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 ofVeoneer, 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 endedDecember 31, 2020 , filed with theSEC onFebruary 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 EstimatesVeoneer 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. InMay 2021 , we implemented an organizational refinement to driveVeoneer from a regional-based organization toward a product-based product organization. This refinement will allow the Company to better focus on execution, innovation and product development. This change did not affectVeoneer's financial reporting structure. Executive Overview OnJuly 22, 2021 Veoneer entered into a definitive merger agreement under which Magna will acquire the Company. The Company's Board of Directors believes this is a compelling transaction for our shareholders and all of our stakeholders. It will deliver significant and immediate value toVeoneer stockholders and reflects an attractive premium to our trading price and provides new opportunities for our employees to join one of the most capable suppliers in the mobility space. The plan is to finalize the agreement in the coming months and we will provide timely updates as the process progresses. For the quarter, we were pleased with the Company''s performance during a challenging period. Despite the uncertainty created by supply disruptions, the COVID-19 pandemic and sequentially lower light vehicle production leading to lower sales, the Company improved its gross profit and operating loss as well as its cash flow. These improvements were achieved through the progress of our on-going market adjustment initiatives, and we expect continuous progress throughout 2021 as sales increases and the results of the efficiency programs are expected to keep our costs at near planned levels. Planned launches are on track, although the positive volume effects are somewhat held back by the short-term fluctuations in OEM demand. During the quarter we had five key launches, four out of which were Active Safety launches that will start to contribute to our expected strong organic sales growth in the quarters and years to come. The launch of the Geely EMA was especially significant forVeoneer as we are a full system and integration supplier to the vehicle. This is a flagship program for the Company, highlighting the strength of our vision, radar, ECU and software capabilities. It further highlights the current 23 -------------------------------------------------------------------------------- momentum the Company has inChina where among other customer wins we signed yet another new customer for our vision technology. The Company's order intake developed better in the quarter than what we expected, due in part to new opportunities that we were able to capture and partly due to orders expected in the third quarter materializing already in the second quarter. We won orders across most products areas, highlighting the strength of our current product portfolio. With this positive development we are well on track to reach higher order levels in 2021 as compared to 2020. The first Arriver perception and drive policy software running on the Qualcomm Snapdragon Ride platform has now been demonstrated in-vehicle to potential customers with encouraging initial feedback, a true milestone. During the quarter the Volvo XC40 Recharge, which runs the current generation of Arriver software, was picked as "Top Safety Pick+" by theInsurance Institute for Highway Safety inthe United States , another proof point that we are on track to create a leading global challenger for Active Safety systems and software. These developments are the result of the strong execution of the entireVeoneer team. COVID-19 and Semiconductor Supply CommentaryVeoneer is working to minimize the impact of the supply constraints in semiconductors. The supply constraints are likely to remain into the second half 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 strong if not full recovery during the second half of the year, particularly in the fourth quarter, as vaccination programs eases the constraints from COVID-19 and the semiconductor industry starts to catch up with demand. These assumptions are taken into account in our full year 2021 outlook. For 2021 and the upcoming years, the most important driver forVeoneer's business is new customer and technology launches, which should drive significant out-performance as compared to the global LVP. As noted in our 2020 full year results and first quarter 2021 results, in response to the pandemic, the Company continues to expand its MAIs to further mitigate the impact of the pandemic on its cash flow and operating results. As part of the MAIs, during the first half of 2021 the Company undertook certain restructuring activities, recording restructuring expenses of approximately$5 million , impacting certain engineering and administrative functions. 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. Our OEM customers continue to recover to more normal volumes, or higher than normal volumes in certain countries, and in the first half of 2021, 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 continue to protect our associates, safeguard our operations and meet our customers' needs while managing through these unprecedented circumstances. 2021 Outlook The macro-economic environment remains very uncertain, mainly due to the global supply chain challenges created as a result of the COVID-19 pandemic. These global supply chain shortages have led multiple OEM customers to reduce their production schedules on short notice, which in turn makes the global LVP very difficult to forecast. For the full year 2021, we expect our organic sales growth (non.U.S. GAAP measure) to exceed 25% and a currency translation, net increase of 4%, both as compared to 2020. Also for full year 2021, we estimate Active Safety organic sales growth to be in the range of 40-45%. We anticipate positive leverage on this organic sales growth (non.U.S. GAAP measure) during 2021 to improve our gross margin. The RD&E, net run rate is expected to be in the range of$110 to$120 million per quarter, while capital expenditures and depreciation are expected to be approximately$100 million and$115 million , respectively, for the full year 2021. As a result of these underlying assumptions, we expect our operating loss for the full year 2021 to improve as compared to 2020, and we expect our cash balance to be more than$400 million at 2021 year-end. We also expect our operating loss and cash flow performance to improve sequentially during 2021.Veoneer expects its order intake to increase in 2021 as compared to 2020. 