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, 2019 filed with the SEC on February 21, 2020 .
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 Commentary
•2020 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 Delaware corporation with its principal executive offices in
Stockholm, Sweden . The Company functions as a holding corporation and owns two
principal operating subsidiaries, Veoneer AB and Veoneer US, Inc. On June 29,
2018 the spin-off of Veoneer from Autoliv, Inc. ("Autoliv") was completed
through the distribution by Autoliv of all the outstanding shares of common
stock of Veoneer to Autoliv's stockholders as of the close of business on June
12, 2018 , the common stock record date for the distribution, in a tax-free, pro
rata distribution (the "Spin-Off"). On July 2, 2018 , the shares of Veoneer
common stock commenced trading on the New York Stock Exchange under the symbol
"VNE" and the Veoneer Swedish Depository Receipts representing shares of Veoneer
common stock commenced trading on Nasdaq Stockholm under the symbol "VNE SDB."
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. Prior to the Spin-Off, Veoneer operated for almost
four years as an operating segment within Autoliv . Veoneer's safety systems are
designed to make driving safer and easier, more comfortable and convenient for
the end consumer and to intervene before a collision to avoid a potentially
hazardous situation. Veoneer endeavors to prevent vehicle accidents or reduce
the severity of impact in the event a crash is unavoidable. Through our customer
focus, and being an expert partner with our customers, we intend to develop
human centric systems that benefit vehicle occupants.
Veoneer'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. In addition, we offer driver monitoring systems, LiDAR
sensors, RoadScape positioning and other technologies critical for HAD and AD
solutions by leveraging our partnership network and internally developed
intellectual property.
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Executive Overview
Health and safety continue to be our first priorities and we are closely
monitoring the development of the COVID-19 pandemic, which unfortunately shows
signs of becoming more severe again, and we are staying ready to take the
necessary safety precautions and business actions.
Vehicle production accelerated through the quarter, leading to a rapid increase
in demand in the entire automotive supply chain, in a time when we are still
fighting the effects of the global COVID-19 pandemic. In this challenging
environment we executed a record number of activities including: successful
vehicle launches, continued market adjustment initiatives, signing of a letter
of intent with Qualcomm, finalizing the split of Zenuity and the divestment of
our brake business. To summarize our underlying performance improved in almost
all metrics. We are pleased with Veoneer's operational performance in the third
quarter and would like to thank the entire Veoneer team for their focus,
dedication and discipline during this highly unusual year.
Cash flow was particularly strong in the quarter and while it included certain
timing effects it allows us to expect a better 2020 full year cash flow before
financing than previously expected. Our market adjustment initiatives also
continue to deliver the targeted improvements, we are establishing new levels of
run- rate for cash flow and capital expenditures and continue to drive
improvements in RD&E efficiency.
Our daily execution is the foundation that will allow our plans to materialize,
and we are managing key launches well including the flagship Mercedes S-Class,
the Subaru Levorg and the Volvo XC40 Electric . We are on track for additional
fourth quarter and early 2021 launches. This development is fundamental to
achieving our stated target to return to organic growth towards the later part
of 2020. The selection by EuroNCAP of the Mercedes GLE as the best vehicle in
its 2020 test for assisted driving, where most of the active safety content
comes from Veoneer is another recent important technology proof-point.
The Qualcomm collaboration is important to Veoneer for multiple reasons.
Technologically, it strengthens our capability to provide a full scalable system
for the next generation ADAS and later autonomous driving. The combination of
Veoneer's software for perception and drive policy and Qualcomm's powerful and
energy efficient System On a Chip (SoC) will bring a competitive offer to the
market for vehicle launches in 2024 and beyond. Commercially, the go-to-market
strategy led by Qualcomm will allow for broader access to the market.
Our focus areas first outlined at the beginning of 2020 remain: successful
customer launches in 2020 and heading into 2021, market adjustment initiatives
to continue to drive efficiencies and improve cash flow, and continuing to win
profitable new business.
COVID-19 Commentary
The COVID-19 pandemic continues to cause significant uncertainty in the global
economy. This includes the automotive industry and light vehicle production
("LVP") for 2020 and the upcoming years ahead, which are dependent on underlying
consumer demand.
