VEONEER, INC. This MD&A should be read in conjunction with the accompanying audited consolidated financial statements and notes. Forward-looking statements in this MD&A are not guarantees of future performance and may involve risks and uncertainties that could cause actual results to differ materially from those projected. Refer to the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. Risk Factors for a discussion of these risks and uncertainties. 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: •Veoneer-SSW/Qualcomm Merger Update •Executive Overview •Trends, Uncertainties and Opportunities •Non-U.S. GAAP Financial Measures •Results of Operations •Liquidity and Capital Resources •Significant Accounting Policies and Critical Accounting Estimates
Veoneer-SSW/Qualcomm Merger Update
Veoneer's stockholders approved the merger agreement with Qualcomm,SSW and SSW Merger Sub Corp inDecember 2021 and by the end ofJanuary 2022 the deal had received the required regulatory approvals inthe United States ,Germany ,France andItaly . In addition, SSW and Qualcomm are consulting other regulators regarding the merger. As communicated before the deal is expected to close in 2022. The earliest date to close the deal according to the merger agreement is in earlyApril 2022 . The parties are working diligently to be in a position to close at that time.
Executive Overview
The fourth quarter was another period of solid performance by the entireVeoneer team. During this time of unprecedented internal and external change our team managed to deliver solid results and stay focused on the day to day operations which continues to be challenged by semiconductor related shortages and the effects of the COVID-19 pandemic. Despite being limited by semiconductor related shortages our sales continued to significantly outperform the light vehicle production and our operating loss, taking into consideration around$20 million of merger related costs, improved significantly from the same period a year ago. In general our financial management continues to be very strong and in the fourth quarter we managed to achieve positive operating cash flow. The merger process with SSW/Qualcomm is progressing well and it will allow for all parts of the Company to further focus on its core competencies. ForVeoneer as a leading supplier of systems, sensors and integration for ADAS and safety and for Arriver as a leading software house combining their solution with Qualcomm's world leading Snapdragon Ride SoC. We are committed to provide timely updates to our shareholders as the process continues and we are approaching the closing and the payout to our shareholders.
During the fourth quarter we also took the next steps in our ESG efforts by setting ambitious targets for reducing our carbon footprint and eventually becoming carbon neutral by the year 2040.
We continue to focus on daily execution and look forward to significant growth
and a new structure for
Supply chain constraints and COVID-19 Commentary
Veoneer is executing to minimize the impact from the supply chain constraints in semiconductors. Theses constraints and other uncertainties may continue to have an adverse effect on industry performance and our business. The effects are likely to remain at least during the first half of 2022, after which we expect a gradual recovery to take place. It is currently hard to predict the pace of the recovery. According to IHS Markit's latest estimates semiconductor related shortages reduced the 2021 global LVP by close to 10 million units. Our estimate is that the supply chain constraints impacted our sales in 2021 by around$200 million . 39
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For 2022 and the upcoming years, the most important drivers for
As noted in prior results announcements, in response to the pandemic, the Company continues to expand its Market Adjustment Initiatives (MAIs) program 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 2022 and the years ahead, which are dependent on underlying consumer demand. 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, includingVeoneer , 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 theEuropean 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. OnJune 26, 2020 , theUNECE'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 inJanuary 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. 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. 40 -------------------------------------------------------------------------------- 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 onJune 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 beginningJuly 6, 2022 for new vehicle types and beginningJuly 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 andAsia 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 fromChina may help to pull forward some safety critical ADAS technologies that are not yet considered as relevant for passenger car regulation in EU andJapan (e.g. Blind Spot or Night Vision). Market Overview Millions (except where Light Vehicle Production by Region - 2021 specified) IHS Markit as of January China Japan Rest of Asia Americas Europe Other Total 17, 2022 Full Year 2021 23.0 7.3 11.1 14.5 15.6 1.9 73.4 Change vs. 2020 5 % (4) % 15 % 2 % (5) % 12 % 3 % For the full year of 2021, the global light vehicle production (according to IHS Markit) increased by approximately 3% as compared to 2020. In 2021 the continued COVID-19 pandemic together with the effects of the global semiconductor supply shortage lead to continued low volumes and only a smaller increase where a bounce-back in the first half year was partly offset by a decrease in the second half. This increase is approximately 11 percentage point lower than expected at the beginning of 2021. Within theAmericas North America had roughly flat vehicle production, while within Asia China increased year over year by 5%,India by 25%, where asJapan decreased by 4%, and lastly withinEurope ,Western Europe declined by 7% andEastern Europe declined by 2%. 2021 showed a first annual increase in light vehicle production since 2017 when a record 92 million vehicles were produced. The most recent IHS Markit 2022 outlook is for global light vehicle production to rebound, although still affected by the global semiconductor supply shortage in the first half of the year, and increase approximately 9% from 2021 levels to 80 million vehicles in 2022.North America ,Western Europe andJapan are expected to be the largest contributors to the increase in 2022 as compared to 2021.
