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As Of Filer Filing As/For/On Docs:Pgs 2/23/07 Autoliv Inc 10-K 12/31/06 4:92
Document/Exhibit Description Pages Size 1: 10-K Annual Report HTML 156K 2: EX-31 Certification per Sarbanes-Oxley Act (Section 302) HTML 10K 3: EX-32 Certification per Sarbanes-Oxley Act (Section 906) HTML 6K 4: EX-13 Annual or Quarterly Report to Security Holders HTML 564K
| Autoliv Annual Report 2006 |
Autoliv Annual Report 2006 Reader's Guide and Financial Information This annual report, together with the proxy statement, is distributed to all Autoliv Inc. shareholders of record as of March 6, 2007, the record date for the 2007 Annual General Meeting. The proxy statement provides information on not only the agenda for the meeting but also on the work of the Board and its committees, compensation paid to and presentation of directors and certain senior officers. Please also refer to the Form 10-K and Form 10-Q reports and Autoliv's other filings with the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE). These filings (including the CEO/CFO Section 302 Certifications, Section 16 Insider Filings, and the 2006 CEO Certification to the NYSE) are available at www.autoliv.com under Investors/Filings and at www.sec.gov. Autoliv's Corporate Governance Guidelines, Charters, Codes of Ethics and other documents governing the Company can be downloaded from the Company's corporate website. Autoliv's financial reports, press releases, proxy statements and other general information about the Company are published both in English and Swedish. Hard copies of the above-mentioned documents can be obtained free of charge from the Company. As a U.S. company incorporated in Delaware, Autoliv follows Generally Accepted Accounting Principles in the United States (U.S. GAAP) and all amounts are in U.S. dollars unless otherwise indicated. "We", "the Company" and "Autoliv" refer to "Autoliv Inc." as defined in Note 1 "Principles of Consolidation". For forward-looking information, refer to the "Safe Harbor Statement". Driven for Life Sadly, every year more than one million people perish in countless traffic accidents around the world, and many more are seriously injured. If the current trend continues, these traffic fatalities will double by 2020 according to WHO, the World Health Organization. While human suffering cannot be measured, monetary costs to society are estimated in the hundreds of billions of dollars every year for health care, rehabilitation and loss of income. It is this fact that provides our direction and embodies our vision: to reduce traffic fatalities and injuries significantly. A progressive approach to automotive safety can yield good results. Our products save more than 20,000 lives every year and prevent ten times as many severe injuries. Both are impressive results, but much work remains to be done. That is why we spent $400 million in 2006 or more than 6% of revenues on research, development and application engineering. Product quality, manufacturing efficiency and profitability are key factors that define the success of our Company. We monitor these measures closely to ensure our long-term financial performance and market leading position. We recognize our responsibility to our shareholders, customers, employees and to the societies where we operate, and remain committed to fulfilling their expectations and requirements. In this process, we never lose sight of our vision to substantially reduce traffic accidents, fatalities and injuries. We are driven for life. In Brief Autoliv is the world's largest automotive safety supplier with sales to all the leading vehicle manufacturers in the world. We develop, market and manufacture airbags, seatbelts, safety electronics, steering wheels, anti-whiplash systems, child seats as well as night vision systems and other active safety systems. We account for more than one third of the global market for these products. Sales 2006 By Market Europe: 52% North America: 27% Japan: 9% Rest of the World: 12% Our Resources Headcount: 41,800 - Where of in RD&E: 4,100 Plants: >80 - In number of countries: 28 Crash Tracks: 20 Technical Centers: 13 - In number of countries: 12 Autoliv's Advanced Safety Systems Autoliv has accounted for virtually all major technological breakthroughs in the occupant restraint industry over the last 20 years and remains in the forefront of development. The new MINI is an example of a vehicle that features many advanced products from Autoliv. ELECTRONICS The electronic control unit (ECU) is the brain of the car's safety systems. It decides not only if, but exactly when, the seatbelt pretensioners should be fired and each airbag protection system should be deployed. The ECU contains a crash sensor and a microprocessor, as well as back-up electricity in the event the connection to the car battery is cut off in the crash. The ECU is located in the middle of the vehicle, where it is well protected during a crash. There are also satellite sensors located in the front-end and the sides of the vehicle for early detection of a collision. AIRBAGS Driver airbags reduce driver fatalities in frontal crashes by approximately 25% (for belted drivers) and serious head injuries by over 60%. The steering wheel has a modern design with several controls, which makes driving not only more comfortable but also safer by having the controls at "a finger tip's distance". Passenger airbags reduce fatalities in frontal crashes by approximately 20% (for belted front-seat passengers). They deploy in 50 milliseconds, half the time of the blink of an eye. Both the driver and the passenger airbag in the new MINI are smart. Consequently, the power of the airbags can be tuned to the severity of the crash, using dual-stage airbag inflators, i.e. airbag inflators with adaptive output. Thorax or chest airbags reduce the risk of serious chest injuries in side-impact crashes by approximately 25%. Curtain airbags reduce the risk of life-threatening head injuries by approximately 50% for occupants who are sitting on the side of the vehicle that is struck. Curtain airbags that provide head protection for the whole upper side of the vehicle are manufactured using Autoliv's patented one-piece weaving technology. SEATBELT SYSTEMS Modern seatbelts can reduce the overall risk of serious injuries in frontal crashes by 60-70% thanks to two advanced seatbelt technologies installed in the MINI's front and the rear seats: Pretensioners tighten the belt at the onset of a crash, using a small pyrotechnic charge. Thereby slack is eliminated and the occupant is restrained as early as possible, and hence the risk of rib fractures is reduced. Load limiters pay out some webbing before the load on the occupant's chest becomes too high. The excessive energy is instead absorbed more uniformly by the frontal airbags. In combination with pretensioners, load limiters and frontal airbags reduce the risk for life-threatening chest injuries by 75% in frontal crashes. OTHER IMPORTANT PRODUCTS Autoliv also produces knee airbags, anti-sliding bags, whiplash protection systems, child seats as well as night vision systems, telematics and other active safety systems. VISION, MISSION AND STRATEGY Focusing on people has always been both important and natural for Autoliv, as reflected in our corporate vision. But just having a vision is not enough. In order for us to ensure the long-term success and viability of our Company, we must "live" the vision. Turning our vision into reality is our way of doing business, and is what creates value for all and secures a bright future for us. OUR VISION is to substantially reduce traffic accidents, fatalities and injuries. OUR MISSION is to create, manufacture and sell state-of-the-art automotive safety systems. OUR STRATEGY is to be vehicle manufacturers' first-choice supplier through:
OUR VALUES |
| Life | - We have a passion for saving lives. |
| Customers | - We are dedicated to creating satisfaction for our customers and value for the driving public. |
| Employees | - We are committed to the development of people's skills, knowledge and creative potential. |
| Innovation | - We are driven for innovation and continuous improvement. |
| Ethics | - We adhere to the highest level of ethical and social behavior. |
| Culture | - We are founded on global thinking and local actions. |
Summary 2006
STRONG SALES Since 2002, consolidated sales (including acquisitions and currency effects) have grown by 39%, compared to a 3% growth in light vehicle production in the Triad, i.e. Europe, North America and Japan. STABLE MARGINS Operating margin stood relatively unchanged at 8.4% in 2006 compared to 8.3% in 2005 despite pricing pressure from the vehicle industry, higher raw material prices and distressed suppliers. HIGH SHAREHOLDER RETURNS During 2006, Autoliv returned $333 million to shareholders. This was 23% more than cash flow before financing and corresponds to 7.4% of the Company's average market capitalization during the year. |
| (Dollars in millions, except as indicated) | 2006 | 2005 | 2004 |
| Sales | $6,188 | $6,205 | $6,144 |
| Operating income | 520 | 513 | 513 |
| Income before taxes | 481 | 482 | 485 |
| Net income | 4021) | 293 | 326 |
| Earnings per share in $ (assuming dilution) | 4.881) | 3.26 | 3.46 |
| Operating margin (%) | 8.4 | 8.3 | 8.4 |
| Cash from operations | 560 | 479 | 680 |
| Return on shareholders' equity (%) | 17.11) | 11.7 | 13.2 |
| Dividends paid | 112 | 105 | 70 |
| Share repurchases | $221 | $378 | $144 |
| 1) Release of tax reserves and other discrete tax items boosted net income by $95 million, earnings per share by $1.15 and return on equity by 3.9 percentage points.
