10-Q Q3 2006 - Autoliv Inc.


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934


For the quarterly period ended September 30, 2006

Commission File No.: 1-12933

 AUTOLIV, INC. 
(Exact name of registrant as
specified in its charter)

 Delaware 
(State or other jurisdic-
tion of incorporation or
organization)

 51-0378542 
(I.R.S. Employer Identi-
fication No.)

World Trade Center,
Klarabergsviadukten 70,
Box 70381,
SE-107 24 Stockholm, Sweden 
(Address of principal executive offices)

 N/A 
(Zip Code)


 +46 8 587 20 600 
(Registrant's telephone number,
including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirement for the past 90 days.
Yes: [x]  No: [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer: [x]  Accelerated filer: [ ]   Non-accelerated filer: [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes: [ ]   No: [x]
Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: As of October 27, 2006, there were 81,273,151 shares of common stock of Autoliv, Inc., par value $1.00 per share, outstanding.


FORWARD-LOOKING STATEMENTS

This Form 10-Q contains statements that are not historical facts but forward-looking statements that involve risks and uncertainties that could cause Autoliv, Inc.'s ("Autoliv" or the "Company") results to differ materially from what is projected, including but not limited to the following: higher raw material costs or other expenses; a major loss of customers; increased competitive pricing pressure on the Company's business; failure to develop or commercialize successfully new products or technologies; the outcome of pending and future litigation and changes in governmental procedures, laws or regulations, including environmental regulations; plant disruptions or shutdowns due to accidents, natural acts or governmental action; labor disputes; product liability and recall issues; and other difficulties in improving margin or financial performance. In addition, the Company's forward-looking statements could be affected by general industry and market conditions and growth rates, general domestic and international economic conditions, including currency exchange rate fluctuations, and other factors. Except for the Company's ongoing obligation to disclose material information under the federal securities laws, the Company undertakes no obligations to update publicized information and forward-looking statements whether as a result of new information or future events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.


INDEX

 PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
1.1 Basis of Presentation
1.2 Receivables
1.3 Inventories
1.4 Restructuring
1.5 Product Related Liabilities
1.6 Comprehensive Income
1.7 Stock Incentive Plan
1.8 New Accounting Pronouncements
1.9 Income Taxes
1.10 Retirement Plans
1.11 Contingent Liabilities
1.12 Debt and Credit Agreements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS




PART I - FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS



CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in millions, except per share data)

  Quarter July - September First 9 months
  2006 2005 2006 2005
Net sales
- Airbag products $925.8 $934.3 $3,030.3 $3,152.0
- Seatbelt products 484.8 457.4 1,556.1 1,587.9
Total net sales 1,410.6 1,391.7 4,586.4 4,739.9
 
Cost of sales (1,132.4) (1,110.5) (3,634.9) (3,772.1)
Gross profit 278.2 281.2 951.5 967.8
 
Selling, general & administrative expenses (79.3) (78.2) (242.8) (249.1)
Research, development & engineering expenses (94.6) (88.8) (307.8) (310.2)
Amortization of intangibles (3.7) (3.9) (11.3) (11.3)
Other income (expense), net 1.3 (6.0) (5.8) (20.3)
Operating income 101.9 104.3 383.8 376.9
 
Equity in earnings of affiliates 1.5 1.1 4.6 5.1
Interest income 1.7 1.4 6.4 5.8
Interest expense (12.2) (11.4) (33.8) (35.9)
Other financial items, net (1.1) (.3) (3.7) (.6)
Income before income taxes 91.8 95.1 357.3 351.3
 
Income taxes 34.9 (33.7) (43.9) (119.8)
Minority interests in subsidiaries (5.0) (2.3) (14.3) (8.9)
Net income $121.7 $59.1 $299.1 $222.6
 
Earnings per share - basic $1.49 $.67 $3.62 $2.46
Earnings per share - diluted $1.48 $.66 $3.60 $2.45
 
Weighted average number of shares outstanding, assuming dilution and net of treasury shares (in millions) 82.1 89.3 83.0 90.9
Number of shares outstanding, net of treasury shares and excluding dilution (in millions) 81.2 87.0 81.2 87.0
 
Cash dividend per share - paid $.35 $.30 $.99 $.85
 
See "Notes to unaudited consolidated financial statements".


CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)

  September 30 December 31
  2006 2005
  (unaudited)  
Assets    
Cash & cash equivalents $131.9 $295.9
Receivables 1,245.3 1,149.0
Inventories 513.4 485.4
Other current assets 174.8 232.2
Total current assets 2,065.4 2,162.5
 
Property, plant & equipment, net 1,127.7 1,080.7
Investments and other non-current assets 157.7 142.9
Goodwill 1,532.3 1,524.8
Intangible assets, net 144.9 154.3
Total assets $5,028.0 $5,065.2
 
Liabilities and shareholders' equity
Short-term debt $118.8 $508.4
Accounts payable 697.5 682.6
Accrued expenses 313.4 305.1
Other current liabilities 284.6 268.2
Total current liabilities 1,414.3 1,764.3
 
Long-term debt 982.8 757.1
Pension liability 58.9 49.6
Other non-current liabilities 110.1 112.4
Minority interests in subsidiaries 77.1 65.7
Shareholders' equity 2,384.8 2,316.1
Total liabilities and shareholders' equity $5,028.0 $5,065.2
 
See "Notes to unaudited consolidated financial statements"


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)

  Quarter July - Sept First 9 months
  2006 2005 2006 2005
 
Operating activities
Net income $127.7 $59.1 $299.1 $222.6
Depreciation and amortization 74.1 72.7 222.8 234.7
Deferred taxes and other (2.8) 12.9 (2.0) 36.0
Changes in operating assets and liabilities (91.0) (20.8) (117.2) (169.2)
Net cash provided by operating activities 102.0 123.9 402.7 324.1
 
Investing activities
Capital expenditures (87.6) (66.0) (247.7) (234.5)
Proceeds from sale of property, plant and equipment 3.5 .4 32.9 2.2
Acquisitions of businesses and other, net 6.4 .6 6.8 2.2
Net cash used in investing activities (77.7) (65.0) (208.0) (230.1)
 
Financing activities
Net increase (decrease) in short-term debt 30.3 36.5 (318.6) (97.5)
Issuance of long-term debt 28.5 136.6 323.7 351.5
Repayments and other changes in long-term debt - (71.4) (158.5) (140.3)
Dividends paid (28.7) (26.8) (82.1) (77.2)
Shares repurchased (52.4) (132.6) (155.1) (233.3)
Stock options exercised .6 .7 6.1 4.3
Minority interests and other, net (3.1) .2 (3.4) (5.0)
Net cash used in financing activities (24.8) (56.8) (387.9) (197.5)
 
Effect of exchange rate changes on cash 6.6 (2.2) 29.2 (18.8)
Increase (decrease) in cash and cash equivalents 6.1 (.1) (164.0) (122.3)
 
Cash and cash equivalents at period-start 125.8 107.0 295.9 229.2
Cash and cash equivalents at period-end $131.9 $106.9 $131.9 $106.9
 
See "Notes to unaudited consolidated financial statements"


KEY RATIOS (UNAUDITED)

  Quarter July - Sept First 9 months
  2006 2005 2006 2005
 
Earnings per share - basic1) $1.49 $.67 $3.62 $2.46
Earnings per share - diluted1) $1.48 $.66 $3.60 $2.45
Equity per share 29.37 27.93 29.37 27.93
Cash dividend per share - paid .35 .30 .99 .85
Operating working capital, $ in millions 3) 668 587 668 587
Capital employed, $ in millions 3,352 3,243 3,352 3,243
Net debt, $ in millions 3) 967 814 967 814
Net debt to capitalization, % 3)4) 28 25 28 25
 