Non-
Non-
In this report we refer to organic sales or changes in organic sales growth, a non-U.S. GAAP financial measure that we, investors and analysts use to analyze the Company's sales trends and performance. We believe that this measure assists investors and management in analyzing trends in the Company's business because the Company generates approximately 68% of its sales in currencies other than inU.S. dollars (its reporting currency) and currency rates have been and can be rather volatile. The Company has historically made several acquisitions and divestitures, although none that impacted the reporting periods in question. Organic sales and organic sales growth represent the increase or decrease in the overallU.S. dollar net sales on a comparable basis, allowing separate discussions of the impact of acquisitions/divestitures and exchange rates on the Company's performance. The tables in this report present the reconciliation of changes in the totalU.S. GAAP net sales to changes in organic sales growth. The Company uses in this report EBITDA, a non-U.S. GAAP financial measure, which represents the Company's net income excluding interest expense, income taxes, depreciation and amortization and including loss from equity method investment. The tables below provide reconciliations of net income (loss) to EBITDA. The Company uses in this report net working capital, a non-U.S. GAAP financial measure, which is defined as current assets (excluding cash and cash equivalents) minus current liabilities excluding short-term debt and net assets and liabilities held for sale. The Company also uses in this report cash flow before financing activities, a non-U.S. GAAP financial measure, which is defined as net cash used in operating activities plus net cash used in investing activities. The Company also uses in this report free cash flow a non-U.S. GAAP financial measure, which is defined as net cash used in operating activities less capital expenditures. Management uses these measures to improve its ability to assess operating performance at a point in time as well as the trends over time. The tables set forth in "Reconciliations ofU.S. GAAP to nonU.S. GAAP" below provide a reconciliation of current assets and liabilities to net working capital, cash flow before financing activities and free cash flow. 41 -------------------------------------------------------------------------------- Investors should not consider these non-U.S. GAAP measures as substitutes, but rather as additions, to financial reporting measures prepared in accordance withU.S. GAAP. These measures, as defined, may not be comparable to similarly titled measures used by other companies. Forward-looking non-U.S. GAAP financial measures used in this report are provided on a non-U.S. GAAP basis.Veoneer has not provided aU.S. GAAP reconciliation of these measures because items that impact these measures, such as foreign currency exchange rates and future investing activities, cannot be reasonably predicted or determined. As a result, such reconciliations are not available without unreasonable efforts andVeoneer is unable to determine the probable significance of the unavailable information.
Results of Operations
Fiscal Year 2021 compared to 2020
The following tables showVeoneer's performance by segment for the years endedDecember 31, 2021 and 2020 along with components of change compared to the prior year.Veoneer is organized into one product areaSafety Electronics , which includes Restraint Control Systems and Active Safety.