President's Letter Dear Shareholder, 2006 was not an easy year. Light vehicle production dropped in our important West European and North American markets. Market prices continued to erode, raw material costs continued to rise, and distressed suppliers caused us problems and made it increasingly more difficult to reduce costs. Despite these headwinds, we managed to reach the same sales ($6.2 billion) as in 2005 and increase operating income slightly (by 1% to $520 million). In addition, reported earnings per share rose by $1.62 to $4.88. Most of this increase or $1.35 was due to one-time tax items in 2006 and 2005. However, 27 cents was due to higher income and our share-repurchase program, partially offset by currency effects. This program enables Autoliv to take advantage of the low interest-rates that the Company's strong financial position and cash flow provide. We also reached our target that operating cash flow, which amounted to $560 million in 2006, should exceed half a billion dollars. This allowed us to invest nearly $300 million in property, plant and equipment for future growth and profitability. It also allowed us to improve (i.e. increase) Autoliv's leverage position and to return $333 million to shareholders through dividend payments and share buy-backs. The total amount returned to shareholders represents a yield of 7.4% in relation to Autoliv's average market capitalization during 2006. In 2006, we also achieved most of Autoliv's other targets. For instance, we reduced cost for purchased components by more than 3%, improved labor productivity by more than 5% and moved more than 1,000 jobs to low-cost countries. Vision Autoliv has become the industry leader in passive safety systems. We are committed to consolidating and strengthening this position, while gradually establishing our Company in new markets such as Night Vision systems and other active safety technologies. We see so many opportunities in this area (i.e. Autoliv's core business) that we have no need to establish our Company in new, non-related businesses. As a result, funds and resources that are not required for the core business are better returned to shareholders, allowing us to focus on what we do best. Strategies <br Our strategies for strengthening Autoliv as a profitable company that generates value for its customers, shareholders and its other constituencies are presented on page 6 in the Annual Report. The success of these strategies has been proven over a great many years. In 2006, we took several actions in line with these strategies: In technical leadership, we introduced a new night vision system based on a superior infrared camera that we and our suppliers have developed. We also introduced a new airbag with safety vents. This superior product has been introduced in three vehicle models (all with five stars in the public crash-rating tests) and another 19 vehicle models are already in the order book. We also delivered the world's first seat-cushion airbag for rear-seat passengers, which resulted in a Toyota/Lexus Technology Award. In system capabilities, we were trusted with the world's first (and recently the second) contract for integration of the central sensing unit of the Electronic Stability Control (ESC) systems with our airbag electronics. We are not entering the ESC market but rather using Autoliv's system capabilities to eliminate cost redundancies for the customer. Highest-value system solutions were evidenced by receiving Toyota's Value Improvement Award for our "contribution to the quality of Toyota's vehicles". Another example was the world's largest seatbelt order ever. Thanks to our global presence, standardization and technology, we could offer General Motors a very competitive seatbelt price while maintaining our profitability target; a true win-win situation. In cost efficiency, we reduced costs by more than $200 million by redesigning products, consolidating the supplier base, moving jobs to low-cost countries and taking advantage of global and low-cost country sourcing possibilities. We also introduced a new passenger airbag that has 25% less weight, fewer parts and that, consequently, is less expensive to manufacture than the bag it replaces (which, in turn, was 30% lighter than its predecessor product). Quality excellence was evidenced by receipt of several recognition awards such as a Toyota Global Contribution Award, a Honda Supplier Excellence Award and a Supplier of the Year Award from General Motors. Global presence has always been a competitive edge for Autoliv. We strengthened this advantage by opening our ninth plant in China, agreeing to make our Korean joint venture wholly owned and by expanding our Korean plant. Without our dedicated and motivated employees these results would not have been possible. Our employees have done an excellent job over many years. We are committed to continually develop their skills, knowledge and potential even more. PLANS FOR 2007 In 2007, we will continue to reduce costs, move production to low-cost countries and consolidate our supplier base. We will strengthen our superior presence in Asia, for instance, by building India's first airbag plant and by building a plant in Southern China, mainly for our Japanese customers in China and Japan. We also need one more plant in Mexico and another one in Romania to meet the continued order intake and to prepare for additional moves to low-cost countries. In R&D, we will start developing the next generation of our night vision system and continue to explore the potentials in active vehicle structures. OUTLOOK FOR 2007 During 2007, light vehicle production is expected to be flat in the Triad (i.e., Europe, North America and Japan) and to decline by 4% in the important West European markets. However, Autoliv expects to be able to offset this decline with an improved vehicle mix in Europe and North America, continued introductions of side-curtain airbags and by continued strong performance in emerging markets, primarily Asia. Based on these assumptions, organic sales for 2007 are expected to increase by at least 3%. Thanks to higher sales and internal cost reductions, gross margin is expected to be maintained or improve slightly depending on the possibility to further reduce component costs without aggravating the already serious supplier problems. The trend towards higher R,D&E expense in relation to sales is likely to continue. Two decisions in 2006 will also temporarily impact operating income. Firstly, start-up costs in Asia (primarily in China) are forecasted to increase by almost $25 million from the 2006 level. The start-up activities are necessary to pave the way for further cost reductions and expansions in low-cost countries. Secondly, the acquisition of the remaining shares in Autoliv-Mando will increase amortizations by $12 million (decreasing annually through 2010). Despite these $35-40 million in additional costs that are expected to have a negative margin effect of about 0.6 percentage points, operating margin is expected to exceed 8.0%. Earnings per share is expected to be favorably impacted by already executed share repurchases in 2006 and by approximately 3 cents from the Autoliv-Mando acquisition. The effective tax rate is forecasted to amount to 33%, almost the same level as the underlying rate of 32% in 2006 excluding the effect of discrete tax items. Consequently, we expect the improvement to continue in the underlying earnings per share in 2007. Lars Westerberg Better Leverage To take advantage of Autoliv's low borrowing cost, we have increased the Company's leverage position during the last years. Better Earnings Per Share Earnings per share has more than doubled to $4.88 from $1.79 in 2002. Of the improvement in 2006 of $1.62, $1.35 was due to one-time tax effects, while the aggregated effect of share repurchases, higher income and negative currency effects was 27 cents. Better Allocation Currently, 47% of headcount is in low-cost countries compared to 29% at the end of 2002. Total headcount has increased by 31% since 2001 (to almost 42,000) while sales have increased by 55% to $6.2 billion. Creating Shareholder Value Autoliv is creating value for its shareholders by:
THE MARKET Autoliv's target is to grow sales faster than the occupant restraint market, which is driven by:
Market Growth One of Autoliv's targets is to grow sales faster than the Company's market, i.e. the global occupant restraint market. This market has grown at an annual average compounded rate of 5% since 1997, when the present Autoliv company was started, while Autoliv's sales have risen at an average annual rate of 7%. The market is driven by: - Higher safety content per vehicle - Global vehicle production On average, since 1997, these drivers have caused the global occupant restraint market to rise by 3% and 2%, respectively, to $17 billion in 2006. In 2006, the global occupant restraint market grew by 3% despite a decline of 2% and 3%, respectively, in light vehicle production in Western Europe and North America, which are the two largest markets. These declines, however, were more than offset by light vehicle production in Asia Pacific (excluding Japan) and in Eastern Europe, which rose by 12%. This caused the global occupant restraint market to grow despite continued market price erosion and the fact that the average safety content per vehicle in Asia Pacific and in Eastern Europe is still only 50% of the global average of approximately $265 per vehicle. Vehicle Production Light motor vehicles (i.e. with a weight less than 6 tons) are, by far, the most important market for Autoliv's products. Heavy trucks rarely have airbags and, therefore, much less safety content per vehicle. In addition, the annual global production of heavy trucks is less than one million compared to an estimated global production of approximately 64 million light vehicles in 2006. During the next few years, global production of light vehicles is expected to grow by 4% per year despite virtually flat production in North America, Western Europe and Japan. However, in Asia Pacific and Eastern Europe, light vehicle production is expected to continue to grow by 9% per year, at least through 2010. Safety Content per Vehicle Partially as a result of this mix shift towards more low-end vehicles for emerging markets, the global average of safety value per vehicle was flat in 2006 for the second consecutive year despite a growing market for side-impact airbags. The safety value was also affected by the overall price erosion in the automotive industry. However, each new vehicle model still tends to get more safety products than its preceding model. This trend of higher safety content per vehicle is driven by consumer demand, new crash test programs and regulations. New regulations are particularly important in the U.S., while consumer demand is the main market driver in other regions. Examples of new regulations and test programs that are expected to drive Autoliv's sales and market during the next several years are:
Consequently, the average safety value per vehicle is expected to continue to grow, but at a lower rate than in the 1990s since global vehicle production will be made up of relatively more lowend vehicles for emerging markets. Market share gains At an average growth rate of 7% since 1997, Autoliv's sales have grown significantly faster than the global occupant restraint market. As a result, Autoliv has increased its market share - in line with our target - and now our Company commands more than one-third of the market. The market share gains are mainly due to Autoliv's strong positions:
Competition Autoliv's competitive edge is technological leadership, superior global footprint and system capabilities with in-house expertise in all key competence areas. We also have a strong position in China, Korea and other rapidly-growing emerging markets. In addition, we have a favorable customer mix and a particularly good relationship with the most safety-oriented vehicle manufacturers. Our two largest competitors each account for about one fifth of the global market. - TRW is an American company listed on the New York Stock Exchange with 30% of its sales of $13 billion in occupant restraints. - Takata is a Japanese company that recently became listed in Tokyo. Takata has grown partially as a result of the success of the Japanese vehicle manufacturers. All other competitors (including Key Safety Systems and Toyota's in-house suppliers) account for approximately 25% of the market. Market by Product Curtain airbags and other side-impact airbags are the fastest growing product line of the market. Already these products, which were introduced in the middle of the 1990s, account for 23% of the $17 billion global occupant restraint market. Autoliv is benefiting from this trend by having introduced these products and by still commanding an average global market share of 40%. Autoliv has also benefited from having 40% of the global seatbelt market. This product line has grown at an average annual rate of 3% or almost as fast as the general market despite the fact that seatbelts were introduced in the 1950s, long before airbags. In 2006, seatbelts accounted for 28% of the market compared to 32% in 1997. Safety electronics have grown in line with the general market and continue to account for close to one fifth of the market. In this product line, Autoliv has expanded its market share - both through a major acquisition in 2002 and organic growth - to almost 16% in 2006 from 8% in 1997. Despite increasing volumes, the market value for frontal airbags has stagnated at $5 billion due to severe pricing pressure. Frontal airbags now account for less than 30% of the market compared to nearly 50% in 1997. Autoliv is less affected by this trend than most competitors since frontal airbags represent only 21% of 2006 revenues. Market by Region The European market, which has doubled in value since 1997, has accounted for 50% of the growth of the global occupant restraint market. Since Autoliv commands almost 50% of this market, we have benefited from this trend. We are also benefiting from the rapid growth in the Rest of the World (mainly Asia Pacific). This market has surged by 189% since 1997 and now accounts for 18% of the global market which is more than, for instance, the Japanese occupant restraint market. As a result, Autoliv's sales in the Rest of the World have quadrupled. This market now accounts for 12% of consolidated sales compared to 4% in 1997. This trend is likely to continue since we have a relatively strong market position in these emerging markets, where the largest competitors typically are local companies that lack global capabilities and the latest technologies which we and our largest global competitors have and are developing. Sales by Customer We believe Autoliv has an attractive customer mix and that our enviable customer mix will continue to become even better balanced. Autoliv's relatively high dependence on Ford, General Motors and DaimlerChrysler has moderated (particularly in North America) to less than 40% of consolidated sales from 47% in 1997. In 2006, these three customers accounted for 32% of global vehicle production compared to 38% in 1997. Autoliv's relatively high dependence on these customers is partly a reflection of the fact that their vehicle models have a higher average safety value per vehicle than the global average of approximately $265. Our sales to the Asian manufacturers continue to increase and they now account for 27% of revenues compared to approximately 20% in 1997. Autoliv has an especially strong position with most manufacturers of premium vehicles. For instance, Volvo and BMW account for 6% and 5%, respectively, of Autoliv's sales, while they account for 1% and 2% of global vehicle production. Ford (including Volvo Cars with 6%) accounted for 20% of Autoliv's revenues in 2006. The high dependence on Ford, GM and DaimlerChrysler has shrunk to less than 40% from 47% and increased the most with Volkswagen, Kia, Honda and Hyundai. Kia and Hyundai are included in "Others". COST CONTROL To create shareholder value we also apply an effective cost management. Our targets are:
The two most important cost items to control are direct material and labor costs. Approximately 50% of our revenues are spent on components and other direct materials from external suppliers, while another 26% of revenues are spent on wages, salaries and other direct and indirect labor costs. Direct Material We have met our cost reduction targets for every year except in 2005 when steel prices sky-rocketed. Steel represents almost 8% of sales. In 2006, our cost for components and other direct materials totaled $3 billion. Of this amount, nearly 40% was related to the raw-material content in components and the remaining 60% was labor and other value added by our suppliers in the supply chain. The raw material portion has increased from 25% in 2002 and is likely to continue to increase, both as a result of higher raw material prices and our supplier consolidation program and sourcing in low-cost countries which affect the value-added portion but not the raw-material costs. The most efficient cost-reduction method is redesigning and replacing existing designs and components with new, more cost-efficient ones with a particular focus on reducing raw material content. For instance, we recently started to introduce a passenger airbag that has 25% less weight than the previous product generation which, in turn, was 30% lighter than its predecessor. Using fewer components also simplifies the manufacturing process, thereby reducing costs even more. Another cost-reduction method is our supplier consolidation program which is expected to reduce the number of suppliers from more than 2,000 to approximately 500 before the end of this decade. By then, we also expect to have increased our component sourcing in low-cost countries (LCC) from less than 15% in 2004 to 50%. In 2006, we reduced the supplier base by 100 to 1,850 and increased the level of component sourcing in LCC by 5 percentage points to approximately 24%. Labor Costs For several years, we have met our target to improve labor productivity by at least 5% per year. In 2006, labor productivity (measured as a reduction of labor minutes per manufactured unit) improved by at least 7%. In addition, we continue to reallocate production to low-cost countries. In 2006 alone, we increased headcount in these countries by nearly 4,000 to 47% of total headcount and reduced headcount in high-cost countries by more than 1,000. Thanks to these measures, total labor costs have been reduced to 26% of sales from 27% despite pricing provided to customers, salary increases and expansion in R,D&E, which is mainly labor. Cost Breakdown Autoliv's cost breakdown has been very stable despite price pressure from customers and higher raw-material prices. However, direct labor costs have been reduced faster than sales price erosion thanks to the movements of production to low-cost countries. Numbers before 2000 are not comparable to current numbers. Targets and Achievement |
| Long-Term Target | Performance in 2006 | Achieved | |
| Organic sales1) | Better-than-market | -1% compared to +3% | |
| Direct material cost | -3%/year | -3.3% | X |
| Supplier consolidation | 2,300 to 500 | 1,950 to 1,850 | |
| Sourcing in LCC | 15% to 50% | 19% to 24% | |
| Labor productivity | 5%/year | 7.9% | X |
| Jobs to LCC | 1,000/year | 1,000 | X |
| Operating working capital1) | Less than 10% of sales | 9.9%2) | X |
| Leverage ratio3) | Less than 3 times | 1.3 | X |
| Interest coverage3) | Greater than 2.75 times | 14 | X |
| Operating cash flow1) | Greater than $500 million/year | $560 million | X |
| 1) For definitions, see page 25 in the Annual Report. 2) Excluding effect of 1.8 percentage points from discrete tax items and unsually-high tax payments made at year-end. 3) For definitions, see page 35 in the Annual Report.