Gross margin, % 5) 19.7 20.2 20.7 20.4
Operating margin, % 6) 7.2 7.5 8.4 8.0
 
Return on shareholders' equity, % 20.6 9.6 17.0 11.7
Return on capital employed, % 12.5 13.0 15.9 15.7
 
Weighted average no. of shares in millions 1)2) 82.1 89.3 83.0 90.9
No. of shares at period-end in millions 7) 81.2 87.0 81.2 87.0
No. of employees at period-end 35,400 34,300 35,400 34,300
Headcount at period-end 41,300 39,700 41,300 39,700
Days receivables outstanding 8) 83 86 74 76
Days inventory outstanding 9) 37 36 33 32

1)Net of treasury shares.
2)Assuming dilution.
3)See tabular presentation reconciling this non-GAAP measure to GAAP in the Management's Discussion & Analysis of Financial Condition and Results of Operations.
4)Net debt in relation to net debt, minority and equity.
5)Gross profit relative to sales.
6)Operating income relative to sales.
7)Net of treasury shares and excluding dilution.
8)Outstanding receivables relative to average daily sales.
9)Outstanding inventory relative to average daily sales.


See "Notes to unaudited consolidated financial statements"



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are dollars in millions, except for per share amounts)
September 30, 2006




1.1 Basis of Presentation

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments considered necessary for a fair presentation have been included in the financial statements. All such adjustments are of a normal recurring nature.

The consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The Company's reporting periods in this report consist of thirteen week periods, ending on the Friday closest to the last day of the calendar month. For convenience, the accompanying financial statements have been shown as ending on the last day of the calendar month.

In the first quarter of 2006 the Company began accruing dividends when declared by the Board of Directors. The effect of this change, recorded in "Other current liabilities", is not material to the Company's financial position for any periods presented.

Statements in this report that are not of historical fact are forward-looking statements, that involve risks and uncertainties that could affect the actual results of the Company. A description of the important factors that could cause Autoliv's actual results to differ materially from the forward-looking statements contained in this report may be found in Autoliv's reports filed with the Securities and Exchange Commission (the "SEC").

For further information, refer to the consolidated financial statements, footnotes and definitions thereto included in the Autoliv, Inc. annual report on Form 10-K for the year ended December 31, 2005.

The filings with the SEC of Autoliv's annual report, annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, management certifications, current reports on Form 8-K and other documents can also be obtained free of charge from Autoliv at the Company's address. These documents are also available at the SEC's website, www.sec.gov, and at the Company's corporate website www.autoliv.com.


1.2 Receivables

During the third quarter of 2006 the Company has sold receivables relating to selected customers to various external financial institutions without recourse. These factoring agreements have the effect of reducing net debt, reducing accounts receivable and days sales outstanding. The Company received $39 million in cash net of discount of $0.5 million. No factoring agreements were entered into in 2005.


1.3 Inventories

Inventories are stated at lower of cost (principally FIFO) or market. The components of inventories, net of reserve, were as follows:

September 30, 2006

December 31, 2005

Raw material

$182.0

$166.8

Work in progress

226.3

206.7

Finished products

105.1

111.9

$513.4

$485.4


1.4 Restructuring

2005

In 2005, employee-related restructuring provisions of $19.6 million were made for severance costs related to plant consolidation, primarily in the United Kingdom, Australia and France. The provision has been charged against "Other income (expense), net" in the income statement. The change in liability during 2005 is mainly related to a resolution of a legal dispute. The table below summarizes the change in the balance sheet position of the total restructuring reserves from December 31, 2004 to December 31, 2005.

December 31

Cash

Change in

Translation

December 31

2004

payments

reserve

difference

2005

Restructuring - employee related

$4.7

$(15.7)

$19.6

$(.8)

$7.8

Liability

16.2

-

(6.0)

(.7)

9.5

Total reserve

$20.9

$(15.7)

$13.6

$(1.5)

$17.3

During 2005, 1,054 additional employees became entitled to redundancy payments and 689 employees covered by the restructuring reserves left the Company. As of December 31, 2005, 461 employees remained who are covered by the restructuring reserves.



2006

Q1
The movements in the employee-related restructuring provisions in the quarter mainly relate to plant consolidation initiated in 2005, primarily in the United Kingdom, Australia and France. The provision has been charged against "Other income (expense), net" in the income statement. The change in liability during 2006 is mainly related to a resolution of a legal dispute resulting in cash payments. The table below summarizes the change in the balance sheet position of the restructuring reserves from December 31, 2005 to March 31, 2006.


December 31

Cash

Change in

Translation

March 31

2005

payments

reserve

difference

2006

Restructuring - employee related

$7.8

$(3.4)

$3.4

-

$7.8

Liability

9.5

(4.5)

(1.3)

$.1

3.8

Total reserve

$17.3

$(7.9)

$2.1

$.1

$11.6


During the quarter, 182 employees covered by the reserves left the Company. As of March 31, 2006, 500 employees remained who are covered by the restructuring reserves.

Q2
The increase in the employee-related restructuring provisions in the quarter mainly relates to textile operations in high-cost countries. The cash payments relate to the United Kingdom, Canada and Australia for restructuring activities initiated in 2006 as well as in 2005. The provision has been charged against "Other income (expense), net" in the income statement. The table below summarizes the change in the balance sheet position of the restructuring reserves from March 31, 2006 to June 30, 2006.

March 31

Cash

Change in

Translation

June 30

2006

payments

reserve

difference

2006

Restructuring - employee related

$7.8

$(6.2)

$6.8

$.4

$8.8

Liability

3.8

-

(.5)

.2

3.5

Total reserve

$11.6

$(6.2)

$6.3

$.6

$12.3


During the quarter, 486 employees covered by the reserves left the Company. As of June 30, 2006, 370 employees remained who are covered by the restructuring reserves.

Q3
The increase in the employee-related restructuring provisions in the quarter mainly relates to operations in high-cost countries. The cash payments mainly relate to the United Kingdom, Sweden and Australia for restructuring activities initiated in 2006 as well as in 2005. The provision has been charged against "Other income (expense), net" in the income statement. The table below summarizes the change in the balance sheet position of the restructuring reserves from June 30, 2006 to September 30, 2006.

June 30

Cash

Change in

Translation

Sept 30

2006

payments

reserve

difference

2006

Restructuring - employee related

$8.8

$(2.7)

$1.1

-

$7.2

Liability

3.5

-

(2.1)

-

1.4

Total reserve

$12.3

$(2.7)

$(1.0)

-

$8.6


During the quarter, 180 employees covered by the reserves left the Company. As of September 30, 2006, 287 employees remained who are covered by the restructuring reserves.


1.5 Product Related Liabilities

The Company has reserves for product risks. Such reserves are related to product performance issues including recall, product liability and warranty issues. The Company records liabilities for product related risks when probable claims are identified and it is possible to reasonably estimate costs. Provisions for warranty claims are estimated based on prior experience and likely changes in performance of newer products and the mix and volume of the products sold. The provisions are recorded on an accrual basis.

Cash payments have been made for recall and warranty-related issues in connection with a variety of different products and customers. The significant payments in 2005 were made in connection with ongoing recalls for the replacement of defective products.

For further explanation, see section 1.11 "Contingent Liabilities" below.