The following tables showVeoneer's consolidated net sales by product for the years endedDecember 31, 2021 and 2020 along with components of change compared to the prior year. ConsolidatedNet Sales Twelve Months EndedDecember 31 Components of Change vs. Prior Year Dollars in millions, 2021 2020 U.S. GAAP Reported Currency Divestitures Organic1 (except where specified) $ $ Chg. $ Chg. % $ % $ % $ % Restraint Control Systems 689 670 19 3 21 3 - - (2) - Active Safety 869 624 245 39 26 4 - - 219 35 Brake Systems 48 70 (22) (31) - - (24) (35) 2 6 Other 51 9 42 431 - - - - 42 431 TotalNet Sales $ 1,657 $ 1,373 $ 284 21 %$ 47 3 %$ (24) (2) %$ 261 19 %
1 Non-
Veoneer Performance
The following table shows
During the full year of 2021, excluding Brake Systems and Other, organic sales increased inNorth America by 6%,Europe by 14% andAsia by 36%. The organic sales growth was entirely driven by Active Safety Products which grew by 35%. Excluding Brake Systems and "Other", Active Safety accounted for 56% of full year 2021 sales as compared to 48% for the full year 2020. Restraint Control Systems - Net sales for the full year of 2021 increased by 3% to$689 million as compared to 2020. Organic sales were flat, indicating a slight underperformance compared to the global LVP which was due to mix effect (lower sales of cars withVeoneer content). Active Safety - Net sales for the full year of 2021 increased by 39% to$869 million as compared to 2020. This increase was driven by launches and continued ramp ups of recent launches. All products in Active Safety including Vision, Radar, Thermal Imaging, ADAS ECUs, RoadScape™ and Software saw strong growth with Vision being the number one contributor to the organic sales growth. Brake Systems and Other - Net sales for the full year of 2021 increased by$20 million to$99 million as compared to 2020. This was due to increased sales to ZF for the Ford F-150 platform, which was partly offset by declining legacy business to Honda US. 42
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Income Statement Year Ended December31 Dollars in millions, 2021 2020 (except per share data) $ % $ % Change Net sales$ 1,657 $ 1,373 $ 284 Cost of sales (1,384) (83.5) % (1,191) (86.7) % (193) Gross profit 273 16.5 % 182 13.3 % 91 Selling, general & administrative expenses (159) (9.6) % (165) (12.0) % 6 Research, development & engineering (424) (25.6) % (407) (29.7) % (17)
expenses, net
Amortization of intangibles (7) (0.4) % (6) (0.4) % (1) Other income (40) (2.4) % 29 2.2 % (69) Operating loss (357) (21.6) % (367) (26.7) % 10 Gain on divestiture and assets impairment - - % (91) (6.7) % 91 charge, net Loss from equity method investments 6 0.4 % (39) (2.9) % 45 Interest income 3 0.2 % 9 0.6 % (6) Interest expense (21) (1.3) %$ (20) (1.5) % (1) Other non-operating items, net - - % (4) (0.2) % 4 Loss before income taxes (369) (22.3) % (512) (37.3) % 143 Income tax expense (16) (0.9) % (32) (2.3) % 16 Net loss1 (385) (23.2) % (544) (39.6) % 159 Less: Net loss attributable to - - % 1 (0.1) % (1) non-controlling interest Net loss attributable to controlling$ (385) (23.2) %$ (545) (39.7) %$ 160
interest
Net loss per share - basic2$ (3.44) $ (4.89) $ 1.45 Weighted average number of shares 111.88 111.56 0.32
outstanding in millions2
1 Including Corporate and other sales.
2 Basic number of shares used to compute net loss per share. Participating share awards with right to receive dividend equivalents are (under the two class method) excluded from EPS calculation.
Gross Profit - Gross profit of$273 million for the full year of 2021 was$91 million higher as compared to 2020. The main contributors were the higher sales volumes, customer recoveries for higher costs of components and raw materials and positive currency effects which were partly offset by higher non quality costs, particularly relating to premium freight.
Operating Loss - Operating loss of
RD&E, net of$424 million for the full year of 2021 was$17 million higher as compared to 2020. In 2020 engineering reimbursements were around$80 million higher than normal. Gross RD&E as percentage of sales declined by about 10%.
SG&A expense of
Other income and amortization of intangibles combined declined$70 million for the full year of 2021 as compared to 2020 mainly due to merger related costs and positive effects from the divestitures of Nissin Kogyo Brake Systems and Zenuity in 2020. Net Loss - Net loss of$385 million for the full year of 2021 decreased by$159 million as compared to 2020. In 2020 the net loss was negatively impacted by the$(91) million net effect of the divestiture gain on VNBS-Asia and impairments of VBS-US and the divestiture of the Zenuity JV. In addition tax expense was$16 million lower in 2021. Interest, net for the full year of 2021 was$(7) million lower as compared to 2020, mainly due to lower interest income and interest rate. Other non-operating items, net improved by$4 million , mainly due to exchange rates.