CASH FLOW A growing market and sales, and an effective cost management are not enough to create shareholder value. We therefore focus on cash flow which can be returned to shareholders by:
Capital Structure At the end of 2006, operating working capital had risen to 11.7% of sales compared to the cap of 10% in the Company's policy. However, this ratio was boosted from the end of 2005 by 1.8 percentage points due to discrete tax items and tax payments made before year-end. We expect to meet this long-term target also for the next few years, although it may fluctuate between quarters. We should also be able to continue to conform to our policy that the leverage ratio should be significantly below three and our interest coverage ratio significantly above 2.75. These ratios were 1.3 and 14.0, respectively, at the end of 2006. Furthermore, we believe depreciation (including amortization) will be roughly in line with anticipated capital expenditures during the next few years. The need for additional manufacturing capacity could, however, be affected by, for instance, the above-mentioned voluntary commitment for side-impact protection in the United States. Capital Employed From 2001, it has been possible to grow sales by 55% and more than double operating income and still only increase capital employed by 17%. This improvement in capital utilization reflects a number of initiatives, such as plant consolidations, outsourcing, simplification of manufacturing processes by product redesign and moving to low-cost countries where less capital-intensive manufacturing processes can be utilized. It should also be noted that growth in sales and profits has been achieved without any major acquisitions. As a result, goodwill and other intangibles, net now correspond to 27% of sales compared to 42% in 2001. Since our market tends to increase, it should be possible to continue to grow business organically even without major acquisitions. As a result and given the cost containment programs we have introduced, we should be able to continue to grow earnings faster than capital employed. Use of Funds In conclusion, Autoliv has the potential to continue to generate strong cash flow. When analyzing how to best use this operating cash flow ($560 million in 2006), the Autoliv Board uses the model depicted on page 15 in the Annual Report. To create value for shareholders, cash flow from operations should only be used to finance investments in operations to the point when the return on equity still exceeds the cost of equity. For a number of years, Autoliv's returns on equity have reached or exceeded 12%, well above the Company's cost of equity. Accordingly, in 2006, we re-invested, net $295 million in our business. We also used cash flow from operations to increase dividend payments to $112 million. In addition, we bought back shares for $221 million by utilizing the remaining $153 million of operating cash flow and by increasing debt by $68 million. On this marginal debt, the interest rate was less than 5.5% or not even half of Autoliv's long-term return on equity of at least 12%. Hence, it should be profitable to increase leverage. Share Buy-Backs Stock repurchases create value if the share is undervalued, but it destroys value if the share is overvalued. Autoliv therefore tries to buy back shares opportunistically, i.e. more shares when there is deemed to be a dip in the share price and less when the share price is higher. Since the inception of the repurchase program in 2000, 24 million shares have been repurchased for $920 million at an average cost of $38.36 per share. At the end of 2006, the Autoliv share closed at $60.30, indicating a market value of approximately $1.4 billion for the repurchased shares. This 57% increase in the indicated market value compares favorably with the 22% reduction in the number of shares outstanding due to the share repurchases. By taking advantage of Autoliv's strong financial position and buying back shares in this opportunistic way, it should be possible to grow earnings per share faster than sales, thereby improving the potential to create incremental shareholder value. Dividend Policy Since Autoliv uses both dividend payments and share buy-backs to return funds to shareholders, the Company has no set dividend policy. Instead, the Board of Directors continuously analyzes which one of these methods is most efficient to create shareholder value. The model takes all important variables into account such as the cost of marginal borrowing, the return on marginal investments and the price of the Autoliv share. Management believes that such recurrent analyses have the potential to generate more value for Autoliv's shareholders than a pre-defined dividend policy. In 2006, this approach resulted in a total return to the Autoliv shareholders of $333 million which was 23% more than the year's cash flow before financing and corresponded to a total yield of 7.4%, i.e., total returns in relation to Autoliv's average market capitalization during 2006. In addition, the Autoliv stock appreciated 30%, thereby continuing to outperform both most of its peers in the automotive industry and the general stock market in New York, which the Autoliv stock has done for the last five years. Research & Development - Technological Leadership Autoliv's comprehensive safety research and product innovation have been essential in establishing the Company as the industry's global sales leader with superior profitability. In our quest to reduce traffic accidents, fatalities and injuries we continue to research automotive safety problems beyond current regulatory and rating requirements. MANY ORDERS FOR NEW AIRBAG In 2006, Autoliv introduced a new airbag that offers improved protection for certain passengers in the front-seat and saves costs for the vehicle manufacturers. Although airbags save thousands of lives every year, they are potentially dangerous for children and other occupants who are sitting too close to a deploying frontal airbag. Autoliv's new "Safety-Vent Airbag" automatically releases pressure should the occupant be too close to the bag. If the occupant is at a safe distance to the bag, two straps will be stretched and, as a consequence, cinch their vent tubes to allow gas pressure to build up in the bag. Already, Autoliv has more than 20 contracts for this new product. RECORD INVESTMENT IN R,D&E During 2006, we increased our gross expenditures for R,D&E by 7% to $507 million or to 8.2% of sales from 7.7% in 2005 and 7.6% in 2002. Of the 2006 amount, $106 million was related to customer-funded engineering projects and crash tests. Net of this income, we increased our R,D&E expenditures by 3% to $398 million or to 6.4% of sales, compared to 6.2% in 2005 and 5.2% in 2002. THE FUTURE OF AUTOMOTIVE SAFETY: INTEGRATED SAFETY As the global leader in passive safety products and systems, Autoliv is now looking to reduce accidents and their severity by developing complimentary active safety technologies. By integrating passive and active safety systems, we expect to provide breakthroughs in vehicle crash worthiness and occupant protection for frontal and side impact crashes. ADAPTIVE CRASH PROTECTION Although there are many different types of frontal crashes (e.g. head-on vehicle-to-vehicle crashes, offset vehicle-to-vehicle crashes, crashes against trees, animals or pedestrians, etc.) it has, so far, been impossible to tune the design of a vehicle for each specific crash condition. Vehicle manufacturers have instead been forced to make a compromise between these different requirements and, as a result, a vehicle can be stiffer than necessary and dangerous for certain milder crashes and not strong and hard enough for other more violent crashes. We are now addressing this problem by developing "active structures". Each such structure uses a "crash box" at the front end of the vehicle beams. An empty crash box is relatively soft to provide best possible protection to pedestrians' legs in low to medium speed crashes. If, however, in an imminent high-speed crash, a radar or another pre-crash warnings system detects a full vehicle-to-vehicle crash, both crash boxes will be pressurized using airbag inflator technology from Autoliv. The vehicle structure then becomes stiff and offers more efficient protection. If only one of the vehicle's front corners is engaged in a violent crash, only the crash box behind this corner is activated. Particularly these crashes with low overlap or crashes into trees or poles can be dangerous. They are difficult for the airbag sensor to detect in time and they often cause high risks for intrusions