During the third quarter, our customers in Europe and North America generally
experienced a sharp ramp-up of their production, after most factories had been
idled, or running on very reduced schedules during the latter part of the first
quarter and the early part of the second quarter. However, during the third
quarter, we experienced an even stronger increase in production ramp-ups by our
customers in China , while there has been a stabilization of production in other
Asian vehicle producing countries from the initial recovery during the second
quarter this year. The strong customer call-offs, predominately in China have
continued in the fourth quarter and are creating some challenges in the supply
chain for certain key components in the restraint control business.
Our updated planning assumptions reflect the stronger than expected recovery of
global LVP during the third quarter and our current customer forecasts for the
fourth quarter. The latest IHS forecast implies a year-over-year LVP decline of
approximately 4% for the second half of 2020 and approximately 19% for the full
year 2020, which are both improvements from July 2020 . However, we continue to
monitor the situation as the number of new COVID-19 cases in Europe and the
United States seem to be on the rise, which may impact the LVP and our customer
forecasts in the near-term.
As our OEM customers recovered to more normal, or higher than normal in certain
countries, we have returned to higher production levels as well. The health and
safety of our associates continues to be our first priority, and we are taking
the necessary actions to protect our associates, safeguard our operations and
meet our customers' needs while managing through these unprecedented
circumstances.
As noted in our 2020 Outlook, in response to the pandemic, the Company continues
to extend its market adjustment initiatives (MAIs) to further mitigate the
impact of the pandemic on its cash flow and operating results. The actions taken
by the Company
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to mitigate the impact, include reducing its annual RD&E, net by more than $100
million and other expenses with the intention of reducing the Company's
operating loss and conserving cash in 2020 so as to enter 2021 in a stable cash
position. Veoneer estimates the negative organic sales impact from the lower
customer demand to be approximately $30 million for the third quarter and
approximately $250 million through the first nine months of 2020.
In 2020, the most important driver for Veoneer's business is new customer and
technology launches. For the top 15 launches we see no cancellations of
projects; however, approximately half of such launches have been postponed by up
to one quarter while the rest remain on track, or actually even slightly ahead
of schedule. The exact volumes and consumer take rates are hard to predict at
this point in time.
2020 Outlook
The sharp production rebound in the third quarter of 2020 is expected to
sequentially improve further during the fourth quarter. Based on current
customer call-offs and forecasts, Veoneer expects to return to organic sales
growth during the fourth quarter and to outperform the LVP for the second half
of 2020. The Company expects this organic growth to accelerate into 2021.
Veoneer remains on track with its implementation of additional MAIs with the
underlying aim to offset the negative effects from lower sales and the impact on
cash flow. Veoneer expects RD&E, net in full year 2020 to improve by more than
$100 million as compared to 2019, on a comparable basis, and the operating loss
to improve in full year 2020 as compared to 2019, on a comparable basis.
Capital expenditures are expected to be less than $125 million for full year
2020. As a result of a better than expected third quarter, the Company's current
outlook is for cash flow before financing activities to be better than $(170)
million for the second half of 2020, however the COVID-19 pandemic continues to
create a challenging and uncertain environment.
Trends, Uncertainties and Opportunities
Trend toward Collaborative Driving
The environment around us continues to be rapidly changing and we currently see
a shift across the automotive and autotech industries. The industry developments
during 2019 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. 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+ autonomous driving solutions for the next
decade however the recent developments of the COVID-19 pandemic, during the
first half of 2020, 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.
One 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. Starting 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.
In May 2020 Euro NCAP announced that is was postponing the roll-out of upcoming
road map updates by one year (from 2022 to 2023 and from 2024 to 2025). This
should help our industry to overcome the situation with respect to the COVID-19
pandemic, but it should not change the overall trend towards introduction of new
roadmap requirements, which are just delayed by one year. We anticipate strong
global sensor adoption rate increases (forward, side and rear) due to the
European NCAP's push for crash avoidance, increased adoption rates due to
growing demand around ADAS software features, volume growth due
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to redundant sensing concepts needed for higher levels of autonomy, potential
opportunities in relation to compliance with cyber-security and software updates
and step-by-step increased demand for connectivity components as a result.
