VEONEER, INC.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to help the reader understand the results of
operations, financial condition and cash flows of Veoneer, Inc. ("Veoneer ," the
"Company," "we," or "our"). This MD&A should be read in conjunction with the
financial statements and accompanying notes to the financial statements included
elsewhere herein, as well as the risk factors and other disclosures made in this
Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K
for the year ended December 31, 2020 , filed with the SEC on February 19, 2021 .
Introduction
The following MD&A is intended to help you understand the business operations
and financial condition of the Company. This MD&A is presented in the following
sections:
•Executive Overview
•COVID-19 and Semiconductor Supply Commentary
•2021 Outlook
•Trends, Uncertainties and Opportunities
•Market Overview
•Results of Operations
•Non-U.S. GAAP Financial Measures
•Liquidity and Capital Resources
•Off-Balance Sheet Arrangements and Other Matters
•Contractual Obligations and Commitments
•Significant Accounting Policies and Critical Accounting Estimates
Veoneer is a global leader in the design, development, manufacture, and sale of
automotive safety electronics with a focus on innovation, quality and
manufacturing excellence. The Company's current product offerings include
automotive radars, mono and stereo vision cameras, night vision systems,
positioning systems, advanced driver assist systems ("ADAS") electronic control
units, passive safety electronics (airbag control units and crash sensors),
brake control systems and a complete ADAS software offering towards highly
automated driving ("HAD") and eventually autonomous driving, through its
recently formed software unit and brand Arriver. In addition, we offer driver
monitoring systems, LiDAR sensors, RoadScape positioning and other technologies
critical for HAD and automated driving ("AD") solutions by leveraging our
partnership network and internally developed intellectual property.
Executive Overview
Veoneer showed strong operational performance during the third quarter. Despite
a sequential drop in the light vehicle production of 12%, our net sales were
essentially flat, sequentially. Through our Market Adjustment Initiatives, we
also managed to improve our gross profit and reduce our operating loss
sequentially and year-over-year.
The global underlying demand for all of our products remains very strong, but as
is true for many industries and companies today, semiconductor shortages and
supply chain constraints continue to hamper our growth. We are managing this
situation daily, and are doing our utmost to support our customers through this
difficult situation.
The gradual weakening of the LVP during the quarter was especially challenging
where we saw a temporary buildup of inventory which is reflected in our working
capital and cash flow. We have taken initiatives to rectify the situation and
view this as another sign of our discipline and executional strength as the full
year 2021 LVP expectation eroded from a 14% growth in the beginning of the year,
to virtually flat growth from the depressed COVID-19 pandemic levels in 2020.
We continue to see strong momentum for our technologies and products. During the
quarter the high-volume Subaru Forrester was launched with our stereo vision
camera. We also launched our 9th customer for Monovision, we announced that we
are delivering key technologies for Mercedes S-Class upgrade to level 3
capabilities, and we had the first public demonstration of the
Arriver-Snapdragon Ride solution to great feedback at the IAA Show in Munich .
Following the end of the quarter, we announced that we signed a merger agreement
with SSW and Qualcomm for the acquisition of Veoneer by SSW and subsequent
transfer of Arriver to Qualcomm. The Board of Directors determined that the $37
per share, all cash transaction offered by SSW and Qualcomm was superior to the
previous transaction agreement with
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Magna International. The proposed transaction with SSW and subsequent
SSW-Qualcomm transaction are pending and subject to various conditions and we
will provide updates as appropriate.
Our focus continues to be on the day-to-day execution, delivering to our
customers, overcoming shortages and logistics issues, and continuing to develop
our products and technologies.
COVID-19 and Supply Constraint Commentary
Veoneer is executing to minimize the impact from the supply chain constraints in
semiconductors. These effects are likely to remain at least until the end of
2021 although we do expect a gradual recovery to take place. Currently it is
hard to predict the pace of the recovery, but as underlying consumer demand
continues to look strong, we anticipate a gradual recovery in 2022.
For 2021 and the upcoming years, the most important driver for Veoneer's
business is new customer and technology launches, which we continue to expect to
drive out-performance as compared to the global LVP.