Income tax expense of
There was no Non-controlling interest transactions for the full year of 2021 as
compared to
43
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Loss per Share - Loss per share of $3.44 for the full year of 2021 improved by
$1.45 as compared to 2020. This improvement was primarily driven by the
decreased operating loss and equity method investment improvement of $0.5 per
share. This was offset by the merger related cost of $0.27 per share.
Results of Operations
Fiscal Year 2020 compared to 2019
Veoneer's results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 along with components of change compared to the prior year that have been omitted under this item can be found in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 19, 2021 . Reconciliations ofU.S. GAAP to nonU.S. GAAP (Dollars in millions) Year Ended December 31 Net Loss to EBITDA 2021 2020 Net Loss$ (385) $ (544) Gain on divestiture and assets impairment charge, net - 91 Depreciation and amortization 114 103 Loss from equity method investment (6) 39 Interest and other non-operating items, net 18 16 Income tax expense / (benefit) 16 32 EBITDA$ (243) $ (263) (Dollars in millions) Year Ended December 31 Segment EBITDA to EBITDA 2021 2020 Electronics$ (174) $ (167) Brake Systems - (35) Segment EBITDA$ (174) $ (202) Corporate and other (69) (61) EBITDA$ (243) $ (263) (Dollars in millions) Year Ended December 31 Working Capital to Net Working Capital 2021 2020 Total current assets$ 941 $ 1,244 less Total current liabilities 565
587
Working Capital$ 376 $ 657 less Cash and cash equivalents (424) (758) less Short-term debt 3 4 Net Working Capital$ (45) $ (97) (Dollars in millions) Year Ended December 31 Cash flow before Financing Activities 2021 2020 Net cash used in Operating Activities$ (291) $ (192) plus Net cash (used in) /provided by Investing Activities (31) 85 Cash flow before Financing Activities$ (322) $ (107) (Dollars in millions) Year Ended December 31 Free Cash flow 2021 2020 Net cash used in Operating Activities$ (291) $ (192) less Capital expenditures (60) (91) Free Cash flow$ (351) $ (283) 44
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Liquidity and Capital Resources
Liquidity
As of
The Company's primary source of liquidity is its existing cash balance of$424 million , which will primarily be used for ongoing working capital requirements and capital expenditures. The Company believes that its existing cash resources will be sufficient to support its current operations for at least the next twelve months. The Company leases certain offices, manufacturing and research buildings, machinery, automobiles and data processing and other equipment. Such operating leases, some of which are non-cancelable and include renewals, expire on various dates. See Note 4, Leases, to the consolidated financial statements included herein.
The Company sponsors defined benefit plans that cover eligible employees in
OnMay 28, 2019 , the Company issued, in a registered public offering in theU.S. , 4% Convertible Senior Notes with an aggregate principal amount of$207 million . The Notes bear interest at a rate of 4.00% per year payable semi-annually in arrears onJune 1 andDecember 1 of each year, beginning onDecember 1, 2019 and will mature onJune 1, 2024 , unless repurchased, redeemed or converted in accordance with their terms prior to such date. OnJune 30, 2017 ,Veoneer committed to make a$15 million investment inAutotech Fund I, L.P. pursuant to a limited partnership agreement, and as a limited partner, will periodically make capital contributions toward this total commitment amount. As ofDecember 31, 2020 ,Veoneer contributed a total of approximately$12 million to the fund. As ofDecember 31, 2020 , the Company has received approximately$3 million of distributions from the fund. The fund focuses broadly on the automotive industry and complements the Company's innovation strategy, particularly in the areas of Active Safety and ADAS. Under the limited partnership agreement, the general partner has the sole and exclusive right to manage, control and conduct the affairs of the fund. During 2021, the Company sold its investment in theAutotech Fund for$17 million and recognized a loss of$5 million reported in Gain/(loss) from equity method investment in the Consolidated Statements of Operations. There are no material obligations other than short-term obligations related to inventory, services, tooling, and property, plant and equipment purchased in the ordinary course of business. Our liquidity plans are subject to a number of risks and uncertainties, including those described in the "Forward-Looking Statements" section of this MD&A and Part I, Item 1A. Risk Factors, some of which are outside of our control. Cash Flow Year Ended December 31 (Dollars in millions) 2021 2020 Selected cash flow items $ $ Net working capital1 (45) (97) Net cash used in operating activities (291) (192) Capital expenditures (60) (91) Equity method investments 29 9 Net cash (used in) /provided by investing activities (31)
85
Cash flow before Financing Activities1 (322)
(107)
Net cash provided by financing activities (7)
(9)
1 Non-
Net Working Capital1 - Net working capital of
45
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Net cash used in operating activities - Net cash used in operating activities of
$291 million for the full year of 2021 increased $99 million as compared to 2020
mainly due to the negative swing in the change in Working Capital of around $140
million .