into the passenger compartment. Since this new technology improves the crashworthiness of vehicles, it could be possible to make vehicles smaller and more compact with less weight without reducing the occupant safety or the space for the occupants, thereby reducing fuel consumption and emissions and also providing better driving conditions in dense traffic. Human Resources - Dedicated and Competent Employees Our Human Resources organization and activities support Autoliv's overriding profitability target by making sure that our Company offers an attractive and safe workplace, while ensuring we have enough skilled, competent and dedicated people to maintain growth. CAREER DEVELOPMENT We offer a wide range of career development programs, including on-the-job training, job rotation and international assignments. Our belief is that by investing in these programs we will enable a highly motivated workforce. By providing our employees a broader view, we are increasing the workforce mobility and developing our organization to be more global, flexible, dynamic and target-driven. In 2006, we increased our investments in employee training and development programs to a record high of 7 days per employee per year. In 2006, we introduced a career development tool that will be used both internally and externally to recruit the most competent people to open positions in the Company. We also have a program for identifying high potential employees, who are offered development plans, including leadership training and expatriate positions. A global trainee program started out in early 2006. The participants represent six nationalities and their average age is 28 years. Of the participants, 40% are women. We believe that building a network of highly qualified people and developing the organization to be less hierarchical is an investment for the future. By encouraging our employees to grow, we will grow our business. By providing our employees with a more global view, our organization will strengthen its competitive edge in a global environment. Additionally, more than 2/3 of our senior managers are being recruited internally. To continue this trend, a succession-planning program for all key positions was implemented worldwide a few years ago. WELL-BALANCED WORKFORCE In addition to attracting and retaining talented professionals and skilled workers, our target is to have a balance between men and women and to have a diversity of age groups and nationalities. The average age of our employees is only 35 years, which reflects the Company's rapid expansion over the past few years. Almost half of our associates are women, also with a similar age distribution. NEW SAFETY RECORD To remain an attractive employer, we invest in the well-being of our associates. These investments range from safe and healthy workplaces with competitive compensation to ethical principles and promoting sustainable development. All of our plants' safety records are benchmarked. In 2006, 12 plants met our tough target of zero injuries, compared to 10 plants in 2005 and 7 in 2004. The graph on page 18 in the Annual Report shows the injury rate (i.e. number of injuries per 200,000 work hours) for the entire Autoliv corporation. INNOVATIVE EMPLOYEES Another operational indicator of our global manufacturing monitoring system is the number of improvement suggestions per employee. Who are better to propose improvements to the manufacturing processes, than the line operators themselves? We therefore encourage our employees to be creative and we globally benchmark the suggestion rates at our plants. During 2006, we received 23% more improvement suggestions per employee than in 2005, which should contribute to additional productivity improvements over the next years. HIGHER LABOR PRESENCE Reduction of absenteeism in our plants is an important target for us, especially in Western Europe, where absenteeism has historically been close to 10%. However, we have managed to reduce it gradually and in 2006 the level was less than 5% in Europe, well in line with our global average of 5%. PRODUCTIVITY CONTINUES TO IMPROVE In 2006, we improved our labor productivity by almost 8%, exceeding our target of 5% improvement. A broader measure that we monitor is the value added per headcount. Since 2002, it has increased to $73,300 per head compared to the average headcount cost of $39,600 in 2006. During 2002 and 2003, the value added and the average headcount cost were affected by the stronger Euro. In 2005 and 2006, the value added has been impacted by the move to low-cost countries, where manufacturing is less automated and therefore the value added per head lower. LEADERSHIP To maintain our Company's worldwide leading position, leadership training on all levels is very important. Three years ago, we introduced a leadership training program where we both identify the need for training and conduct the training according to very high standards and our core values. We want our leaders to assume the five leadership behaviors presented in our Leadership Pentagon. MEET ONE OF AUTOLIV'S TRAINEES Why did you apply for the trainee program? I wanted to put my international background into practice in my working life. By being in the trainee program, I'm able to work on an international arena where I am challenged to use my professional skills as well as personal skills at a maximum level. During the course of the program, what will you be doing? I will be working in different customer accounts at different Autoliv sites in, for instance, Sweden, Turkey and Germany. My assignments will give me a broad insight into areas such as: Request for quotations from customers, customer management, product development and production. How do you believe the program will help you in your future career? Assignments in different plants introduce you to new cultures and teach you how to find new ways of communication. Performing and delivering results in these dynamic environments are, of course, a challenge but it is a great way to get a broad view of our Company and this has given me a great cross border/cross function network that I and Autoliv will have use for in the future. Handan Dogramaci - Graduate Engineer from Chalmers University of Technology, Gothenburg, Sweden Corporate Social Responsibility - Highest Ethical Standards Every year our products save 20,000 lives and help prevent at least ten times as many severe injuries. This saves tens of billion dollars every year to societies and is the most important contribution from Autoliv to Corporate Social Responsibility (CSR). We also assume this responsibility in several other ways. ETHICAL CODES Autoliv's ethical Code draws on universal standards such as the "Global Sullivan Principles of Social Responsibilities" and on the UN's "Global Compact". In our Code we therefore commit ourselves, for instance, to:
Our Code of Business Conduct and Ethics can be downloaded from www.autoliv.com. The Code applies to all operations and all employees worldwide. The Autoliv president in each country is responsible for communicating the Code to the employees. Our Code is also an integrated part of the Autoliv Supplier Manual (ASM). All new and existing suppliers are required to sign an acknowledgement letter where they confirm that they will comply with the ASM-requirements, including the Code. COMPLIANCE MONITORING Each Autoliv country president, business director and certain other managers are obliged to report violations to our codes and other regulations. It is a standing heading in their monthly letters to the Autoliv CEO. In addition, our employees are encouraged to report any violation of law or Autoliv codes. It can be done anonymously by using a special "hotline". We have also initiated a self-assessment review of Autoliv facilities. This study assesses the compliance with and the standards of working conditions, work hours, work rules, work practices, health & safety status, union representation, wages & salaries, benefits and insurance coverage. Almost every second Autoliv associate works in a low-cost country and we have the strategy to continue to expand in these countries. We therefore started this Social Responsibility Assessment in the low-cost countries where Autoliv has operations. The results are satisfying and show that all our plants in these emerging markets maintain overall good standards and practices. We will continue the assessment this year in high-cost countries. Our leading suppliers are monitored as part of our regular quality audits of them. ENVIRONMENT Our environmental management goes beyond the legal requirements, since recyclable