As noted in prior results announcements, in response to the pandemic, the
Company continues to expand its Market Adjustment Initiatives ("MAIs") to
further mitigate the impact of the pandemic on its cash flow and operating
results.
The COVID-19 pandemic continues to cause significant uncertainty in the global
economy. This includes the automotive industry and the global LVP for 2021 and
the upcoming years ahead, which are dependent on underlying consumer demand.
Simultaneously and triggered by the COVID-19 pandemic, the automotive industry,
like other industries dependent on semiconductors, is experiencing challenges in
the supply of Semiconductors. This supply constraint and other uncertainties may
continue to have an adverse effect on industry performance and our business. The
health and safety of our associates continues to be our first priority, and we
are taking the necessary actions to continue to protect our associates,
safeguard our operations and meet our customers' needs while managing through
these unprecedented circumstances.
Trends, Uncertainties and Opportunities
Trend toward Collaborative Driving
The environment around us continues to change rapidly and we currently see a
shift across the automotive and autotech industries. The industry developments
during 2021 have further strengthened the trend toward advanced driver support -
Collaborative Driving - and away from fully autonomous cars for the consumer
based vehicle mass market.
New technologies, creating new levels of interaction and driver support are
starting to revolutionize driving, but we also see the driver being actively
involved for many years to come. While the industry refers to "Level 2+" or even
"Level 2++" Veoneer calls this Collaborative Driving, and includes any SAE level
of automation up to Level 4. Currently there are renewed initiatives in the
industry for Level 3 conditional automation where the driver for certain periods
of time can be out of loop, but has to be ready to take control of the vehicle
at any time. At the same time there is a growing realization that the
introduction of truly self-driving cars will likely take longer and be more
expensive than previously anticipated. This fundamental insight opens up new
opportunities for companies, including Veoneer , but it also requires adjusting
the priorities of resources. As such, we believe that the market will stay
mainly focused on Level 1-Level 2+ and Level 3 autonomous driving solutions for
the next decade however, while we see a continued strong drive toward more
automation and driver support, the ongoing impacts from the COVID-19 pandemic,
and perhaps ongoing impact, could affect the evolution of ADAS, Collaborative
Driving and AD for consumer purchased light vehicles.
Global Regulatory and Test Rating Developments
Europe continues to take a proactive role in promoting or requiring Active
Safety technologies. The European New Car Assessment Program ("NCAP")
continuously updates its test rating program to include more active safety
technologies to help the European Union reach its target of cutting road
fatalities by 50% by 2030, as compared to 2020. In order to help our industry to
overcome the situation with respect to the COVID-19 pandemic, Euro NCAP
postponed the rollout of upcoming road map updates by one year (from 2022 to
2023 and from 2024 to 2025). However, this should not change the overall trend
towards introduction of new roadmap requirements, which are just delayed by one
year.
On June 26, 2020 , the UNECE's World Forum for Harmonization of Vehicle
Regulations , announced the first binding international regulation on "Level 3"
vehicle automation. The new regulation marks an important step towards the wider
deployment of automated vehicles to help realize a vision of safer, more
sustainable mobility for all. Beginning in January 2021 the regulation provides
guidelines on the Automated Lane Keep System ("ALKS") feature, requires driver
availability recognition systems, and a "black box" data storage system for AD.
It also outlines requirements for emergency and minimal risk maneuvers and
driver transition demand as well as cyber-security and software update
protocols.
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We anticipate strong global sensor adoption rate increases (forward, side and
rear) due to the Euro NCAP's push for crash avoidance, increased adoption rates
due to growing demand around ADAS software features, volume growth due to
redundant sensing concepts needed for higher levels of autonomy, potential
opportunities in relation to compliance with cybersecurity and software updates
and step-by-step increased demand for connectivity components. The ongoing
2020x-decade will be characterized by stepwise introduction of regulations which
boost the market of Active Safety and Automation, but also set obligatory
thresholds for safety.
a.At first minimal requirements for safety critical features (e.g. AEB) will
become mandatory.
b.Continued with a framework for advanced L1-L3 features in highway
applications, extending conventional certification towards new assessment
methods (including Physical Tests + Real World Test Drive + Simulation, etc.).
c.Followed by regulations enabling use of higher level automation (e.g. L4
shuttles) and more complex environment (e.g. urban)
d.In parallel, we will face increasing regulatory requirements for cybersecurity
and software updates in order to reflect advancing digitalization and
connectivity.