The table below summarizes the change in the balance sheet position of the product-related liabilities for the quarter.

Quarter July - September

2006

2005

Reserve at beginning of the period

$26.0

$51.9

Change in reserve

2.7

4.5

Cash payments

(5.5)

(12.8)

Translation difference

-

.7

Reserve at end of the period

$23.2

$44.3



1.6 Comprehensive Income

Comprehensive income includes net income for the year and items charged directly to equity.

  Quarter
July - September		 Nine months
January - September
  2006 2005 2006 2005
Net income $121.7 $59.1 $299.1 $222.6
Minimum pension liability (.2) .1 (.5) .5
Fair value of derivatives (.3) (.1) (1.3) 4.2
Translation of foreign operations - 12.4 17.8 (128.0)
Other comprehensive income (loss) (.5) 12.4 16.0 (123.3)
 
Comprehensive income $121.2 $71.5 $315.1 $99.3


1.7 Stock Incentive Plan

Under the Autoliv, Inc. 1997 Stock Incentive Plan (the "Plan") adopted by the Shareholders, and as further amended, 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 ("RSUs"). All options are granted for 10-year terms, have an exercise price equal to the fair market value of the share at the date of the 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 source of the shares issued upon share option exercise or lapse of RSU service period is treasury shares. The number of stock options exercised and the number of RSUs vested during the nine month period are 194,806 and 111,694, respectively.

Beginning January 1, 2006, compensation costs for all of the Company's stock-based compensation awards are determined based on the fair value method, using a modified prospective method as defined by FAS-123(R). The Company records the compensation expense for RSUs and stock options over the service lives of the employees during the vesting period. The impact of the adoption of FAS-123(R) was less than 0.1 percentage point in relation to sales.

As a result of adopting Statement 123(R) on January 1, 2006, the Company's income before income taxes and net income for the quarter ended September 30, 2006, are $1.0 million and $0.7 million lower, respectively, and the Company's income before income taxes and net income for the nine months ended September 30, 2006 are $3.0 million and $2.0 million lower, respectively, than if it had continued to account for share-based compensation under APB Opinion 25. Basic and diluted earnings per share for the quarter ended September 30, 2006 are $0.01 and $0.01 lower, respectively, and the Company's basic and diluted earnings per share for the nine months ended September 30, 2006 are $0.02 and $0.02 lower, respectively, than if the Company had continued to account for share-based compensation under APB Opinion 25.

The total compensation expense for RSUs granted in 2006, 2005 and 2004 was $4.8 million, $4.6 million and $3.6 million, respectively. The weighted average fair value of options granted during 2006, 2005 and 2004 was estimated at $13.83, $13.33 and $11.11, respectively, using the Black-Scholes option-pricing model. The total compensation cost related to nonvested awards not yet recognized is $5.9 million and $1.0 million for RSUs and stock options respectively. The weighted average period over which this cost is expected to be recognized is approximately two years and three months for RSUs and stock options respectively.

Below is a pro-forma table which presents how the Company's total and per share net income for 2005 would have appeared had compensation costs 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:

  Quarter
July - September		 Nine months
January - September

2005 2005

Net income as reported

$59.1

$222.6

Add:Compensation under intrinsic value method included in net income, net of tax

.6

1.8

Deduct:Compensation under fair value

  method for all awards, net of tax

(1.6)

(4.8)

Net income pro-forma

$58.1

$219.6

Earnings per share:

  As reported - basic

$.67

$2.46

  As reported - assuming dilution

$.66

$2.45

  Pro-forma - basic

$.65

$2.43

  Pro-forma - assuming dilution

$.65

$2.42


1.8 New Accounting Pronouncements

New accounting policies issued by the Financial Accounting Standards Board (FASB), which are effective on or after January 1, 2006, are the following:

Statement No.151 Inventory Cost, an amendment of ARB No. 42, Chapter 4, was issued in November 2004 and is effective for fiscal years beginning after June 2005. FAS-151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The application of FAS-151 did not have a significant impact on earnings and financial position.

Revised Statement No. 123 Share-Based Payment was issued in December 2004. On April 14, 2005, the SEC provided additional phased-in guidance regarding Statement No. 123(R). Under the terms of this guidance the provisions became effective for the Company on January 1, 2006. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values (i.e. pro-forma disclosure is no longer an alternative to financial statement recognition). The application of FAS-123(R) did not have a materially different impact than the pro-forma earnings disclosed in the note to the Stock Incentive Plan.

FASB Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, which aims to clarify the requirement to record liabilities stemming from a legal obligation to clean up and retire fixed assets, like a plant or a factory, when a retirement depends on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. The application of FIN 47 did not have any significant impact on earnings and financial position.

FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, creates a single model to address uncertainty in tax positions prescribing a minimum threshold for the recognition of tax positions. FIN 48 also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from FASB No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has yet not completed its analysis of the impact of FIN 48.

Statement No.157, Fair Value Measurements, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. FAS-157 was issued in September 2006 and is effective for fiscal years beginning after November 15, 2007. The Company has not yet evaluated the effects on earnings and financial position of the application of FAS-157.

Statement No.158 Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FAS-87, 88, 106, and 132(R). FAS-158 was issued in September 2006. FAS-158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan in its statement of financial position beginning with fiscal years ending after December 15, 2006. FAS-158 requires the measurement of plan assets and benefit obligations as of the date of the employer's fiscal year-end beginning with fiscal years ending after December 15, 2008. The Company has not yet evaluated the effects on earnings and financial position of the application of FAS-158.

1.9 Income Taxes

The effective tax rate for the first nine months of 2006 was 12.3%, which compares with 34.1% in the first nine months of 2005. During the third quarter of 2006, the Company recognized a non-cash income tax benefit of $57 million resulting from the release of income tax reserves associated with the United States income tax audit examination cycle. On September 18, 2006, following the recent completion of a United States Internal Revenue Service ("IRS") examination, the statute of limitations covering the United States federal income tax returns of Autoliv, Inc. and its United States subsidiaries for all years through December 31, 2002 closed. The recently completed IRS examination and the corresponding closing of the statute of limitations covered the six tax years since the formation of the Autoliv, Inc. United States tax group in 1997.

During the second and third quarters, several subsidiaries recorded adjustments to their estimates of prior year income tax provisions. During the first quarter, several subsidiaries completed studies of R&D tax credit eligibility and concluded that they are able to substantially increase the benefit claimed for these credits for both 2005 and 2006. The 2005 catch-up effect was recorded entirely in the first quarter. Excluding the total of $71 million of discrete tax items, the effective rate for the nine-month period would have approximated historical levels. These discrete items include the $57 million release of income tax reserves, the R&D tax credit benefit noted above and various other items including provision to tax reserve adjustments. The $66 million of discrete tax items in the third quarter only, created tax income and led to a negative effective tax rate. Excluding the discrete items, the third quarter tax rate would have approximated historical levels.

At September 30, 2006, the Company had approximately $56 million of remaining reserves for income taxes that may become payable in future periods as a result of income tax audits. The Company provides reserves on the basis that tax authorities will examine all issues in all open years. At any given time the Company is undergoing income tax audits in several tax jurisdictions and covering multiple years. The Company expects the completion of certain tax audits and the closure of certain tax years in the near term and believes that it is reasonably possible that additional reserves could be released into income during fiscal year 2006.

1.10 Retirement Plans

The Company has non-contributory defined benefit pension plans covering employees at most United States operations. Benefits are based on an average of the employee's earnings in the years proceeding retirement and on credited service. Certain supplemental unfunded plan arrangements also provide retirement benefits to specified groups of participants.