Capital Expenditures - Capital expenditures of $60 million , or 4% of sales, for
the full year of 2021 decreased by $31 million as compared to 2020 mainly due to
delays into 2022 due to lower LVP relating to supply chain constraints.
Net cash provided by investing activities - Net cash used in investing
activities of
Cash flow before financing activities1 - The cash flow before financing
activities of
Year Ended December 31
Associates 2021 2020
Total Associates 7,099 7,543
Whereof: Direct Manufacturing 1,332 1,452
R,D&E 4,171 4,476
Temporary 1,066 1,359
Associates, net decreased by 444 to 7,099 from 7,543 during the full year 2021
as compared to 2020. The reductions were primarily a result of our MAI program
and engineering efficiency improvements.
Significant Accounting Policies and Critical Accounting Estimates
New Accounting Pronouncements
The Company has considered all applicable recently issued accounting guidance. The Company has summarized in Note 2, Summary of Significant Accounting Policies to the consolidated financial statements included herein each of the recently issued accounting pronouncements and stated the impact or whether management is continuing to assess the impact.
Critical Accounting Estimates
The application of accounting policies necessarily requires judgments and the
use of estimates by a Company's management. Actual results could differ from
these estimates. By their nature, these judgments are subject to an inherent
degree of uncertainty. These judgments are based on our historical experience,
terms of existing contracts, and management's evaluation of trends in the
industry, information provided by our customers and information available from
other outside sources, as appropriate. Certain policies relate to estimates that
involve matters that are highly uncertain at the time the accounting estimate is
made and different estimates or changes to an estimate could have a material
impact on the reported financial position, changes in financial condition or
results of operations. Such critical estimates are discussed below. For these,
materially
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different amounts could be reported under varied conditions and assumption. Other items in the Company's consolidated financial statements require estimation, however, in our judgment, they are not as critical as those discussed below.
Revenue Recognition
In accordance with ASC 606, Revenue from Contracts with Customers, revenue is measured based on consideration specified in a contract with a customer, adjusted for any variable consideration (i.e. price concessions or annual price adjustments) as estimated at contract inception. The variable consideration calculation involves management assumptions including the volume of light vehicle production, sales volumes for specific parts, or price concessions to be granted. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer. In addition, from time to time,Veoneer may make payments to customers in connection with ongoing and future business. These payments to customers are generally recognized as a reduction to revenue at the time of the commitment to make these payments, unless certain criteria are met, warranting capitalization. If the payments are capitalized, the amounts are recognized as a reduction of the transaction price as the related goods are transferred. As ofDecember 31, 2021 and 2020, the Company had no outstanding obligations to make payments to customers in connection with ongoing and future business. The Company assesses these amounts for impairment. During 2020, Assets Held for Sale were impaired as part of the evaluation of the value less costs to sell of that asset group. See Note 6 Divestiture for additional information. No impairment was recorded in 2021 or 2019.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales.
Nature of goods and services
The following is a description of principal activities from which the Company
generates its revenue. The Company previously had two operating segments,
Electronics includes all electronics resources and expertise, Restraint Control
Systems and Active Safety products, and Brake Systems provided brake control and
actuation systems. Both of the segments generate revenue from the sale of
production parts to original equipment manufacturers ("OEMs"). The remaining
Brake Systems business is no longer a reportable segment due to immateriality.
The Company accounts for individual products separately if they are distinct
(i.e., if a product is separately identifiable from other items and if a
customer can benefit from it on its own or with other resources that are readily
available to the customer). The consideration, including any price concession or
annual price adjustments, is based on stand-alone selling prices for each of the
products.
The Company recognizes revenue for production parts primarily at a point in time.