An example of a recent development that further strengthens the trend toward
collaborative driving, is Intelligent Speed Assist (ISA) an item of updated EU
General Safety Regulation roadmap, which was finalized on June 23, 2021 . The ISA
is a system that prompts and encourages drivers to slow down when they are over
the speed limit. New regulation mandates motor vehicles to be equipped with ISA
systems beginning July 6, 2022 for new vehicle types and beginning July 7, 2024
for all new vehicles.
In several regions legal approval of the introduction of new technologies
happens as exceptional procedure on national level. However, we have recently
observed an increasing willingness of legislators in the US and Asia to
contribute to the global regulatory framework for AV-technologies. This means
that, while the agreement on minimal common base requirements for the industry
will take longer and therefore may postpone the introduction of new regulations,
the harmonization with base requirements could help the industry and a more
active position from China may help to pull forward some safety critical ADAS
technologies that are not yet considered as relevant for passenger car
regulation in EU and Japan (e.g. Blind Spot or Night Vision).
Market Overview
Millions (except where Light Vehicle Production by Region - 2021
specified)
IHS Markit as of October China Japan Rest of Asia Americas Europe Other Total
15, 2021
Third Quarter 2021 5 2 2 3 3 0 16
Change vs. 2020 (16) % (24) % (5) % (23) % (30) % 1 % (19) %
For the third quarter of 2021, the global light vehicle production (according to
IHS Markit) decreased by approximately (20)% mainly due to the global outbreak
of the COVID-19 pandemic in 2020. Every major vehicle producing geography was
still impacted by the pandemic including: China (16)%, Europe (30)%, South Korea
(17)%, North America (26)% and Japan (24)%.
Light Vehicle Production by Region - 2021
Millions (except where
specified) China Japan Rest of Asia Americas Europe Other Total
IHS as of October 15, 2021
Full Year 2021 22 7 11 14 16 2 72
Change vs. 2020 (1) % (5) % 10 % 1 % (4) % 12 % 0 %
For the full year of 2021, global light vehicle production (according to IHS
Markit) is expected to be flat, due the anticipated full year effects of the
COVID-19 pandemic. All major vehicle producing geographies are expected to be
impacted by the pandemic including: China (1)%, Europe (4)%, South Korea (2)%,
North America (1)% and Japan (5)%. The global LVP of approximately 72 million is
at the same level as 2020.
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Results of Operations
Three Months Ended September 30, 2021 as compared to Three Months Ended
September 30, 2020
The following analysis illustrates Veoneer's overall and by segment performance
for the three months ended September 30, 2021 and 2020 along with components of
change as compared to the prior year.
Net Sales by Product
The following tables illustrate Veoneer's consolidated net sales by product for
the three months ended September 30, 2021 and 2020 along with components of
change as compared to the prior year.
Components of Change vs.
Net Sales Three Months Ended September 30 Prior Year
US GAAP
(Dollars in millions, except 2021 2020 Reported Change Currency Organic1
where specified) $ $ $ % $ % $ %
Restraint Control Systems 153 188 (35) (19) % 5 2 % (40) (21) %
Active Safety 215 170 45 27 % 4 3 % 41 24 %
Brake Systems 11 13 (2) (18) - - % (2) (18) %
Other $ 12 $ - $ 12 - $ - - $ 12 -
Total $ 391 $ 371 $ 20 5 % $ 9 2 % $ 11 3 %
1 Non-U.S. GAAP measure reconciliation for organic sales
Net Sales - Veoneer's net sales for the quarter of $391 million increased by 5%
as compared to 2020. The organic sales1 increased by 3% and the net currency
translation effects were positive by 2%. Given that the LVP growth expectations
declined by around 17pp from the beginning of the quarter to (20%) (according to
IHS Markit), our net sales were also lower than our expectations from the
beginning of the quarter. Veoneer outperformed the LVP in all regions, except
rest of Asia which accounts for only around 4% of net sales.