Autoliv, in consultation with the relevant plan fiduciaries, has revised its approach to investing global pension assets. From 2006 onwards, the level of equity exposure will be reduced from broadly 80% to approximately 65%. This move will help reduce volatility in both balance sheet and income statement figures for pensions going forward and takes into account the increasing maturity of the Company's United Kingdom pension plan.

The main defined benefit plan is a United States plan, for which the funding policy is that the funding level will target meeting the accrued benefit obligation (ABO).

The Company has frozen participation in the United States pension plans to include only those employees hired as of December 31, 2003.

The Company's main non-United States defined benefit plan is the United Kingdom plan. The United Kingdom defined benefit plan was subject to a significant curtailment in 2005 in connection with a plant closure.

The Net Periodic Benefit Costs related to Other Post-retirement Benefits were not significant to the Consolidated Financial Statements of the Company for the three months ended September 30, 2006.

For further information on Pension Plans and Other Post-retirement Benefits, see Note 18 to the Consolidated Financial Statements of the Company included in the Company's Annual Report for the year ended December 31, 2005.

The components of the total net benefit cost associated with the Company's defined benefit retirement plans are as follows:


  Quarter
July - September		 Nine months
January - September
  2006 2005 2006 2005

Service cost

$3.8

$4.4

$11.4

$13.7

Interest cost

3.0

2.9

8.9

8.1

Expected return on plan assets

(2.8)

(2.1)

(8.4)

(6.1)

Amortization of prior service cost

-

.1

.1

.5

Amortization of net (gain) loss

.6

.4

1.8

.9

Net periodic benefit cost

$4.6

$5.7

$13.8

$17.1



1.11 Contingent Liabilities

Product Warranty and Recalls
Autoliv is exposed to product liability and warranty claims in the event that its products fail to perform as expected and such failure results, or is alleged to result, in bodily injury and/or property damage. We cannot assure that we will not experience any material warranty or product liability losses in the future or that we will not incur significant costs to defend such claims. In addition, if any of our products are or are alleged to be defective, we 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 us in excess of our available insurance, may have a material adverse effect on our 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 expected. 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 costs. Our warranty reserves are based upon our best estimates of amounts necessary to settle future and existing claims. We regularly evaluate 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.

The table in section 1.5 "Product-Related Liabilities" above summarizes the change in the balance sheet position of the product-related liabilities during the quarter.

For information on legal proceedings, see Part II - Other Information, Item 1.


1.12 Debt and Credit Agreements

In the second quarter of 2006, a €300 million Eurobond together with the related hedging instruments matured, as disclosed in Note 12 of the Company's Annual Report for the year ended December 31, 2005. The Company has issued United States commercial paper, which is classified as long-term debt, and used available cash balances to repay the matured financial instruments. The Company has also issued $310 million equivalent of SEK denominated medium-term notes during the first two quarters to extend its maturity profile and has repaid SEK commercial paper to off-set the issuance of the medium-term notes.

The result of the above is that "short-term debt" has decreased by $390 million since the beginning of the year. "Cash and cash equivalents" have decreased by $164 million. "Long-term debt" has increased by $226 million and the related derivative assets presented in "Other current assets" have decreased by $94 million since the beginning of the year.





ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion should be read in conjunction with our Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2005 Annual Report on Form 10-K filed with the SEC on February 28, 2006. Unless otherwise noted, all dollar amounts are in millions.

Autoliv is one of the world's leading suppliers of automotive safety systems with a broad range of product offerings including modules and components for passenger and driver-side airbags, side-impact airbag protection systems, seatbelts, steering wheels, safety electronics, safety seats and other safety systems and products. Autoliv has production facilities in 29 countries and has as customers almost all of the world's largest car manufacturers.

Autoliv is a Delaware holding corporation with principal executive offices in Stockholm, Sweden, which owns two principal subsidiaries, Autoliv AB ("AAB") and Autoliv ASP, Inc.("ASP"). AAB, a Swedish corporation, is a leading developer, manufacturer and supplier to the automotive industry of car occupant restraint systems. Starting with seatbelts in 1956, AAB expanded its product lines to include seatbelt pretensioners (1989), frontal airbags (1991), side-impact airbags (1994), steering wheels (1995) and seat sub-systems (1996). ASP, an Indiana corporation, pioneered airbag technology in 1968 and has since grown into one of the world's leading producers of airbag modules and inflators. ASP designs, develops and manufactures airbag inflators, modules and airbag cushions, seatbelts and steering wheels. It sells inflators and modules for use in driver, passenger, side-impact and knee bolster airbag systems for worldwide automotive markets.

Shares of Autoliv common stock are traded on the New York Stock Exchange under the symbol "ALV" and Swedish Depositary Receipts representing shares of Autoliv common stock trade on the Stockholm Stock Exchange under the symbol "ALIV". Options in Autoliv shares are traded in Philadelphia and AMSE under the symbol "ALV".



Non-GAAP financial measures

Some of the following discussions refer to non-GAAP financial measures: see "Organic sales", "Operating working capital", "Net debt", "Leverage ratio" and "Interest coverage ratio". Management believes that these non-GAAP financial measures assist investors in analyzing trends in the Company's business. Investors should consider these non-GAAP financial measures in addition to, rather than as a substitute for, financial reporting measures prepared in accordance with GAAP. These non-GAAP financial measures have been identified as applicable in each section of this report with a tabular presentation reconciling them to GAAP. It should be noted that these measures, as defined, may not be comparable to similarly titled measures used by other companies.



RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2005

Market Overview

During the quarter, light vehicle production in the Triad (i.e. Europe, North America and Japan) is estimated to have decreased by 2% compared to the third quarter 2005. At the beginning of the quarter, light vehicle production was expected to be flat.

In Europe, (including Eastern Europe), where Autoliv generates more than half of its revenues, light vehicle production decreased by 1% due to an overall 5% drop in Western Europe. Both declines were 2 percentage points worse than expected. However, in Eastern Europe light vehicle production is reported to have risen by 15%.

In North America, which accounts for a quarter of Autoliv's consolidated revenues, light vehicle production dropped by 8% which was twice as much as expected. "The Big 3" (i.e. GM, Ford and Chrysler) reduced their production by 12%, while the North American light vehicle production of Asian and European vehicle manufacturers was flat. Autoliv has a higher sales value per vehicle with the Asian and European manufacturers than with an average Big-3 vehicle, which somewhat moderated the sharp drop in North American vehicle production.

In Japan, which accounts for nearly one tenth of Autoliv's consolidated sales, light vehicle production increased by 6%.

Autoliv's market is driven not only by vehicle production but also by the fact that new vehicle models are being equipped with an increasing number of airbags and other safety systems in response to consumer demand, new crash test programs and regulations. For instance, the United States Congress is expected to adopt the proposed regulation on side impact crash testing and China is introducing a crash test rating program for new vehicle models.


Consolidated Sales

Autoliv's consolidated net sales increased by 1% to $1,411 million compared to the third quarter 2005. Currency effects boosted sales by 3%. Consequently, organic sales (i.e. U.S. GAAP sales excluding currency translation effects and acquisitions/divestitures) decreased by only 2% despite a 5% decrease in West European and a 8% drop in North American light vehicle production. At the beginning of the quarter, organic sales were expected to remain unchanged compared to the same quarter 2005, but light vehicle production has been weaker than expected both in North America and Western Europe. A long strike among certain customers in Korea also negatively affected sales.