On May 17, 2018 , the European Commission proposed a new mandate, as part of the
European General Safety Regulation ("GSR") road-map through 2028, to make
certain Active Safety features compulsory in light vehicles by 2022. During
March of 2019 the EU mandate was adopted as initially proposed by the European
Commission . We believe that adoption of the mandate will significantly expand
demand for our Active Safety products. Indeed, with respect to sensors and ADAS
software features, our order intake since the adoption of the mandate seems to
reflect the anticipated increase in demand. However, during 2019 we have seen
OEM delays in the sourcing of these technologies as customers reconsider how
they want to architect and design, in a scalable way to include these new
standard technologies. In addition, we believe that the mandate and the European
GSR generally will influence other market regulators as they evaluate their
respective vehicle test rating programs and safety legislation.
In China , the Ministry of Industry and Information Technology issued the Key
Working Points of Intelligent Connected Vehicle Standardization for 2018 to
promote and facilitate the development of the intelligent connected vehicles
industry, and advance the development of fundamental standards and those that
are in urgent demand. The guideline has pointed out that more than 30 key
standards will be defined by 2020 to fund the systems for ADAS and low-level
autonomous driving, and a system of over 100 standards will be set up by 2025
for higher level autonomous driving. During the third quarter of 2018, the
Chinese government commenced testing of new vehicles according to the new China
New Car Assessment Program where active safety features like Autonomous
Emergency Braking ("AEB") are required to achieve the maximum safety rating.
On October 4, 2018 , the U.S. Department of Transportation ("DoT") issued new
voluntary guidelines on automated driving systems ("ADS") under its "Preparing
for the Future of Transportation: Automated Vehicles 3.0" initiative, building
on its "Vision for Safety 2.0" from September 2017 , which prioritized aligning
federal guidance around twelve safety design elements of interest to the auto
industry. This initiative should have a positive impact on the adoption of ADAS
and HAD on the road towards Autonomous Vehicles ("AV"). On April 2, 2020 the U.S
DoT closed the comment period for the "Automated Vehicles 4.0" which seeks to
ensure a consistent U.S. Government approach to AV technologies, and to detail
the authorities, research, and investments being made across the United States
so that the United States can continue to lead AV technology research,
development, and integration.
In 2018 the UN Economic Commission for Europe created a new Working Party to
deal with regulations for Automated/Autonomous and Connected Vehicles. In
addition to the EU and Japan , which have both started to work closely together
to develop ADAS regulations, in the last three years, the U.S. and China have
both indicated a willingness to be active in several working groups towards
harmonization of future regulations for ADAS and AV. This would create a common
umbrella for countries which follow type-approval rules (EU, Japan , Australia )
and countries which are outside of type-approval system, e.g., under
self-certification regimes (U.S. , Korea ) or specific national rules (China ).
Key future potential regulations are expected for (i) safety critical
ADAS-features (e.g. AEB); (ii) Highway AV-features (Physical Tests + Real World
Test Drive + Audit); (iii) Cyber-security and Software updates; and (iv)
Connected Vehicles. On one hand, the agreement on minimal common base
requirements for the industry will take a longer time and therefore may postpone
introduction of regulations. On the other hand, the harmonization with base
requirements would help the industry while a more active position from China may
help to pull forward some safety critical ADAS technologies which are not yet
considered as relevant for regulation in EU and Japan (e.g. Blind Spot or Night
Vision).
Market Overview
Light Vehicle Production by Region - 2020
Millions (except where
specified) China Japan Rest of Asia Americas Europe Other Total
IHS as of October 16, 2020
Third Quarter 2020 6.0 2.0 2.4 4.3 4.3 0.4 19.5
Change vs. 2019 9 % (12) % (17) % (4) % (8) % (12) % (4) %
For the third quarter of 2020, global light vehicle production (according to
IHS) declined by approximately 4% mainly due to lower production output in most
vehicle producing countries except China where the LVP increased 9%. At the
beginning of the quarter the global global LVP was expected to decline by
approximately 12%. Major vehicle producing geographies include Europe (8)% and
Japan (12), while South Korea and North America are essentially flat as compared
to 2019 for the third quarter.