According to IHS Markit, the main reason for the downward revisions of the LVP
(from the beginning of the quarter) is the semiconductor shortages, which
reduced the LVP during the quarter by close to 3.5 million vehicles.
Restraint Control Systems - Net sales for the quarter of $153 million decreased
by 19% as compared to 2020. Our organic sales decline of 21%, was essentially in
line with the underlying LVP changes, primarily driven by the semiconductor
shortages.
Active Safety - Net sales for the quarter of $215 million increased by 27% as
compared to 2020. The organic sales increase was 24%, primarily driven by an
intense launch period that started in Q1 2020 and will continue throughout the
remainder of 2021 and into 2022 and 2023. Asia saw the strongest growth during
the quarter, driven by the continued industry wide ramp up phase for Active
Safety in China and the continued ramp up of our Subaru customer programs in
Japan .
Strong volume demand for mono, stereo and thermal camera systems, ADAS ECUs and
driver monitoring systems on several models, and across multiple customers drove
the increase in organic sales. Radar systems also continued to grow, although at
a slower rate, reflecting a continued successful transition to 77GHz radars.
Brake Systems and Other - The combined net sales for the quarter was $23
million . The Brake Systems sales of $11 million are related to the Honda legacy
business and $12 million of Other sales are Brake ECUs to ZF.
Electronics Segment Three Months Ended September 30 Components of Change vs. Prior Year
US GAAP
(Dollars in millions, 2021 2020 Reported Change Currency Organic1
except where specified) $ % $ % $ % $ % $ %
Net Sales 380 358 22 - $ 10 2 % $ 12 4 %
Operating Loss / Margin $ (69) (18) % $ (80) (22.2) % 11
Segment EBITDA1 / Margin $ (40) (11) % $ (53) (14.9) % $ 13
Associates 7,117 7,329 $ (212) 1 Non-
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Net Sales - Net sales for the Electronics segment increased by $22 million to
$380 million for the quarter as compared to 2020. This sales increase was mainly
due to the organic sales1 increase in Active Safety of $45 million and positive
net currency translation effects of $10 million , which was partially offset by
decline in Restraint Control Systems of $35 million .
Operating Loss - Operating loss for the Electronics segment of $69 million for
the quarter decreased by $11 million as compared to 2020. This decrease is
mainly due to the RD&E, net of $22 million , which was partially offset by one
time expenses of $11 million related to pending merger with SSW and Qualcomm.
EBITDA1 - EBITDA loss for the Electronics segment decreased by $13 million to
negative $40 million for the quarter as compared to 2020. This change is mainly
due to the operating loss improvement for the segment.
Associates - Associates, net in the Electronics segment decreased by 212, net to
7,117 as compared to 2020, mainly due to a net decrease in RD&E associates of
more than 258.
Deliveries - Deliveries during the quarter were 2.9 million units for Restraint
Controls Systems and 2.6 million units for Active Safety.
Corporate and Other Three Months Ended September 30
(Dollars in millions, except 2021 2020 US GAAP Reported Change
where specified) $ % $ % $ %
Net Sales $ 11 $ 4 $ 7 197 %
Operating Loss / Margin
- % $ - EBITDA1 / Margin$ (20) (168) %$ (20) - % $ - Associates 126 104 22 1 Non-U.S. GAAP measure reconciliation for EBITDANet Sales -Net Sales of$11 million for the third quarter reflects the legacy Honda Brake Systems business after the VBS-US divestiture. Associates - Associates, net increased by 22 to 126 for the quarter as compared to 2020 due to the associates now included in Corporate and Other related to supporting the legacy Honda Brake Systems business. Operating Loss and EBITDA1 - Operating and EBITDA loss of negative$20 million was unchanged as compared to 2020. 28
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