Organic sales were driven by Autoliv's strong position in "The Rest of the World" (e.g. China) where both the increase in vehicle production and the increase in the safety content per vehicle is stronger than in the traditional markets within the Triad. Sales were also driven by the continued introduction of Autoliv's side curtain airbag, The Inflatable Curtain, into an increasing number of vehicle models. In addition, Autoliv gained market share in steering wheels, safety electronics and seatbelts. These favorable trends were not enough, however, to offset the negative effects caused by weak North American and West European vehicle production, a strike among certain customers in Korea, continued pricing pressure from customers and strong competition in frontal airbags.

The Company has substantial operations outside the United States and currently, approximately 75% of the sales are denominated in currencies other than the U.S. dollar. This makes the Company and its performance in regions outside the United States sensitive to changes in the U.S dollar exchange rates. The measure "Organic sales" presents the increase or decrease in our overall U.S. dollar net sales on a comparative basis, allowing separate discussion of the impacts of acquisitions/divestments and exchange rate fluctuations. The tabular reconciliation below presents the change in "Organic sales" reconciled to the change in the total net sales as can be derived from our unaudited financial statements.


Reconciliation of the change in "Organic sales" to GAAP financial measure
Components of net sales increase (decrease)
Quarter July - September, 2006
(All amounts are Dollars in millions)

          Europe N. America         Japan         RoW         Total
  % $ % $ % $ % $ % $
 
Organic sales change (6.2) (44.9) (4.6) (19.4) 11.2 13.8 17.0 21.8 (2.0) (28.7)
Impact of acquisitions/divestments - - - - - - - - - -
Effect of exchange rates 6.6 47.7 (.1) (.4) (3.7) (4.6) 3.8 4.9 3.4 47.6
Reported net sales change .4 2.8 (4.7) (19.8) 7.5 9.2 20.8 26.7 1.4 18.9


Sales by Region

Sales from Autoliv's European companies stood relatively unchanged at $722 million due to favorable currency effects of 7%. The decline in organic sales of 6% reflects the 5% drop in West European light vehicle production, an unfavourable vehicle model mix and the expiration of certain frontal airbag contracts. Thanks to market share gains, organic sales of seatbelts actually rose despite the 1% decline in European light vehicle production. The penetration rate for curtain airbags continues to increase as evidenced by the introduction of the Inflatable Curtain into vehicle models such as Audi's Q7; Ford's Galaxy; Opel's Zafira; Peugeot's 207; and Toyota's Avensis, Corolla, Verso and Yaris.

Sales from Autoliv's North American companies decreased by 5% to $402 million due to the 8% drop in North American light vehicle production. Autoliv's performance reflects a favorable customer mix, market share gains in electronics and steering wheels, as well as the introduction of curtain airbags (up 10%) into vehicle models such as Buick's LaCrosse; Chrysler's Jeep Compass and Dodge Caliber; Honda's Pilot; Nissan's Altima; Toyota's Sienna and Volkswagen's Jetta. Sales were negatively impacted by the expiration of certain frontal airbag contracts and the continued phase-out of unprofitable inflators for airbags.

Sales from Autoliv's companies in Japan rose by 7% to $132 million despite negative currency effects of 4%. Organic sales grew by 11% driven by sales of curtain airbags for Honda's CRV and Toyota's Land Cruiser, Rav4, Ryu and 4Runner. Sales were also supported by market share gains in electronics.

Sales from Autoliv's companies in the Rest of the World (RoW) surged by 21% to $155 million, including currency effects of 4%. Growth of organic sales of 17% was driven by a doubling of the sales of curtain airbags and by strong performance in other side airbags as well as in seatbelts. Sales were also supported by business for Hyundai's Lavita and Sonata; Kia's Sorento, Roche, Carens and Grand Carnival; and Samsung's SM5.



Sales by Product

Sales of airbag products (including electronics and steering wheels) decreased by 1% to $926 million, despite a 3% favorable currency effect. The decrease of 4% in organic sales was due to the drops in North American and West European vehicle production, the expiration of certain frontal airbag contracts and the phase-out of unprofitable airbag inflator contracts. The decline in airbag sales was moderated by higher sales for curtain airbags (organic sales up 11%) and market share gains in steering wheels and electronics.

Sales of seatbelt products (including seat sub-systems) rose by 6% to $485 million, including a 4% positive currency effect. The 2% growth in organic sales despite weak vehicle production is a reflection of Autoliv's gains of market share in Europe and Japan as well as of Autoliv's strong position in Asia Pacific and other emerging markets where both vehicle production and the standards of the seatbelt systems are improving quickly.


Earnings for the Three-Month Period Ended September 30, 2006

During the past several quarters, Autoliv has managed to offset the pricing pressure in the automotive industry and improve gross margin. This has been made possible by systematic and relentless cost reduction activities, including plant consolidations, movement of production to low-cost countries and consolidation of the supplier base. The pricing pressure has also been addressed by the phase-out of unprofitable and low-margin products as well as by expansion in Asia and in side airbags.

However, during the past quarter, light vehicle production dropped in the largest markets. Both raw material prices (mainly $6 million from zinc and aluminum) and distressed suppliers have also had a negative impact. As a result, gross profit declined by 1% or $3 million to $278 million and gross margin decreased to 19.7% from 20.2%.

Operating income decreased by 2% or $2 million to $102 million as a result of the $3 million lower gross profit. Operating margin declined to 7.2% from 7.5% as a result of the 0.5% lower gross margin. R,D&E expense rose to 6.7% of sales from 6.4% as a reflection of strong order-intake and other activities primarily in safety electronics. However, the negative effect from higher R,D&E expense was offset by lower other operating expense because, in the third quarter 2005, other operating expense was impacted by unusually high restructuring costs. During the reporting period, the operating income was negatively affected by employee-related restructuring expenses of $1.2 million, mainly related to plant consolidation of operations in high-cost countries. During the quarter, 180 employees covered by the restructuring reserves left the Company.

Income before taxes decreased by $3 million to $92 million, mainly due to $2 million lower operating income. A $7 million negative net interest expense impact due to higher average net debt and higher floating interest rates was virtually offset completely by interest savings from the changes Autoliv made in its borrowing structure last year in connection with taking advantage of the Jobs Creation Act.

Net income rose by $63 million to $122 million due to a release of tax reserves of $57 million and other discrete tax items of $9 million, principally adjustments related to previous years' tax returns.

Earnings per share rose by 82 cents to $1.48. Earnings per share was boosted primarily by 80 cents from the release of tax reserves and other discrete tax items and by 3 cents from the stock repurchase program. The average number of shares outstanding decreased by 8% to 82.1 million. Currency effects boosted earnings per share by 1 cent, while lower net income had a 2 cent negative impact.

Return on capital employed amounted to 13% and return on equity to 21% compared to 13% and 10%, respectively, in the third quarter 2005. The release of tax reserves and the other discrete tax items contributed 11 percentage points to the improvement in return on equity.


NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2005

Market overview

During the nine-month period January through September 2006, light vehicle production in the Triad increased by nearly 2% due to a strong first quarter.

In Europe, light vehicle production increased by close to 2% due to an 18% increase in Eastern Europe, while light vehicle production in Western Europe declined by 2%.

In North America, light vehicle production decreased by 1%. The Asian and European vehicle manufacturers increased their North American production by 4%, while GM, Ford and Chrysler reduced their production by 3%. This customer and vehicle model mix was favorable for Autoliv due to the Company's strong market position with the Asian and European vehicle manufacturers.

In Japan, light vehicle production increased by 5% in the first nine-month period.