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Light Vehicle Production by Region - 2020
Millions (except where
specified) China Japan Rest of Asia Americas Europe Other Total
IHS as of October 16, 2020
Full Year 2020 21.3 7.6 9.1 14.2 16.3 1.6 70.1
Change vs. 2019 (9) % (16) % (26) % (23) % (23) % (17) % (19) %
For the full year of 2020, global light vehicle production (according to IHS) is
expected to decline by approximately 19%, due the anticipated full year effects
of the COVID-19 pandemic. At the beginning of the quarter global LVP was
expected to decline by approximately 22%. All major vehicle producing
geographies are expected to be impacted by the pandemic including: China (9)%,
Europe (23)%, South Korea (13)%, North America (21)% and Japan (16)%. The global
LVP of approximately 70 million is the lowest level since 2010 of 72 million.
The expected decline of approximately 16 million light vehicles in 2020 as
compared to 2019 is the highest single year light vehicle decline on record, and
is the third consecutive annual decline in light vehicle production from 2017
when a record 92 million light vehicles were produced.
Results of Operations
Three Months Ended September 30, 2020 as compared to Three Months Ended
September 30, 2019
The following analysis illustrates Veoneer's overall and by segment performance
for the three months ended September 30, 2020 and 2019 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, 2020 and 2019 along with components of
change as compared to the prior year.
Net Sales Three Months Ended September 30 Components of Change vs. Prior Year
US GAAP
(Dollars in millions, 2020 2019 Reported Change Currency Divestiture Organic1
except where specified) $ $ $ % $ % $ % $ %
Restraint Control 188 193 (5) (3) 4 2 - - (9) (5)
Systems
Active Safety 170 178 (8) (5) 8 4 - - (16) (9)
Brake Systems 13 91 (78) (85) 1 1 (77) (85) (2) (7)
Total $ 371 $ 462 $ (91) (20) % $ 13 3 % $ (77) (17) % $ (27) (7) %
1 Non-U.S. GAAP measure reconciliation for Organic Sales
Net Sales - Net sales for the quarter declined by 20% to $371 million as
compared to 2019. Organic sales1 declined by 7% as compared to the 4% decline in
LVP for the quarter. The remainder of the decline was the VNBS-Asia divestiture
of 17% while the net currency effect was favorable by 3%. During the quarter,
organic sales developed slightly better than our expectations entering the
quarter.
Sequentially, from the second quarter in 2020, net sales more than doubled from
$184 million primarily due to the sharp recovery in North America and Europe .
The negative impact of COVID-19 on organic sales is estimated to be
approximately $30 million during the third quarter.
Restraint Control Systems - Net sales for the quarter of $188 million decreased
by 3% as compared to 2019. The organic sales decline of 5% was primarily due to
lower LVP in Europe and North America .
Active Safety - Net sales for the quarter of $170 million decreased by 5% as
compared to 2019. This decline was primarily driven by the organic sales decline
of 9%. This slight under-performance versus the LVP was driven by launch delays
with certain customer models in North America , Europe , China and Japan , as
mentioned in previous quarters.
The COVID-19 impact on lower underlying LVP in our major markets for our Active
Safety products more than offset the strong underlying demand for mono, stereo
and thermal camera systems and ADAS ECUs on several customer models.
Brake Systems - Net sales for the quarter of $13 million decreased by 85% or $78
million as compared to 2019. The VNBS-Asia divestiture accounted for $77 million
of the decline year-over-year.
