic sales growth | 6% | 13% | 8% |
| Impact of acquisitions | 0% | 4% | 1% |
| Effect of exchange rates | 6% | 8% | 7% |
| Reported net sales increase | 12% | 25% | 16% |
Net sales for 2004 increased by 16% or by $843 million. The weakening of the U.S. dollar increased reported sales by approximately 7%. Acquisitions made during 2003 and 2004 added incremental sales of $71 million or just over 1%.
Organic sales (i.e. sales excluding currency effects and acquisitions/divestitures) increased by $415 million or 8%. At the same time, production of light vehicles in the Triad is estimated to have been flat. Organic sales increased in every quarter compared to the corresponding quarter in 2003 and outperformed the underlying vehicle production in the Triad. Organic sales grew by 4% in the first quarter, 10% in the second quarter, 8% in the third quarter and by 8% in the fourth quarter. The organic growth was primarily due to market share gains in seat belts and higher market penetration rates for side curtain airbags, increased market and market share in Asia in addition to a favorable customer and vehicle mix in North America and Europe.
A 6% organic increase in sales of airbag products was principally due to the continuing rollout of the Inflatable Curtain, market share gains in steering wheels and higher penetration rates for thorax side airbags. A 13% organic growth in sales of seat belt products was primarily due to continued market share gains in the Triad and to higher vehicle production in the Rest of the World. The market share gains were partly a reflection of the favorable customer and vehicle model mix.
In Europe, where Autoliv generates more than 55% of its revenues, sales rose by 19%. Organic growth was 9% despite flat European light vehicle production. Currency effects added 10%. Sales were mainly driven by market share gains in seat belts, underpinned by a favorable vehicle mix, and the increasing demand for curtain airbags.
In North America, which accounts for a quarter of Autoliv’s revenues, sales increased by 3% despite a nearly one-percent decline in light vehicle production. This decline was due to the “Big 3” (i.e. GM, Ford and Chrysler), which reduced their production by 4%, while the Asian and European manufacturers increased their North American vehicle production by 9%. This change in the production mix was favorable, since Autoliv as of 2004 has a higher sales value per vehicle to the Asian customers than to an average vehicle from the “Big 3”. Organic sales were mainly due to the strong demand for curtain airbags (up 65%) and market share gains in seat belts, while sales were negatively impacted by the expiration of frontal airbag contracts and the continued phase-out of low-margin inflators. Organic sales of seat belt products increased by 31%.
In Japan, which accounts for almost 10% of revenues, sales jumped 30%. The acquisition of NSK in April 2003 increased reported 2004 sales by 11% and currency effects added 7%. Organic growth of 12% was 9 percentage points better than the Japanese light vehicle production.
In the Rest of the World, which generated about one tenth of the 2004 revenues, sales surged by 30%, including currency effects of 8% and acquisitions of 5%. The organic growth of 17% was driven by sales in Korea and China.
The pressure on sales prices continued, but was more than offset by higher volumes and the effect of ongoing cost reduction programs. In addition, 2003 was negatively impacted by hedging activities, while these activities had a positive effect in 2004 before they expired on March 31.
Gross profit therefore increased by 22% to $1,221 million from $1,003 million in 2003. Gross margin improved to 19.9% from 18.9% in 2003.
Operating income rose by 20% to $513 million or 8.4% of sales, compared to the operating income of $427 million in 2003, which was 8.1% of sales. In 2003, the operating margin was boosted by 0.6% due to the $31 million one-time license revenue. In 2004, Selling, General & Administrative expense (“SG&A”) declined to 5.0% of sales from 5.2% in 2003, despite approximately $9 million in incremental external costs for the new legislation, the Sarbanes-Oxley Act. Research, Development & Engineering (“RD&E”) increased to 6.0% of sales from 5.8% in 2003. RD&E is expected to continue to increase, in relation to sales, by 0.3 percentage points due to a reclassification in 2005. The level of customer reimbursements for engineering work is also expected to continue to decrease. This effect should be offset by piece price amortization in sales prices. Amortization of intangibles declined to 0.3% of sales from 0.4% in 2003.
Other income (expense), net in 2004 was a negative of $11 million or 0.2% of sales in 2004, compared to $24 million of income, or 0.4% of sales in 2003 mainly due to the one-time license revenue.
Interest expense, net declined to $36 million from $44 million in 2003. Net debt at December 31, 2004, decreased by $186 million to $599 million from $785 million at December 31, 2003. Average net debt decreased by $165 million.
Strong cash flow from operations, including a $68 million reduction in working capital, reduced borrowing requirements. This cash generation was partially offset by higher spending on capital expenditures, higher dividend payments and repurchase of shares. The weighted average interest rate, net was 5.1% compared to 5.0% in 2003. The lower borrowing requirements therefore outweighed the higher interest rate and resulted in the reduction in interest expense net.
The effective tax rate in 2004 was 30.8% versus 30.3% in 2003. The 0.5% increase was the net impact of several factors. Most significantly, a somewhat favorable country tax rate differential was not sufficient to offset a reduced level of benefits from net operating losses and a lower amount of available tax credits.
As a result of higher operating profit and lower interest expense net income rose by 22% to $326 million in 2004 from $268 million in 2003. Net income as a percent of sales increased to 5.3% from 5.1% in 2003.Earnings per share, assuming dilution, increased by 65 cents to $3.46 from $2.81 in 2003.
In 2003 the one-time license revenue added 0.5% to the net margin and contributed 27 cents to earnings per share.
In 2004, currency effects (including both translation and transaction effects) added 39 cents and the effect of the stock repurchase program 3 cents, while the higher tax rate reduced earnings per share by 2 cents.