Consolidated Sales

For the year's first nine months, sales decreased by 3% to $4,586 million, including negative currency translation effects of 1%. The 2% decline in organic sales was due to the 2% decline in West European vehicle production, the expiration of certain frontal airbag contracts and the phase-out of unprofitable products. These negative effects were partially offset by strong demand for curtain airbags, higher market share for electronics and strong growth in Asia.

The Company has substantial operations outside the United States and currently, approximately 75% of the sales are denominated in currencies other than the U.S. dollar. This makes the Company and its performance in regions outside the United States sensitive to changes in the U.S dollar exchange rates. The measure "Organic sales" presents the increase or decrease in our overall U.S. dollar net sales on a comparative basis, allowing separate discussion of the impacts of acquisitions/divestments and exchange rate fluctuations. The tabular reconciliation below presents the change in "Organic sales" reconciled to the change in the total net sales as can be derived from our unaudited financial statements.


Reconciliation of the change in "Organic sales" to GAAP financial measure
Components of net sales increase (decrease)
First 9 months, 2006
(All amounts are Dollars in millions)

          Europe N. America         Japan         RoW         Total
  % $ % $ % $ % $ % $
 
Organic sales change (6.9) (181.7) (.8) (10.4) 9.5 38.2 14.3 58.0 (2.0) (95.9)
Impact of acquisitions/divestments - - - - - - - - - -
Effect of exchange rates (1.5) (40.8) .1 1.4 (6.8) (27.5) 2.2 9.3 (1.2) (57.6)
Reported net sales change (8.4) (222.5) (.7) (9.0) 2.7 10.7 16.5 67.3 (3.2) (153.5)


Sales by Region

Sales from Autoliv's European companies decreased by 8% to $2,415 million of which 2% was due to currency effects. In addition to the drop in West European vehicle production, organic sales declined by 7% because of a temporary unfavorable vehicle model mix caused by several important vehicle model change-overs.

Sales from Autoliv's North American companies decreased by 1% to $1,286 million in line with the decline in North American vehicle production. Sales were also affected by the expiration of contracts in frontal airbags and inflators, partially offset by a favorable customer mix, strong demand for the Inflatable Curtain and market share gains in electronics.

Sales from Autoliv companies in Japan increased by 3% to $411 million despite a 7% negative currency effect. Growth in organic sales of 10% was mainly driven by strong performance in curtain airbags and market share gains in steering wheels.

Sales from Autoliv companies in the Rest of the World surged by 17% to $474 million, including currency effects of 3%. Growth in organic sales of 14% was driven by a 27% increase in airbags and a sharp jump in safety electronics of 63%, albeit from a previous low level.


Sales by Product

Sales of airbag products decreased by 4% to $3,030 million. Organic sales declined by 3% mainly due to the decline in West European vehicle production.

Sales of seatbelt products decreased by 2% to $1,556 million including 1% from currency effects. The decline in organic sales of 1% was mainly the result of weak vehicle production in Western Europe.


Earnings for the Nine-Month Period Ended September 30, 2006

Gross profit decreased by 2% or $16 million to $952 million due to 3% lower sales, while gross margin improved to 20.7% from 20.4%, mainly due to Autoliv's cost reduction activities.

Despite lower sales and a 1% negative currency effect operating income increased by 2% or $7 million to $384 million and operating margin improved to 8.4% from 8.0%. Last year, operating margin was reduced by plant closure costs, while operating margin this year has been boosted by a capital gain in the first quarter. Excluding these effects, operating margin was 8.3% and 8.5%, respectively, for this year's and last year's nine-month periods.

Income before taxes rose by 2% or $6 million to $357 million.

Net income rose by $76 million to $299 million, aided by the $57 million release of tax reserves and $14 million from other discrete tax items. Excluding the one-time tax effects of these discrete items, the underlying effective tax rate would have approximated historical levels.

Earnings per share rose by $1.15 to $3.60 including 86 cents from the $71 million impact of the discrete tax items. The stock repurchase program had a favorable impact of 13 cents and net income had a positive impact of 23 cents, while currency effects had a 7 cents negative impact on earnings per share.


LIQUIDITY AND SOURCES OF CAPITAL

The Company uses the non-GAAP measure "Operating working capital" as defined in the table below in its communication with investors and for management review of the development of the working capital cash generation from operations. The reconciling items used to derive this measure are by contrast managed as part of our overall debt management.


Reconciliation of "Operating working capital" to GAAP financial measure
(All amounts are Dollars in millions)

  Sept. 30, 2006 June 30, 2006 Dec. 31, 2005 Sept. 30, 2005
 
Total current assets $2,065.4 $2,059.3 $2,162.5 $2,112.4
Total current liabilities (1,414.3) (1,475.8) (1,764.3) (1,864.5)
Working capital $651.1 $583.5 $398.2 $247.9
 
Cash and cash equivalents (131.9) (125.8) (295.9) (106.9)
Short-term debt 118.8 82.0 508.4 547.3
Derivative asset and liability, current .1 (.4) (92.9) (101.0)
Dividends payable 30.1 28.9 - -
Operating working capital $668.2 $568.2 $517.8 $587.3


Operations continued to generate a positive cash flow for the 20th quarter in a row. Cash flow amounted to $102 million and $403 million before investing activities and $24 million and $195 million after these activities, for the third quarter and the first nine months respectively.

Cash flow amounted to $124 million and $324 million before investing activities and $59 million and $94 million after these activities, for the third quarter and the first nine months respectively 2005. This year, cash flow has been boosted by $33 million, primarily from the sale of former manufacturing facilities in the United Kingdom and United States and by $39 million from factoring agreements.

Operating working capital increased during the quarter both as a result of the release of tax reserves, higher inventories and a decrease in accounts payable. Additionally, accounts receivable increased during the third quarter, partially as a result of a $20 million lower impact from factoring agreements than in the previous quarter.

Due to the $57 million release of tax reserves, operating working capital increased during the quarter to $668 million or to 11.0% of 12-month sales and exceeded the Company's policy of 10%. Of the increase in working capital as a percentage of sales, one percentage point was due to the release of tax reserves. On June 30, 2006, operating working capital was 9.4 % of sales and 9.1% on September 30, 2005.

In the third quarter capital expenditures, net, increased to $84 million from $66 million in the same quarter 2005 and exceeded depreciation and amortization of $74 million. Capital expenditures, net amounted to $215 million, and depreciation and amortization to $223 million compared to $232 million and $235 million, for the first nine months respectively 2005. Capital expenditures, net in 2006 were reduced by $33 million of asset sales.

Days receivables outstanding increased seasonally to 83 from 71 but were reduced from 86 days a year ago, partially as a result of factoring agreements. Days inventory outstanding rose during the quarter to 37 from 30 and from 36 days a year ago.

The Company uses the non-GAAP measure "Net debt" as defined in the table below in the communication with investors regarding the capital structure and as the relevant metric monitoring the overall debt management. The reconciling items used to derive this measure are managed as part of the overall debt management. This non-GAAP measure is a supplemental measure to the GAAP measure of total debt.