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Components of Change vs. Prior
Electronics Segment Three Months Ended September 30 Year
US GAAP
(Dollars in millions, 2020 2019 Reported Change Currency Organic1
except where specified) $ % $ % $ % $ % $ %
Net Sales $ 358 $ 371 $ (13) (4) % $ 11 3 % $ (24) (7) %
Operating Loss / Margin $ (80) (22.2) % $ (90) (24.3) % $ 10
Segment EBITDA1 / Margin $ (53) (14.9) % $ (69) (18.5) % $ 16
Associates 7,329 7,616 (287)
1 Non-U.S. GAAP measure reconciliation for Organic Sales and Segment EBITDA
Net Sales - Net sales for the Electronics segment decreased by $13 million to
$358 million for the quarter as compared to 2019. This sales decline was mainly
due to the organic sales1 decline in Restraint Control Systems and Active Safety
of $9 million and $16 million , respectively, which was partially offset by the
positive net currency translation effects of $11 million .
Operating Loss - Operating loss for the Electronics segment of $80 million for
the quarter decreased by $10 million as compared to 2019. This decrease is
mainly due to the RD&E, net underlying improvement related to lower gross costs
and higher engineering reimbursements, which more than offset the costs related
to the Zenuity software team, which was previously reported in the equity method
loss.
EBITDA1 - EBITDA loss for the Electronics segment decreased by $16 million to
negative $53 million for the quarter as compared to 2019. This change is mainly
due to the operating loss improvement for the segment while depreciation and
amortization decreased by $6 million .
Associates - Associates, net in the Electronics segment decreased by 287, net to
7,329 as compared to 2019, mainly due to a net reduction in engineering of more
than 200 associates, even after the addition of approximately 220 Zenuity
associates. Direct labor and temporary associates declined by approximately 140
and 180, respectively reflecting the volume decline as compared to 2019.
Deliveries - Deliveries during the quarter were 2.7 million units for Restraint
Controls Systems and 2.0 million units for Active Safety.
Brake Systems Segment Three Months Ended September 30 Components of Change vs. Prior Year
US GAAP Reported
(Dollars in millions, 2020 2019 Change Currency Divestiture Organic1
except where specified) $ % $ % $ % $ % $ % $ %
Net Sales $ 9 $ 91 $ (82) (89) % $ 1 1 % $ (77) (85) % $ (6) (32) %
Operating Loss / Margin $ (3) (35.2) % $ (17) (18.6) % $ 14
Segment EBITDA1 / Margin $ (4) (33.5) % $ (8) (9.3) % $ 4
Associates - 1,467 (1,467)
1 Non-U.S. GAAP measure reconciliation for Organic Sales and Segment EBITDA
Net Sales - Net sales for the Brake Systems segment decreased by $82 million to
$9 million for the quarter as compared to 2019. The sales decrease was mainly
attributable to the VNBS-Asia divestiture of $77 million .
Operating Loss - Operating loss for the Brake Systems segment for the quarter
decreased by $14 million to $3 million as compared to 2019. This change was
mainly due to the VNBS-Asia divestiture, where the loss in 2019 was $10 million
for the quarter and lower volumes in the remaining legacy Honda Brake Systems
business.
EBITDA1 - EBITDA loss for Brake Systems segment decreased by $4 million to
negative $4 million for the quarter as compared to 2019. This change was mainly
due to the net effect of the divestitures.
Associates - Associates, net in the Brake Systems segment decreased by 1,467 as
compared to 2019, due to the divestitures of VNBS-Asia and VBS-US operations.
Deliveries - Deliveries during the quarter were 0.03 million units for the Brake
Systems segment.
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--------------------------------------------------------------------------------Corporate and Other Three Months Ended September 30 (Dollars in millions, 2020 2019 US GAAP Reported Change except where specified) $ % $ % $ % Net Sales$ 4 $ -$ 4 Operating Loss / Margin$ (20) - %$ (15) - %$ (5) EBITDA1 / Margin$ (20) - %$ (15) - %$ (5) Associates 104 45 59 1 Non-U.S. GAAP measure reconciliation for EBITDANet Sales -Net Sales of$4 million for the third quarter reflects the legacy Honda Brake Systems business after the VBS-US divestiture. Associates - Associates, net increased by 59 to 104 for the quarter as compared to 2019 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$20 million increased by$5 million and$5 million , respectively, mainly due to associate related costs in the quarter as compared to 2019. The Brake Systems loss after the VBS-US divestiture was approximately$1 million .
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