For production parts with revenue recognized at a point in time, the Company recognizes revenue upon transfer of control, which generally occurs upon shipment to the customers and transfer of title and risk of loss under standard commercial terms (typically F.O.B. shipping point). There are certain contracts where the criteria to recognize revenue over time have been met (e.g., there is no alternative use to the Company and the Company has an enforceable right to payment). In such cases, at period end, the Company recognizes revenue and a related asset and associated cost of goods sold and inventory. However, the financial impact of these contracts is immaterial considering the very short production cycles and limited inventory days on hand, which is typical for the automotive industry.
The amount of revenue recognized is based on the purchase order price and adjusted for variable consideration (i.e. price concessions, annual price adjustments or payment to customers). Customers typically pay for the production parts based on customary business practices with payment terms averaging 30 days.
Contract balances
The contract assets relate to the Company's rights to consideration for work
completed but not billed (generally in conjunction with contracts for which
revenue is recognized over time) at the reporting date on production parts. The
contract assets are reclassified into the receivables balance when the rights to
receive payments become unconditional. There have been no impairment losses
recognized related to contract assets arising from the Company's contracts with
customers.
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Receivables
Accounts receivables are recorded at the invoiced amount and do not bear interest.
The Company has evaluated the available adoption options of common credit loss methods that are acceptable as per FASB Accounting Standards Codification Topic 326, Credit Losses. The Company adopted the available Loss-rate method where the impairment is calculated using an estimated loss rate and multiplying it by the asset's amortized cost at the balance sheet date. This method appropriately reflects the Company´s risk pattern in relation to its accounts receivables.
The key components of the Company's Loss-rate model are as follows:
•A list of the Company's customers credit rating and credit default risk rate from Bloomberg.
•Actual write-offs or reversals of previous write-offs of accounts receivables.
•Evaluation of other unusual facts and circumstances which could impact the credit loss rate, such as risk of bankruptcy or potential collectability issues.
The Company's credit loss model includes the Company's customer list. The customer list captures the existing customers. The list is put into a Bloomberg data query to generate customers short-term credit rating. The credit default risk rate is used to calculate the credit loss rate or estimated loss rate. For customers that do not have credit default risk rate, management uses the six-month LIBOR rate as a credit rating and a credit default risk rate. Management believes that the six-month LIBOR rate adequately reflects the short-term nature of the Company's trade receivables and is also in line with the Company's invoice payment terms.
Business Combinations
In accordance with accounting guidance for the provisions in FASB ASC 805, Business Combinations, the Company allocates the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. In addition, an acquisition may include a contingent consideration component. The fair value of the contingent consideration is estimated as of the date of the acquisition and is recorded as part of the purchase price. Each quarter this contingent consideration is re-measured using the discounted cash flow method. The Company uses actual revenue levels as well as changes in the estimated probability of different revenue scenarios to estimate fair values. The Company has engaged outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. The Company adjusts the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as the Company obtains more information regarding asset valuations and liabilities assumed. The Company's purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies. Other estimates used in determining fair value include, but are not limited to, future cash flows or income related to intangibles, market rate assumptions, actuarial assumptions for benefit plans and appropriate discount rates. The Company estimates the fair value based upon assumptions believed to be reasonable, but these are inherently uncertain, and therefore, may not be realized. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Equity Method Investments
The Company initially accounts for an equity method investment at its fair value on the date of acquisition. See Note 2, Summary of Significant Accounting Policies and Note 13,"Equity Method Investment " to the consolidated financial statements included. 48
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Inventory Reserves
Inventories are evaluated based on individual or, in some cases, groups of inventory items. Reserves are established to reduce the value of inventories to the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. There can be no assurance that the amount ultimately realized for inventories will not be materially different than that assumed in the calculation of the reserves.Goodwill and Intangibles The Company evaluates the carrying value and useful lives of long-lived assets when indications of impairment are evident or it is likely that the useful lives have decreased, in which case the Company depreciates the assets over the remaining useful lives. Impairment testing is primarily performed by using the cash flow method based on undiscounted future cash flows. Estimated undiscounted cash flows for a long-lived asset being evaluated for recoverability are compared with the respective carrying amount of that asset. If the estimated undiscounted cash flows exceed the carrying amount of the assets, the carrying amounts of the long-lived asset are considered recoverable and an impairment is not recorded. However, if the carrying amount of a group of assets exceeds the undiscounted cash flows, an entity must then estimate, generally using a discounted cash flow model the long-lived assets' fair value to determine whether an impairment loss should be recognized. The Company reviews goodwill for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate the assets might be impaired. The impairment test was performed inOctober 2021 . In conducting its impairment testing, the Company compares the estimated fair value of each of its reporting units to the related carrying value of the reporting unit. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its estimated fair value, an impairment loss is recognized for the excess of carrying amount over the fair value of the respective reporting unit. Due to the pending merger agreement with Qualcomm and SSW, management performed a qualitative assessment, as permitted by Accounting Standards Update ("ASU") 2011-08, Intangibles -Goodwill and Other (Topic 350): Testing Goodwill for Impairment to test goodwill for impairment in 2021. In performing the qualitative assessment, the Company assessed relevant factors to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. These factors may include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as the pending merger agreement. The pending merger agreement was the predominant factor and allowed the Company to conclude that it was more likely than not that the fair value of the reporting unit exceeded its carrying value.