Reconciliation of "Net debt" to GAAP financial measure
(All amounts are Dollars in millions)

  Sept. 30, 2006 June 30, 2006 December 31, 2005 Sept. 30, 2005
 
Short-term debt $118.8 $82.0 $508.4 $547.3
Long-term debt 982.8 959.2 757.1 472.2
Total debt $1,101.6 $1,041.2 $1,265.5 $1,019.5
 
Cash and cash equivalents (131.9) (125.8) (295.9) (106.9)
Debt-related derivatives (2.8) (2.4) (92.7) (99.0)
Net debt $966.9 $913.0 $876.9 $813.6


Due to strong cash flow, net debt increased by only $54 million to $967 million during the quarter and by only $90 million since the beginning of the year, despite dividends and stock buy-backs totaling $81 million and $237 million during the quarter and the first nine months respectively. Gross interest-bearing debt increased by $61 million during the quarter and decreased by $164 million during the first nine months of the year to $1,102 million, primarily as a result of the retirement of the Eurobond. Net debt to capitalization was increased to 28% from 27% principally by returning $81 million to shareholders.

The non-GAAP measure net debt is also used in the non-GAAP measure "Leverage ratio" which together with the "Interest coverage ratio" constitute the Company's debt limitation policy. This policy provides guidance to credit and equity investors regarding the extent to which the Company would be prepared to leverage its operations. These measures corresponded, until December 2004, to the financial covenants in the Company's Revolving Credit Facility. Although these covenants are no longer existing, the investors are interested in continuing to follow these measures. For details on leverage ratio and interest coverage ratio, refer to the tables below that reconcile these two non-U.S. GAAP measures to GAAP measures.


Reconciliation of "Interest coverage ratio" to GAAP financial measure
First 9 months 2006

(All amounts are Dollars in millions)

Operating income $519.6
Amortization of intangibles (incl. impairment writeoffs) 15.5
Operating profit per the Policy $535.1
Interest expense, net 1) 34.7
Interest coverage ratio 15.4


Reconciliation of "Leverage ratio" to GAAP financial measure
September 30, 2006

(All amounts are Dollars in millions)

Net debt 2) $966.9
Pension liabilities 58.9
Net debt per the policy $1,025.8
   
Income before income taxes $488.0
Plus: Interest expense, net 1) 34.7
Depreciation and amortization of intangibles (incl. impairment writeoffs) 297.0
EBITDA per the Policy $819.7
   
Net debt to EBITDA ratio 1.3

1) Interest expense, net, is interest expense less interest income.
2) Net debt is short- and long-term debt and debt-related derivatives less cash and cash equivalents

The policy is to maintain a net debt position that is significantly below 3.0 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and an interest-coverage ratio significantly above 2.75 times. At the end of the quarter, these ratios were 1.3 and 15.4 respectively. At the end of the third quarter 2005, the leverage ratio and the interest coverage ratio were 1.1 and 13.5, respectively.

Equity increased during the quarter by $42 million to $2,385 million or to $29.37 per share. Equity increased as a result of net income of $122 million and of stock compensation of $3 million. Equity was reduced primarily by share repurchases of $52 million and dividends of $29 million. During the first nine months, equity increased by $69 million despite stock repurchases of $155 million and dividends of $112 million. Equity was favorably impacted by $299 million from net income, $21 million from effects of exercises of stock-related compensations and $18 million from currency effects.

Return on equity improved to 17% from 12% at the beginning of the year almost entirely due to release of tax reserves, while return on capital employed stood unchanged at 16%.



OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on its financial position, results of operations or cash flows.



Headcount

Total headcount (employees plus temporary hourly workers) increased by approximately 1,200 during the quarter to 41,300 and by 2,500 during the nine-month period. However, in high-cost countries headcount decreased by 400 during the quarter and 800 during the nine month period, respectively. Accordingly, 1,600 jobs were added in low-cost countries during the quarter and 3,300 during the nine-month period. Both numbers are all-time highs.

Currently, 46% of headcount and 49% of employees excluding temporaries are in low-cost countries compared to 39% and 42%, respectively, a year ago. The reduction in high-cost countries focused on the number of permanent employees, which dropped by 1,500 during the nine-month period. As a result, 19% of headcount in high-cost countries are temporaries compared to 16% at the beginning of the year.



PROSPECTS

Due to several recently announced cuts in light vehicle production, forecasting is unusually difficult. In the recent volatile forecasts, light vehicle production in the Triad is expected to be flat during the fourth quarter. However, in North America and in Western Europe light vehicle production is expected to drop by 8% and 2%, respectively. At the same time, several new vehicles will be launched and the temporary negative vehicle model mix for Autoliv improves. As a result, Autoliv is likely to offset the negative light vehicle production effects from the two largest markets and resume its organic growth trend from prior years. Currency effects are expected to boost sales in the fourth quarter by 4%, provided that the mid-October exchange rates prevail. Based on these assumptions, consolidated sales are expected to increase by 6% with the organic sales portion estimated to increase by 2%. Accordingly, organic sales for the full year 2006 are now expected to come within 1% of the 2005 level.

Gross margin is expected to remain unchanged at 20.5% from the fourth quarter 2005 despite higher raw material prices and distressed suppliers. R,D&E expenditures are expected to increase due to a strong order-intake and other activities, mainly in safety electronics. As published last year, these expenditures had a 0.9 percentage point (or $13 million) positive effect in the fourth quarter 2005 due to unexpectedly high engineering income and low R,D&E expense. Since these effects are not expected to be as significant as last year, operating margin in the fourth quarter 2006 should approximate 8.5%, comparable to the underlying level in the fourth quarter 2005.

The effective tax rate for the fourth quarter is forecasted to be approximately 32%.



OTHER RECENT EVENTS

Launches in the 3rd quarter 2006
  • BMW's new Mini: Driver airbag with steering wheel, passenger airbag, side airbags, Inflatable Curtains, safety electronics and seatbelts with pretensioners
  • Chrysler's new Sebring: Driver airbag with steering wheel, passenger airbag, Inflatable Curtains and seatbelts with pretensioners
  • Hondas's new Acura MDX: Driver airbag with steering wheel, passenger airbag, side airbags and Inflatable Curtains
  • Hyundai's new Terracan: Driver airbag, passenger airbag, side airbags, Inflatable Curtains and safety electronics
  • Mitsubishi's new Grunder: Driver airbag, passenger airbag and seatbelts
  • Nissan's new Altima: Side airbags and Inflatable Curtains
  • Nissan's new Sentra: Passenger airbag, side airbags, Inflatable Curtains and seatbelts with pretensioners
  • Peugeot's new Boxer: Side airbags, Inflatable Curtains and seatbelts with pretensioners
  • Suzuki's new XL7: Passenger airbag, seatbelts with pretensioners and safety electronics
  • Volvo's new C30: Driver airbag, passenger airbag, side airbags, Inflatable Curtains, and seatbelts with pretensioners.



Other Significant Events
  • $57 million has been released from the Company's tax reserves due to a recently completed tax examination in the United States and the subsequent closing, on September 18, of the statute of limitations covering the tax returns for the six years since the formation of Autoliv Inc. on May 1, 1997 through December 31, 2002.
  • During the quarter, 933,300 shares of Autoliv stock were repurchased for $52 million at an average cost of $56.08 per share. During the nine-month period, 2.8 million shares for $155 million were repurchased at an average cost of $54.81 per share. Since the repurchase program was adopted in 2000, 22.8 million shares have been repurchased at an average cost of $37.32 per share. Under the existing authorizations, an additional 7.2 million shares can be repurchased.
  • Autoliv has been awarded development and supply contracts for a new safety electronics technology where the central vehicle stability sensing function is integrated into the airbag control unit. This world-first electronics architecture will reduce complexity and provide substantial cost savings for these safety systems.
  • Mr. Benoit Marsaud, former Vice President Manufacturing and President of Autoliv Europe, has been appointed to a newly created position as Chief Operating Officer.
  • Autoliv has received a Toyota Technology Award for "the world's first frontal airbag for the rear seat", i.e. Autoliv's Seat Cushion Airbag that has been developed for the Lexus LS460.




