Autoliv, Inc. (“the Company”) provides advanced technology products for the automotive market. In the years 2002, 2003 and 2004, a number of trends have influenced the Company’s operations. The most significant have been:
From a low point in 2001, the impact of these factors has been steadily increasing margins and cash generation.
| Years ended Dec. 31 (Dollars in millions) |
2004 |
2003 |
2002 |
|||
| Sales of airbag products (incl. steering wheels) |
$4,028 | 66% | $3,608 | 68% | $3,160 | 71% |
| Sales of seat belts (incl. seat components) |
2,116 | 34% | 1,693 | 32% | 1,283 | 29% |
| Total sales | $6,144 | 100% | $5,301 | 100% | $4,443 | 100% |
| Light vehicle production In the Triad (in thousands) |
41,741 | +0% | 41,702 | (1%) | 42,328 | |
| Gross profit | $1,221 | +22% | $1,003 | +25% | $803 | |
| Gross margin | 19.9% | +5% | 18.9% | +4% | 18.1% | |
| Operating income | $513 | +20% | $427 | +32% | $323 | |
| Operating margin | 8.4% | +4% | 8.1% | +11% | 7.3% | |
| Net income | $326 | +22% | $268 | +52% | $176 | |
| Net margin | 5.3% | +4% | 5.1% | +31% | 3.9% | |
| Earnings per share | $3.46 | +23% | $2.81 | +57% | $1.79 | |
| Return on equity | 13% | +8% | 12% | +33% | 9% | |
During the three-year period that ended in 2004, global light vehicle production increased by 7%. However, in the established markets in Europe, North America and Japan (“the Triad”) which are most important for Autoliv, light vehicle production was flat. By contrast, light vehicle production increased by 32% in the Rest of the World, mainly Asia. To take advantage of this superior growth, the Company has for the past several years been positioning itself in these emerging markets, through both consolidated subsidiaries and joint ventures. As a result, in 2004, the Rest of the World generated 10% of the Company’s revenues, compared to 8% in 2002.
Another trend is the growing market share for Japanese and other Asian vehicle manufacturers. Their share of global light vehicle production has increased to 39% in 2004 from 36% in 2002. The Company has also positioned itself to take advantage of this trend, mainly through acquisitions in Japan and investments in Korea and China. As a result, in 2004, Asian vehicle manufacturers accounted for 22% of the Company’s revenues compared to 18% in 2002.
A third important trend has been the rapidly increasing demand for Sport Utility Vehicles (SUVs). Before 2002, the Company was underrepresented in this vehicle segment, but mainly through the acquisition that year of Visteon Restraint Electronics (VRE) the Company eliminated this weakness. In addition, the Company has started to benefit from the SUV trend thanks to its leading position in side curtain airbags that have penetrated the SUV segment faster than the passenger car segment.
The most important growth driver for the Company’s market is the steady increase in the safety content per vehicle.
The Company estimates that this trend has broadened the market by 16% during the years 2002-2004.
The most important driver for this growth is side curtain airbags. Since the Company has a stronger position in this product area than the market in general, the trend helps Autoliv increase its global market share.
During the 1990s, the Company experienced sustained growth – both organic and acquisition driven – but following a drop in vehicle production in the major markets that started in late 2000, the Company entered a consolidation phase.
In response, the Company has been increasingly more active in restructuring to reduce costs. Autoliv has also increased its focus on control of working capital and reduced levels of capital expenditure.
At the same time, the Company has continued to make strategic acquisitions and has disposed of certain small, non-core component manufacturing operations. Acquisitions, however, have been at a fairly modest level. Furthermore, the Company has continued to invest in the development of new products and in capacity to support growth.
Although cost of direct materials is nearly 50% of sales, changes in raw material prices have had limited impact on the Company’s performance during most of the period 2002-2004, except for the second half of 2004 when significant price increases of raw materials (particularly steel and petroleum-based products) began to have an effect. They are also expected to have an increased impact on the Company’s cost of materials during 2005.
The usually moderate impact from raw material prices is partly a reflection of the fact that it typically takes between six and twelve months for such price changes to feed through to cost of materials. It is also due to the fact that as much as an estimated 67% of costs for direct materials consist of value added by our supply chain and only approximately 33% are related to the actual raw material content. Furthermore, the Company has implemented new cost-efficient designs and consolidated the supplier base.
For additional information on the Company’s exposure to raw materials and component costs refer to Operational risks.
During the period 2002-2004, pricing pressure from vehicle manufacturers has increased, but the actual price concessions that the automotive safety industry has yielded have been less than in preceding three-year periods.
Despite the continuos pricing pressure, the Company has managed to improve its operating margin to 8.4% in 2004 from 7.3% in 2002. This is mainly a result of higher sales, lower component costs, plant consolidations and of shifting manufacturing to low-production-costs countries.
Since the spring of 2002, the dollar has weakened by more than 50% against the Euro and almost 30% against the Yen.
The translation effect has boosted consolidated sales by 19% and accounted for 46 cents of the $1.67 improvement in earnings per share between 2002 and 2004. Currency translation effects have also generated positive Cumulative Translation Adjustments (“CTA”) that have improved equity by $254 million or 12%.
For additional information on the Company’s currency exposure, refer to Financial risks.
Over the past three years, the Company has generated $900 million in cash before financing and reduced its net debt to $599 million at December 31, 2004, from $1,023 million at December 31, 2001.
At the same time, interest rates have trended downwards during 2002 and 2003, while they increased somewhat in 2004.
As a result, the Company’s weighted average funding cost declined to 4.5% at December 31, 2003 from 4.9% at the end of 2002, and then increased again to 4.7% at December 31, 2004.
These changes have reduced the annual interest expense, net by $13 million and accounted for 6% of the Company’s improvement of $205 million in pre-tax profit between 2002 and 2004. This relatively modest impact of the interest rate changes is due to a combination of a continued low debt level and the Company having locked in fixed rates on a portion of its borrowings in accordance with its debt management policy.
For additional information on interest rate exposure, see Interest rate risk.
In order to increase shareholder value and to return funds to shareholders, the Company initiated a share repurchase program in 2000.
Since the inception of the program until the end of 2004, 11.6 million shares have been repurchased at an average cost of $27.61 per share for a total of $320 million. At the end of 2004, when the Autoliv stock closed at $48.30, the market value of this investment exceeded half a billion dollars.
In addition, since December 2002, the Company has raised the declared quarterly dividend per share in five steps by a total of approximately 170%, including the increase of the dividend declared for the second quarter 2005.