Recall Provisions and Warranty Obligations
The Company records liabilities for product recalls when probable claims are
identified and when it is possible to reasonably estimate costs. Recall costs
are costs incurred when the customer decides to formally recall a product due to
a known or suspected safety concern. Product recall costs typically include the
cost of the product being replaced as well as the customer's cost of the recall,
including labor to remove and replace the defective part. In some cases,
portions of the product recall costs are reimbursed by an insurance company.
Actual costs incurred could differ from the amounts estimated, requiring
adjustments to these reserves in future periods. It is possible that changes in
our assumptions or future product recall issues could materially affect our
financial position, results of operations or cash flows.
Estimating warranty obligations requires the Company to forecast the resolution
of existing claims and expected future claims on products sold. The Company
bases the estimate on historical trends of units sold and payment amounts,
combined with our current understanding of the status of existing claims and
discussions with our customers. These estimates are re-evaluated on an ongoing
basis. Actual warranty obligations could differ from the amounts estimated
requiring adjustments to existing reserves in future periods. Due to the
uncertainty and potential volatility of the factors contributing to developing
these estimates, changes in our assumptions could materially affect our results
of operations.
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Defined Benefit Pension Plans
For theJapan , French, andCanada plans, the amount recognized as a defined benefit liability is the net total of projected benefit obligation (PBO) minus the fair value of plan assets (if any). The plan assets are measured at fair value. Net periodic benefit cost was reported within Costs of sales, Selling, general and administrative expenses and RD&E expenses in the Consolidated Statement of Operations.Veoneer has considered the remaining plans to be part of a multiemployer plan with Autoliv. Pension expense was allocated for these plans and reported within Costs of sales, Selling, general and administrative expenses and RD&E expenses in the Consolidated Statement of Operations. Of the plans sponsored byVeoneer , the most significant plans are theFrance andCanada plans. These plans represent approximately 36% of the Company's total pension benefit obligation. See Note 18, Retirement Plans, to the consolidated financial statements included herein. The Company, in consultation with its actuarial advisors, determines certain key assumptions to be used in calculating the projected benefit obligation and annual pension expense. For theFrance plans, the assumptions used for calculating the 2021 pension expense were a discount rate of 1.2%, expected rate of increase in compensation levels of 2.5%. The discount rate for the Japanese plans has been set based on the rates of return of high-quality fixed-income investments currently available at the measurement date and are expected to be available during the period the benefits will be paid. The expected rate of increase in compensation levels and long-term return on plan assets are determined based on a number of factors and must take into account long-term expectations and reflect the financial environment in the respective local markets. This plan does not have assets as ofDecember 31, 2021 and 2020. Income Taxes Significant judgment is required in determining the worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Many of these uncertainties arise as a consequence of intercompany transactions. See Note 1, Basis of Presentation, Note 20, Income Taxes and Note 23, Relationship with Former Parent and Related Entities, to the Consolidated Financial Statements included herein. Although the Company believes that its tax return positions are supportable, no assurance can be given that the final outcome of these matters will not be materially different than that which is reflected in the historical income tax provisions and accruals. Such differences could have a material effect on the income tax provisions or benefits in the periods in which such determinations are made. See also the discussion of the determinations of valuation allowances on our deferred tax assets in Note 19, Income Taxes, to the consolidated financial statements included herein.