24 -------------------------------------------------------------------------------- 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 DevelopmentsEurope 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. 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 25 -------------------------------------------------------------------------------- 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 July 16, China Japan Rest of Asia Americas Europe Other Total 2021 Second Quarter 2021 5.5 1.8 2.5 3.6 4.2 0.5 18.1 Change vs. 2020 (3.0) % 52.5 % 102.8 % 152.0 % 86.5 % 64.2 % 50.0 % For the second quarter of 2021, the global light vehicle production (according to IHS Markit) increased by approximately 50.0% 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 (3.0)%,Europe 86.5%,South Korea 10.9%,North America 152.0% andJapan 52.5%. Light Vehicle Production by Region - 2021 Millions (except where specified) China Japan Rest of Asia Americas Europe Other Total IHS as ofJuly 16, 2021 Full Year 2021 23.5 8.0 11.2 16.2 17.9 2.1 78.9 Change vs. 2020 6 % 5 % 17 % 14 % 9 % 19 % 10 % For the first half year of 2021, global light vehicle production (according to IHS Markit) is expected to decline by approximately 10%, 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 6%,Europe 9%,South Korea 5%,North America 14% andJapan 5%. The global LVP of approximately 78.9 million is at the same level as 2012. Results of Operations Three Months EndedJune 30, 2021 as compared to Three Months EndedJune 30, 2020 The following analysis illustratesVeoneer's overall and by segment performance for the three months endedJune 30, 2021 and 2020 along with components of change as compared to the prior year.Net Sales by Product The following tables illustrateVeoneer's consolidated net sales by product for the three months endedJune 30, 2021 and 2020 along with components of change as compared to the prior year. Net Sales Three Months Ended June 30 Components of Change vs. Prior Year US GAAP (Dollars in millions, except 2021 2020 Reported Change Currency Organic1 where specified) $ $ $ % $ % $ % Restraint Control Systems 175 100 75 75 7 7 % 68 68 % Active Safety 197 79 118 149 8 9 % 110 140 % Brake Systems 13 5 8 145 - - 8 145 % Other$ 13 $ - $ 13 - $ - -$ 13 - Total$ 398 $ 184 $ 214 116 % $ 15 8 %$ 199 108 % 1 Non-U.S. GAAP measure reconciliation for Organic SalesNet Sales -Veoneer's net sales for the quarter of$398 million increased by 116% as compared to the same quarter in 2020. The organic sales1 increased by 108% and the net currency translation effects were positive by 8%. Given that the LVP growth expectations declined by around 10pp from IHS April to July reports, sales were lower than our expectations from the beginning of the quarter.Veoneer outperformed the LVP in all regions, except rest ofAsia which accounts for only around 5% of net sales. 26 -------------------------------------------------------------------------------- According to IHS, the global LVP increased 50% for the quarter as compared to 2020. This increase was primarily driven byNorth America ,Europe andJapan . It was a reversal from Q1 where growth was driven byChina . These developments led to a sequentially significantly improved regional mix forVeoneer . Restraint Control Systems - Net sales for the quarter of$175 million increased by 75% as compared to 2020. The organic sales growth of 68%, was primarily driven byNorth America andEurope , but all regions saw organic sales growth as a result of new program launches, primarily during the second half of 2020. Active Safety - Net sales for the quarter of$197 million increased by 149% as compared to 2020. The organic sales increase was 140%. The strong growth was primarily driven by an intense launch period which started in Q1 2020 and will continue throughout 2021.China saw the strongest relative growth during the quarter, indicating the start of an industry wide ramp up phase for Active Safety in that region. Strong volume demand for mono, stereo and thermal camera systems, radar and ADAS ECUs on several models, and across multiple customers drove the increase in organic sales. The recovery in radar sales continues, this was the third consecutive growth quarter which indicates continued successful transition to 77GHz radars. Brake Systems and Other - The combined net sales for the quarter was$26 million . The Brake Systems sales of$13 million are related to the Honda legacy business and$13 million of Other sales are Brake ECUs to ZF. Electronics Segment Three Months Ended June 30 Components of Change vs. Prior Year US GAAP (Dollars in millions, 2021 2020 Reported Change Currency Organic1 except where specified) $ % $ % $ % $ % $ % Net Sales 385 179 $ 206 115 % $ 15 8 %$ 191 107 % Operating Loss / Margin -76 (20) % -29 (16) % $ (47) Segment EBITDA1 / Margin -48 (12) % -6 (3) % $ (42) Associates 7,170 6,705 465 1 Non-U.S. GAAP measure reconciliation for Organic Sales and Segment EBITDANet Sales - Net sales for the Electronics segment increased by$206 million to$385 million for the quarter as compared to 2020. This sales increase was mainly due to the organic sales1 increase in Restraint Control Systems and Active Safety of$68 million and$110 million , respectively. Operating Loss - Operating loss for the Electronics segment of$76 million for the quarter decreased by$47 million as compared to 2020. This decrease is mainly due to the RD&E, net underlying improvement related to lower gross costs. EBITDA1 - EBITDA loss for the Electronics segment decreased by$42 million to negative$48 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 increased by 465, net to 7,170 as compared to 2020, mainly due to a net increase in direct associates of more than 358. Deliveries - Deliveries during the quarter were 3.5 million units for Restraint Controls Systems and 2.3 million units for Active Safety. Corporate and Other Three Months Ended June 30 (Dollars in millions, except 2021 2020 US GAAP Reported Change where specified) $ % $ % $ % Net Sales$ 13 $ - $ 13 - %
Operating Loss / Margin
- % $ (1) EBITDA1 / Margin$ (15) (111) %$ (15) - % $ - Associates 132 40 92 1 Non-U.S. GAAP measure reconciliation for EBITDANet Sales -Net Sales of$13 million for the first quarter reflects the legacy Honda Brake Systems business after the VBS-US divestiture. 27
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Associates - Associates, net increased by 92 to 132 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$15 million is unchanged compared to 2020.
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