and environmentally friendly products are a competitive tool in the automotive industry. Most of our products are produced from steel and other metals, or plastics and other oil-based materials. The products are installed in vehicles where their weight will affect the fuel consumption and emissions during the long life of the vehicle. Our products could also affect the environment when the vehicle is scrapped, if due attention is not paid to the material selection. As a result, we focus on all phases of a product's life, and not only on the manufacturing phase that, in our case, is the phase that has the least environmental impact. Before Manufacturing The most important contribution we can make to the environment is to redesign and develop low weight environmentally friendly safety systems. In 2006, we introduced a side curtain airbag that has 38% less weight than the first curtain airbag which was introduced in 1998. Our latest passenger airbag has 25% less weight than the previous product generation which, in turn, was 30% lighter than its predecessor. These two examples alone save 10,000 tons annually (mainly steel) and lead to a corresponding environmental improvement in our supply chain. We also work closely with our suppliers in several other respects and encourage them to implement an international environmental management standard, preferably ISO 14001. We also require them to adhere to our environmental policy. Internal Improvements It is our policy that every Autoliv facility be certified according to ISO 14001. The few remaining non-certified plants are essentially new manufacturing facilities that have not yet been certified. We continuously monitor a number of other environmental indicators such as energy and water consumption and emissions. All values are low. For instance, the level of emission (measured in relation to sales) of the "green house gas" carbon dioxide is four to five times less than for an average engineering company and our level is comparable to a bank or a service company. We therefore focus on reducing freight and packaging materials, where we have the highest savings potentials. After Delivery We actively support our customers in their environmental programs. We are, for instance, represented in the Ford Supplier Sustainability Forum together with ten other leading Ford suppliers who have a track record of being at the forefront of environmental management. The most significant contribution we can make to our customers' environmental targets is to continue to reduce the weight of our products, thereby reducing vehicles' energy consumption and emission. This will help meet the vehicle industry's new commitment that carbon dioxide emissions in Europe should be reduced by 30% in new vehicles. The European directive End of Life of Vehicle (ELV) requires that 85% of material in all new vehicle models should be recoverable by 2006 and 95% should be recoverable by 2015. Although the ELV does not specify recovery levels for individual car components but only states the recovery levels for the whole vehicle, we will make sure that our products will contribute to meeting these standards. The EU-directive also bans the use of hazardous substances such as lead. During 2006, Autoliv completed its multi-year program to phase out lead from its igniters for airbags. Some older igniters contained small quantities of lead (less than one-hundredth of a gram). For selecting and controlling of all materials in our products, Autoliv register all materials and substances in an internal global database. At the end of 2006, 88% of Autoliv's facilities had been certified to ISO 14001, an international environmental management standard. These facilities account for almost 100% of consolidated sales. Virtually all of the non-certified facilities are new plants that have not been certified yet. The weight of Autoliv's side curtain airbag has been reduced with every new product generation. Not only has this saved cost, but it improves the environment both in our supply chain and when the vehicles are used due to less fuel consumption and emissions. Quality - A Key to our Profitability Our products never get a second chance. We must deliver flawless products and still meet the tough price conditions in the automotive industry. Achieving superior quality, while reducing scrap rates and other costs, is therefore key to our profitability. "NO SPILLS ALLOWED" Superior quality is a "must" for a reliable, worldclass supplier of safety systems. It affects our ability to win new orders, as well as impacting our margins through scrap and other related costs. For these reasons, we are committed to a "zero defect" principle that emphasizes proactive methods aimed at eliminating root causes, rather than screening out non-conforming products at the end of the manufacturing line. All new products must pass five checkpoints in Autoliv's Product Development System APDS: Project planning, Concept definition, Product and process development, Product and process validation, and Product launch. In this way, we proactively prevent problems and ensure we deliver only the best designs to the market. Equally important is the training of our employees. Emphasis is placed on ensuring that all team members are aware of and understand the critical connection between them and our life-saving products. Autoliv's Quality System prevents bad parts from entering our plants, and eliminates bad intermediate products as early as possible. Our manufacturing lines are equipped with sensors, cameras and other instruments, at selected critical stations, for detecting errors as early as possible. As a supplement, we maintain an advanced product traceability system. Should there be a suspected problem, we are capable of tracing the issue to the vehicle level. This means that vehicle owners can rest assured that necessary actions will be taken without delay, which contributes to increasing the confidence people place in our safety systems. FLAWLESS PRODUCTS AND DELIVERIES Reported quality deviations very rarely affect the performance of our products. Virtually all deviations are due to other tough requirements, such as flawless labeling, precise delivery of the right parts at the right moment, as well as correct color nuance and surface texture on steering wheels and other products where the "look and feel" is important to the car buyer. We register all deviations and include them in our quality measure PPM (Parts Per Million). The highest level accepted by our customers is 10 PPM. This represents one non-conforming part per hundred thousand delivered. To give an idea of how tough this target is, it could be compared to the number of days since 1750, i.e. before, for instance, the founding of the United States. Ten PPM would require that there not be one single bad day in more than 250 years. Certification Excellence At the end of 2006, over 90% of Autoliv's facilities were certified to the automotive quality standard ISO/TS 16949. These facilities represented 98% of consolidated sales. This is as close to 100% as we could get, since we are continuously opening new plants. During 2006, Autoliv received several awards from customers, including this Supplier Award for Achievement in Project Management from Toyota. Management's Discussion and Analysis |
| Years ended December 31, (Dollars in millions) |
2006 | 2005 | 2004 | |||
| Consolidated sales | $6,188 | 0% | $6,205 | 1% | $6,144 | 16% |
| Light vehicle production in the Triad1)(in thousands) | 46,665 | 1% | 46,059 | 1% | 45,653 | 2% |
| Gross profit | $1,265 | 0% | $1,268 | 4% | $1,221 | 22% |
| Gross margin | 20.4% | 0% | 20.4% | 3% | 19.9% | 5% |
| Operating income | $520 | 1% | $513 | 0% | $513 | 20% |
| Operating margin | 8.4% | 1% | 8.3% | (1%) | 8.4% | 4% |
| Net income2) | $402 | 37% | $293 | (10%) | $326 | 22% |
| Net margin2) | 6.5% | 38% | 4.7% | (11%) | 5.3% | 4% |
| Earnings per share | $4.88 | 50% | $3.26 | 6% | $3.46 | 23% |
| Return on equity2) | 17% | 42% | 12% | (8%) | 13% | 8% |
|
1) North America, Europe (incl. Eastern Europe) and Japan. Accurate global production data for 2006 is not yet available. 2) In 2006, affected by favorable discrete tax items. Autoliv, Inc. ("the Company") provides advanced technology products for the automotive market. In the three-year period 2004-2006 (the time period required by the SEC to be reviewed in this analysis) a number of trends have influenced the Company's operations. The most significant trends have been:
Vehicle Production and Mix During the 2004-2006 period, the most important growth driver for Autoliv's market has been global light vehicle production, which is estimated to have increased faster than in previous three-year periods or by roughly 4% as an annual average rate to around 64 million vehicles. The growth was nearly 5% in 2004, more than 4% in 2005 and 3% in 2006. However, the growth occurred only in the emerging markets, while light vehicle production declined in Autoliv's two largest markets. In Western Europe, the decline was 3% from the 2003 level and in North America 4%. To take advantage of the superior growth in emerging markets, we have been positioning Autoliv in Asia and Eastern Europe through both consolidated subsidiaries and joint ventures. As a result, the Rest of the World (i.e. all markets outside North America, Europe and Japan, i.e. the Triad) continued to grow in importance and accounted for 12% of revenues in 2006, compared to 10% in 2004. Another important factor is the growing global production of Asian vehicle manufacturers, which increased their output by 20% during the three-year period. To take advantage of this trend, we have made substantial investments in Japan, Korea, Thailand and, increasingly, in China. As a result, in 2006, Asian vehicle manufacturers accounted for 27% of revenues compared to 22% in 2004. A third important factor has been Autoliv's ability to become a supplier to the best selling car models in Europe. The Company was particularly successful in this respect during the latest model change-overs. Since most of these model shifts took place three to four years ago, they helped us achieve superior growth in 2004 when the models were new. However, after demand for these best-selling models peaked, they have caused a flattening in consolidated sales in 2005 and 2006 which not even Autoliv's strong performance in emerging markets and with the Asian vehicle manufacturers has been able to offset. For additional information on Autoliv's dependence on certain customers and vehicle models. Safety Content per Vehicle Historically, safety content per vehicle has increased by 3% per year. However, during the last two years, the average safety value has stood almost unchanged at approximately $265 per vehicle despite the fact that new safety technologies, regulations and various rating programs of crash performance continue to drive the market. This stagnation has been caused by the combined effects of pricing pressure in the automotive industry and of the above-mentioned mix changes in global production towards smaller, less-equipped vehicles for the emerging markets. However, the safety standards of vehicles in the emerging markets are improving and, as a consequence, the negative vehicle mix effect is expected to abate. In 2006, for instance, China introduced a rating program for crash performance of new vehicles. The growth in the average global value of safety systems is therefore expected to come back, albeit at a lower rate than historically. Cost Reduction Difficulties Usually the Company has managed to offset higher raw material and component costs by its cost reduction programs related to direct materials. However, in the second half of 2004, significant price increases on raw materials, in particular steel, began to take effect and, during 2005, the Company was directly or indirectly through its suppliers faced with about $90 million higher costs primarily related to higher steel prices and, in 2006, by another $20 million, primarily related to higher prices on zinc and aluminum. To offset these 1.5 and 0.3 percentage point negative effects on gross margins and to cope with continued severe pricing pressure from customers, we have introduced global sourcing programs, consolidated Autoliv's supplier base, phased out unprofitable products and increased component sourcing in low-cost countries. However, the pricing pressure from customers has continued incessantly, while persistently high raw material prices has made it increasingly more difficult to reduce direct material costs in line with sales price erosion without causing severe problems for Autoliv's suppliers. The number of financially distressed suppliers has already risen. Due to this precarious situation, the former positive trend of lower direct material costs in relation to sales has changed and these costs have risen by 0.4 percentage points to almost 50% of sales in 2006 from its low point in 2004. Labor Cost Improvements However, Autoliv has managed to offset this negative trend by taking several actions such as moving production to low-cost countries (LCC). In high-cost countries, headcount has been cut by 3,100 or 12% to 22,300 through the three-year period, while headcount in LCC has been increased by 7,800 or 68% to 19,500. These moves of production are estimated to have generated labor cost savings in the magnitude of $80 million each year or approximately a quarter of a billion dollars during the full three-year period. In addition, labor productivity in manufacturing (measured as labor minutes per units produced) has improved by more than 5% each year, in line with our target. As a result, labor cost in manufacturing has been reduced by a full percentage point in relation to sales to less than 10%, despite price concessions provided to customers and annual wage increases. These savings in direct labor cost have contributed to improve gross margin to 20.4% in 2006 from 19.9% in 2004. Gross margin has also been favorably impacted, compared to 2004, by 0.3 percentage points from a reclassification in 2005. Higher R,D&E During the period, the Company's expense for Research, Development and Engineering (R,D&E) has continued to increase and amounted to 6.4% of sales in 2006 compared to 6.0% in 2004. This increase is primarily due to the above-mentioned reclassification. It also reflects a strong order-intake and other engineering development activities, primarily in safety electronics. The increase is also due to a trend among vehicle manufacturers to out-source more of their R,D&E needs. However, the increases in R,D&E have not exceeded the savings achieved by the move to low-cost countries and by the productivity gains in manufacturing. As a result, operating margin has remained stable at 8.4% in 2006 compared to 8.4% in 2004 despite continued pricing pressure from customers, higher raw material prices and difficulties to reduce component costs due to an increasing number of financially stretched suppliers. Share Buy-Backs and Dividends To increase shareholder value by taking advantage of Autoliv's strong cash flow, financial position and low borrowing cost, the Company accelerated, in August 2005, its repurchases of shares while steadily increasing the quarterly dividend. As a result, the Company returned $743 million to shareholders during 2004-2006 through its stock repurchase program and another $287 million through dividend payments. The total amount of $1,030 million corresponds to a pay-out ratio of more than 100% in relation to total net income of $1,021 million during the period 2004-2006. During the three-year period 2004-2006, nearly 16 million shares have been repurchased at an average cost of $46.96 per share compared to the closing price at the end of 2006 of $60.30. This 28% increase in the value of the repurchased shares compares favorably with the 16% reduction in the number of shares outstanding. ITEMS AFFECTING COMPARABILITY The following items have significantly affected the comparability of reported results from year to year. Management believes that, to assist in understanding the Company's operations, it is useful to consider certain U.S. GAAP measures exclusive of these items. Accordingly, the accompanying tables reconcile from U.S. GAAP to the equivalent non-U.S. GAAP measure. Discrete Tax Items The third and the fourth quarters of 2006 were affected by $95 million from releases of tax reserves and other discrete items. Consequently, as shown in the table below, the effective tax rate was reduced by 19.7 percentage points, which boosted net income by $95 million, earnings per share by $1.15 and return on equity by 3.9 percentage points. In addition, operating working capital was boosted by 1.4 percentage points in relation to sales. Jobs Creation Act Transactions During 2005, Autoliv made internal distributions totaling $855 million under the American Jobs Creation Act of 2004 ("the Act"). The Act provided for an 85% deduction on certain earnings repatriated before 2006 to the U.S. The distributions also enabled Autoliv to replace some of its U.S. debt with debt in Europe at lower interest rates. As a result, during 2006, Autoliv saved $5 million in lower tax expense and another $24 million in lower interest expense. The interest saving was due to a more than 2.5% lower market interest rate level in Sweden than in the U.S. In 2005, the interest expense savings was $5 million. However, the distributions also resulted in an incremental tax expense of $17 million and in an incremental SG&A expense of $1 million. Taking all effects into account as in the table below, net income in 2005 was reduced by $13 million, earnings per share assuming dilution reduced by $0.15, and return on equity by 0.5 percentage points. The effective tax rate was boosted by 3.5 percentage points and cash and cash equivalents increased temporarily to $296 million at the end of 2005 since the cash distributions exceeded the maturing U.S. dollar denominated debt. |