DIVIDEND AND NEXT REPORT

The quarterly dividend has been raised again. This time the increase is 6% to 37 cents per share. The dividend will be paid on December 7, 2006 to shareholders of record as of November 9. The ex-date is November 7, 2006. Autoliv intends to publish the quarterly report for the fourth quarter on February 8, 2007.



CONTRACTUAL OBLIGATIONS AND COMMITMENTS

As of September 30, 2006, our future contractual obligations have not changed significantly from the amounts reported in our 2005 Annual Report on Form 10-K filed with SEC on February 28, 2006.




ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the information that was provided in the Company's 2005 Annual Report on Form 10-K filed with the SEC on February 28, 2006.



ITEM 4

CONTROLS AND PROCEDURES

 


(a)


Evaluation of Disclosure Controls and Procedures

Autoliv's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effectively recording, processing, summarizing and reporting, on a timely basis information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

 

 

(b)

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.



  


PART II - OTHER INFORMATION


ITEM 1 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 United States Federal District Court awarded a supplier of Autoliv ASP, Inc. approximately $27 million plus pre-judgment interest of $6 million in connection with a commercial dispute that relates to purchase commitments. Autoliv appealed the verdict and the supplier cross-appealed in regard to the calculation of the amount of pre-judgment interest. The United States Court of Appeals for the Federal Circuit on August 7, 2006, affirmed the judgment of the district court on certain appeal issues, vacated the district courts decision on certain other appeal issues and remanded the case for the district court to reconsider, and finally adjusted the district court's calculations of pre-judgment interest. The remanded issues are now pending before the United States Federal District Court and decision is expected within approximately two to four months. While legal proceedings are subject to inherent uncertainty, Autoliv believes that it has meritorious 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.


ITEM 1A RISK FACTORS
   
 

There have been no material changes in the information that was provided in the Company's 2005 Annual Report on Form 10-K filed with the SEC on February 28, 2006.


ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   

(c)

Stock repurchase program

 

During the third quarter of 2006, Autoliv has repurchased 933,300 shares for $52.3 million at an average price of $56.08. Since the repurchasing program was adopted in 2000, Autoliv has bought back 22.8 million shares at an average price of $37.32 per share. Under the existing authorizations, another 7.2 million shares could be repurchased. Below is a summary of Autoliv's common stock repurchases by month for the quarter ended September 30, 2006.

  Stockholm Stock Exchange ("SSE") New York Stock Exchange ("NYSE") SSE + NYSE    
  Total No. of Average Price in USD Total No. of Average Price in USD Total No. of Shares Average Price in USD Maximum No. of Shares
  Shares Purchased Paid per Share Shares Purchased Paid per Share Purchased as Part of Publicly Paid per Share that may yet be Purchased
Date         Announced Plans or Programs   under the Plans or Programs
 
July 1-            
July 31            
Total - - - - - - 8,108,400
 
Aug 1-            
Aug 31            
Total 284,800 56.1464 322,600 56.0365 607,400 56.0880 7,501,000
 
Sept 1-            
Sept 30            
Total 172,100 55.9395 153,800 56.1992 325,900 56.0620 7,175,100
 
Total 456,900 56.0684 476,400 56.0890 933,300 56.0789 7,175,100
 
1) Announcement of share buy-back program with authorization to buy back 10 million shares made on May 9, 2000.
2) Announcement of expansion of existing share buy-back program from 10 million shares to 20 million shares made on April 30, 2003.
3) Announcement of expansion of existing share buy-back program from 20 million shares to 30 million shares made on December 15, 2005.
4) The share buy-back program does not have an expiration date.

ITEM 3

DEFAULTS UPON SENIOR SECURITIES
Not applicable.

ITEM 4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.

ITEM 5

OTHER INFORMATION
Not applicable.

ITEM 6

EXHIBITS

 

Exhibit No.

Description

3.1

Autoliv's Restated Certificate of Incorporation incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-4 (File No. 333-23813, filing date June 13, 1997) (the "Registration Statement").

3.2

Autoliv's Restated By-Laws incorporated herein by reference to Exhibit 3.2 to the Registration Statement.

4.1

Rights Agreement, dated as of December 4, 1997, between Autoliv and First Chicago Trust Company of New York incorporated herein by reference to Exhibit 3 to Autoliv's Registration Statement on Form 8-A (File No. 1-12933, filing date December 4, 1997).

10.1

Facilities Agreement, dated November 13, 2000, among Autoliv, Inc. and the lenders named therein, as amended by amendment dated November 5, 2001, as further amended by amendment dated December 12, 2001, and as further amended by amendment dated June 6, 2002, is incorporated herein by reference to Exhibit 10.1 on Form 10-K (File No. 1-12933, filing date July 2, 2002).

10.2

Autoliv, Inc. 1997 Stock Incentive Plan, incorporated herein by reference to Autoliv's Registration Statement on Form S-8 (File No. 333-26299, filing date May 1, 1997).

10.3

Amendment No. 1 to Autoliv, Inc. Stock Incentive Plan, is incorporated herein by reference to Exhibit 10.3 on Form 10-K (File No. 1-12933, filing date July 2, 2002).

10.4

Form of Employment Agreement between Autoliv, Inc. and its executive officers, is incorporated herein by reference to Exhibit 10.3 on Form 10-K (File No. 1-12933, filing date July 2, 2002).

10.5

Form of Supplementary Agreement to the Employment Agreement between Autoliv and certain of its executive officers, is incorporated herein by reference to Exhibit 10.3 on Form 10-K (File No. 1-12933, filing date July 2, 2002).

10.6

Employment Agreement, dated November 11, 1998, between Autoliv, Inc. and Lars Westerberg, is incorporated herein by reference to Exhibit 10.3 on Form 10-K (File No. 1-12933, filing date July 2, 2002).

10.7

Form of Severance Agreement between Autoliv and its executive officers, is incorporated herein by reference to Exhibit 10.3 on Form 10-K (File No. 1-12933, filing date July 2, 2002).

10.8

Pension Agreement, dated November 26, 1999, between Autoliv AB and Lars Westerberg, is incorporated herein by reference to Exhibit 10.3 on Form 10-K (File No. 1-12933, filing date July 2, 2002).

10.9*

Form of Amendment to Employment Agreement - notice.

10.10*

Form of Amendment to Employment Agreement - pension.

10.11*

Form of Agreement - additional pension.

10.12**

Amendment No.2 to the Autoliv, Inc. 1997 Stock Incentive Plan.

11

Information concerning the calculation of Autoliv's earnings per share is included in Note 1 of the Consolidated Notes to Financial Statements contained in the Company's Annual Report on Form 10-K (File No. 1-12933, filing date March 10, 2005) and is incorporated herein by reference.

31.1***

Certification of the Chief Executive Officer of Autoliv, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) of the the Securities Exchange Act of 1934, as amended.

31.2***

Certification of the Chief Financial Officer of Autoliv, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) of the the Securities Exchange Act of 1934, as amended.

32.1***

Certification of the Chief Executive Officer of Autoliv, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2***

Certification of the Chief Financial Officer of Autoliv, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed in 10-K for the fiscal year ended 2002.
** Filed in 10-K for the fiscal year ended 2003.
*** Filed herewith.



SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: October 31, 2006

AUTOLIV, INC.
(Registrant)

By: /s/ Magnus Lindquist



________________
Magnus Lindquist
Vice President
Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)