Contingent Liabilities
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 or other matters. For a discussion of legal matters we are involved in, see Note 17, "Commitment and Contingencies", to the consolidated financial statements included herein.
The Company diligently defends itself in such matters and, in addition, carries insurance coverage to the extent reasonably available against insurable risks.
The Company records liabilities for claims, lawsuits and proceedings when they are probable, and it is possible to reasonably estimate the cost of such liabilities. Legal costs expected to be incurred in connection with a loss contingency are expensed as such costs are incurred.
A loss contingency is accrued by a charge to income if it is probable that an
asset has been impaired, or a liability has been incurred and the amount of the
loss can be reasonably estimated. In determining whether a loss should be
accrued management evaluates, among other factors, the degree of probability of
an unfavorable outcome and the ability to make a reasonable estimate of the
amount of loss. Changes in these factors could materially impact our
consolidated financial statements.
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--------------------------------------------------------------------------------Leases
Lease Classification
The Company, as a lessee, determine the lease classification for each separate lease component at the lease commencement date. Commencement date is defined as the date on which a lessor makes an underlying asset available for use by the Company. This date can be different from the stated commencement date in the contract. This date is whenVeoneer takes possession of or be given control over the use of an underlying asset. For lessees, a lease can be classified either as an operating lease or a finance lease.
Initial Measurement
The Company will recognize a right-of-use asset and a lease liability at lease commencement. The lease liability for both finance and operating leases equals the present value of the unpaid lease payments, discounted atVeoneer's incremental borrowing rate. Lease payment includes undiscounted fixed (including in-substance fixed) payments plus optional payments (e.g. for purchase options, optional renewal periods, periods subsequent to a termination option) that are reasonably certain to be owed. Lease payments do not include variable lease payments that depend on an index or a rate, any guarantee by the lessee of the lessor's debt; or amounts allocated to non-lease components. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In general, the discount rate will not be reassessed unless there is a change in the lease term or in the assessment of a lessee purchase option represent a significant change in the economics of the arrangement.
Short-term Lease & Low Value Lease Recognition Exemption
A short-term lease is a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For leases that meet the definition of "short-term", the Company elected the practical expedient under ASC 842 which allows for simplified accounting. The practical expedient will apply for all classes of underlying assets and under the practical expedient, the Company will recognize the lease payments as lease cost on a straight-line basis over the lease term and will disclose the costs. In addition, the Company determined that the expenses derived from leases with lease term of one month or less will be exempt from being assessed under lease recognition. Impairment test The Company will use the long-lived assets impairment guidance (ASC 360) to determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize. The impairment loss related to a right-of-use asset is presented in the same manner in the income statement as an impairment loss recognized for any other long-lived asset.
Assets and liabilities held for sale
The Company classifies assets and liabilities (disposal groups) to be sold as
held for sale in the period in which all of the following criteria are met:
management, having the authority to approve the action, commits to a plan to
sell the disposal group; the disposal group is available for immediate sale in
its present condition subject only to terms that are usual and customary for
sales of such disposal groups; an active program to locate a buyer and other
actions required to complete the plan to sell the disposal group have been
initiated; the sale of the disposal group is probable, and transfer of the
disposal group is expected to qualify for recognition as a completed sale within
one year, except if events or circumstances beyond the Company's control extend
the period of time required to sell the disposal group beyond one year; the
disposal group is being actively marketed for sale at a price that is reasonable
in relation to its current fair value; and actions required to complete the plan
indicate that it is unlikely that significant changes to the plan will be made
or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for
sale at the lower of its carrying value or fair value less any costs to sell.
Any loss resulting from this measurement is recognized in the period in which
the held for sale criteria are met. Conversely, gains are not recognized on the
sale of a disposal group until the date of sale. The Company assesses the fair
value of a disposal group, less any costs to sell, each reporting period it
remains classified as held for sale and reports any subsequent changes as an
adjustment to the carrying value of the disposal group, as long as the new
carrying value does not exceed the carrying value of the disposal group at the
time it was initially classified as held for sale.
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