| Effects of Discrete Tax Items in 2006 | ||||||
| Reported | Effect of Discrete Tax Items | Adjusted | ||||
| Net income (million) | $402 | $951) | $307 | |||
| Net margin | 6.5% | 1.5% | 5.0% | |||
| Operating working capital/sales | 11.7% | 1.4% | 10.3% | |||
| Earnings per share | $4.88 | $1.15 | $3.73 | |||
| Return on equity | 17.1% | 3.9% | 13.2% | |||
| Effective tax rate | 12.2% | 19.7% | 31.9% | |||
| 1) Consisting of $69 million from release of tax reserves and $26 million from other discrete tax items. | ||||||
Effects of the American Jobs Creation Act in 2005 | ||||||
| Reported | Effect of the Act | Adjusted | ||||
| Net income (million) | $293 | $13 | $306 | |||
| Earnings per share | $3.26 | $0.15 | $3.41 | |||
| Return on equity | 11.7% | 0.5% | 12.2% | |||
| Tax rate | 35.9% | 3.5% | 32.4% | |||
| Reconciliations to U.S. GAAP
Some of the discussions in this Management's Discussion and Analysis refer to non-U.S. GAAP measures that management and securities analysts use in measuring the Company's performance. Management believes that these measures assist investors in analyzing trends in the Company's business for the reasons given below. Investors should not consider these non-U.S. GAAP measures as substitutes, but rather as additions to, financial reporting measures prepared in accordance with U.S GAAP. These non-U.S. GAAP measures have been identified, as applicable in each section of this Annual Report, with tabular presentations in this section, reconciling them to U.S. GAAP. It should be noted that these measures, as defined, may not be comparable to similarly titled measures used by other companies. Organic Sales Since the Company generates approximately 75% of sales in other currencies than in the reporting currency U.S. dollars and currency rates have proven to be very volatile, and due to the fact that the Company has historically made several acquisitions and divestitures, management analyzes the Company's sales trends and performance as changes in "organic sales growth". This presents the increase or decrease in the overall U.S. dollar net sales on a comparable basis, allowing separate discussions of the impact of acquisitions/divestitures and exchange rates. The tabular reconciliation below presents changes in "organic sales growth" as reconciled to the change in total U.S. GAAP net sales. Operating Working Capital Due to the need to optimize cash generation to create value for shareholders, management focuses on operationally derived working capital as defined in the table below. The reconciling items used to derive this measure are, by contrast, managed as part of our overall management of cash and debt, but they are not part of the responsibilities of day-to-day operations' management. Net Debt As part of efficiently managing the Company's overall cost of funds, management routinely enters into "debt-related derivatives" (DRD) as part of its debt management. The most notable volumes of DRDs were entered into in 2001 in connection with the issue of the Eurobond that matured in 2006. Creditors and credit rating agencies use net debt adjusted for DRDs in their analyses of the Company's debt. This non-U.S. GAAP measure was used, for instance, for the Company's Revolving Credit Facility when it still had covenants. By adjusting for DRDs, the total economic liability of net debt is disclosed without grossing it up by currency or interest fair market values (that are offset by DRDs reported in other balance sheet captions). |
| Components in Sales Increase/Decrease (Dollars in millions) | ||||||||||
| 2006 vs 2005 | Europe | N. America | Japan | RoW | Total | |||||
| % | $ | % | $ | % | $ | % | $ | % | $ | |
| Organic sales growth | (5.2) | (175.7) | (0.1) | (0.6) | 9.9 | 52.8 | 14.9 | 82.9 | (0.7) | (40.6) |
| Effect of exchange rates | 1.0 | 34.1 | 0.1 | 1.0 | (5.2) | (28.0) | 3.0 | 16.6 | 0.4 | 23.7 |
| Impact of acquisitions | - | - | - | - | - | - | - | - | - | - |
| Reported net sales change |
(4.2) | (141.6) | 0.0 | 0.4 | 4.7 | 24.8 | 17.9 | 99.5 | (0.3) | (16.9) |
| 2005 vs 2004 | ||||||||||
| Organic sales growth | (3.5) | (122.0) | 3.4 | 57.2 | 7.2 | 36.6 | 8.9 | 41.1 | 0.2 | 12.9 |
| Effect of exchange rates | (0.1) | (4.0) | 0.3 | 4.2 | (1.7) | (8.7) | 7.0 | 32.3 | 0.4 | 23.8 |
| Impact of acquisitions | - | - | - | - | - | - | 5.3 | 24.3 | 0.4 | 24.3 |
| Reported net sales change |
(3.6) | (126.0) | 3.7 | 61.4 | 5.5 | 27.9 | 21.2 | 97.7 | 1.0 | 61.0 |
| Reconciliation of "Operating working capital" to U.S. GAAP measure | ||||||||||
| December 31 2006 |
December 31 2005 |
December 31 2004 |
||||||||
| Total current assets | $2,098.4 | $2,162.5 | $2,190.8 | |||||||
| Total current liabilities | (1,531.6) | (1,764.3) | (1,799.3) | |||||||
| Working capital | 566.8 | 398.2 | 391.5 | |||||||
| Cash and cash equivalents | (168.1) | (295.9) | (229.2) | |||||||
| Short-term debt | 294.1 | 508.4 | 313.8 | |||||||
| Derivative asset and liability, current | 1.2 | (92.9) | 5.0 | |||||||
| Dividends payable | 29.6 | - | - | |||||||
| Operating working capital | $723.6 | $517.8 | $481.1 | |||||||
| Reconciliation of "Net debt" to U.S. GAAP measure | December 31 2006 |
December 31 2005 |
December 31 2004 |
|||||||
| Short-term debt | $294.1 | $508.4 | $313.8 | |||||||
| Long-term debt | 887.7 | 757.1 | 667.1 | |||||||
| Total debt | 1,181.8 | 1,265.5 | 980.9 | |||||||
| Cash and cash equivalents | (168.1) | (295.9) | (229.2) | |||||||
| Debt-related derivatives | (3.3) | (92.7) | (152.5) | |||||||
| Net debt | $1,010.4 | $876.9 | $599.2 | |||||||
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YEAR ENDED DECEMBER 31, 2006 VERSUS YEAR ENDED DECEMBER 31, 2005 Net Sales Net sales for 2006 decreased by 0.3% or by $17 million to $6,188 million because light vehicle production declined by 2% in Western Europe and by 3% in North America. The effect of currency rate changes was negligible. Consequently, organic sales (non-U.S. GAAP measure, see previous section) also declined by less than 1%. Organic sales were driven by higher penetration rates for side curtain airbags, strong growth in Asia and Eastern Europe and higher market share for steering wheels and safety electronics. However, this was not enough to offset the negative effects from West European and North American vehicle production, continued pricing provided to customers, the expiration of certain frontal airbag contracts and the phase-out of unprofitable products. Organic sales declined by 2% in all of the three first quarters of the year and then rose by 4% in the fourth quarter. In the spring, sales were affected by a negative mix in European light vehicle production. This mix effect turned positive in the fourth quarter thanks to several new vehicle model launches to which Autoliv is a supplier. Organic sales of airbag products decreased by 1%, mainly due to the decline in light vehicle production in North America and Western Europe. Sales were also affected by price erosion, the expiration of certain frontal airbag contracts and the phase-out of certain unprofitable products, partially offset by strong growth in sales of curtain airbags. Organic sales of seatbelt products were flat. Consequently, Autoliv managed to offset the decline in light vehicle production in the two largest markets. This was primarily thanks to strong performance in emerging markets and the introduction of pro-active seatbelt pretensioners. In Europe, where Autoliv generates approximately 50% of its revenues, organic sales declined by 5% due to the decline in West European light vehicle production, price erosion, a negative vehicle model mix and the expiration of certain frontal airbag contracts. In North America, which accounts for a quarter of revenues, organic sales stood unchanged despite the decline in light vehicle production. Sales were driven by strong demand for curtain airbags and |