VEONEER, INC.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to help the reader understand the results of
operations, financial condition and cash flows of Veoneer, Inc. ("Veoneer ," the
"Company," "we," or "our"). This MD&A should be read in conjunction with the
financial statements and accompanying notes to the financial statements included
elsewhere herein, as well as the risk factors and other disclosures made in this
Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K
for the year ended December 31, 2020 , filed with the SEC on February 19, 2021 .
Introduction
The following MD&A is intended to help you understand the business operations
and financial condition of the Company. This MD&A is presented in the following
sections:
•Executive Overview
•COVID-19 and Semiconductor Supply Commentary
•2021 Outlook
•Trends, Uncertainties and Opportunities
•Market Overview
•Results of Operations
•Non-U.S. GAAP Financial Measures
•Liquidity and Capital Resources
•Off-Balance Sheet Arrangements and Other Matters
•Contractual Obligations and Commitments
•Significant Accounting Policies and Critical Accounting Estimates
Veoneer is a global leader in the design, development, manufacture, and sale of
automotive safety electronics with a focus on innovation, quality and
manufacturing excellence. The Company's current product offerings include
automotive radars, mono and stereo vision cameras, night vision systems,
positioning systems, advanced driver assist systems ("ADAS") electronic control
units, passive safety electronics (airbag control units and crash sensors),
brake control systems and a complete ADAS software offering towards highly
automated driving ("HAD") and eventually autonomous driving, through its
recently formed software unit and brand Arriver. In addition, we offer driver
monitoring systems, LiDAR sensors, RoadScape positioning and other technologies
critical for HAD and automated driving ("AD") solutions by leveraging our
partnership network and internally developed intellectual property.
In May 2021 , we implemented an organizational refinement to drive Veoneer 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 affect Veoneer's financial reporting
structure.
Executive Overview
On July 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 to Veoneer 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 for
Veoneer 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
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momentum the Company has in China 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 the Insurance Institute for
Highway Safety in the 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 entire Veoneer
team.
COVID-19 and Semiconductor Supply Commentary
Veoneer 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 for Veoneer'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.
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Trends, Uncertainties and Opportunities
Trend toward Collaborative Driving
The environment around us continues to change rapidly and we currently see a
shift across the automotive and autotech industries. The industry developments
during 2021 have further strengthened the trend toward advanced driver support -
Collaborative Driving - and away from fully autonomous cars for the consumer
based vehicle mass market.
New technologies, creating new levels of interaction and driver support are
starting to revolutionize driving, but we also see the driver being actively
involved for many years to come. While the industry refers to "Level 2+" or even
"Level 2++" Veoneer calls this Collaborative Driving, and includes any SAE level
of automation up to Level 4. Currently there are renewed initiatives in the
industry for Level 3 conditional automation where the driver for certain periods
of time can be out of loop, but has to be ready to take control of the vehicle
at any time. At the same time there is a growing realization that the
introduction of truly self-driving cars will likely take longer and be more
expensive than previously anticipated. This fundamental insight opens up new
opportunities for companies, including Veoneer , but it also requires adjusting
the priorities of resources. As such, we believe that the market will stay
mainly focused on Level 1-Level 2+ and Level 3 autonomous driving solutions for
the next decade however, while we see a continued strong drive toward more
automation and driver support, the ongoing impacts from the COVID-19 pandemic,
and perhaps ongoing impact, could affect the evolution of ADAS, Collaborative
Driving and AD for consumer purchased light vehicles.
Global Regulatory and Test Rating Developments
Europe continues to take a proactive role in promoting or requiring Active
Safety technologies. The European New Car Assessment Program ("NCAP")
continuously updates its test rating program to include more active safety
technologies to help the European Union reach its target of cutting road
fatalities by 50% by 2030, as compared to 2020. In order to help our industry to
overcome the situation with respect to the COVID-19 pandemic Euro NCAP postponed
the rollout of upcoming road map updates by one year (from 2022 to 2023 and from
2024 to 2025). However, this should not change the overall trend towards
introduction of new roadmap requirements, which are just delayed by one year.
On June 26, 2020 , the UNECE's World Forum for Harmonization of Vehicle
Regulations , announced the first binding international regulation on "Level 3"
vehicle automation. The new regulation marks an important step towards the wider
deployment of automated vehicles to help realize a vision of safer, more
sustainable mobility for all. Beginning in January 2021 the regulation provides
guidelines on the Automated Lane Keep System ("ALKS") feature, requires driver
availability recognition systems, and a "black box" data storage system for AD.
It also outlines requirements for emergency and minimal risk maneuvers and
driver transition demand as well as cyber-security and software update
protocols.
We anticipate strong global sensor adoption rate increases (forward, side and
rear) due to the Euro NCAP's push for crash avoidance, increased adoption rates
due to growing demand around ADAS software features, volume growth due to
redundant sensing concepts needed for higher levels of autonomy, potential
opportunities in relation to compliance with cybersecurity and software updates
and step-by-step increased demand for connectivity components. The ongoing
2020x-decade will be characterized by stepwise introduction of regulations which
boost the market of Active Safety and Automation, but also set obligatory
thresholds for safety.
a.At first minimal requirements for safety critical features (e.g. AEB) will
become mandatory.
b.Continued with a framework for advanced L1-L3 features in highway
applications, extending conventional certification towards new assessment
methods (including Physical Tests + Real World Test Drive + Simulation, etc.).
c.Followed by regulations enabling use of higher level automation (e.g. L4
shuttles) and more complex environment (e.g. urban)
d.In parallel, we will face increasing regulatory requirements for cybersecurity
and software updates in order to reflect advancing digitalization and
connectivity.
An example of a recent development that further strengthens the trend toward
collaborative driving, is Intelligent Speed Assist (ISA) an item of updated EU
General Safety Regulation roadmap, which was finalized on June 23, 2021 . The ISA
is a system that prompts and encourages drivers to slow down when they are over
the speed limit. New regulation mandates motor vehicles to be equipped with ISA
systems beginning July 6, 2022 for new vehicle types and beginning July 7, 2024
for all new vehicles.
In several regions legal approval of the introduction of new technologies
happens as exceptional procedure on national level. However, we have recently
observed an increasing willingness of legislators in the US and Asia to
contribute to the global regulatory framework for AV-technologies. This means
that, while the agreement on minimal common base requirements for
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the industry will take longer and therefore may postpone the introduction of new
regulations, the harmonization with base requirements could help the industry
and a more active position from China may help to pull forward some safety
critical ADAS technologies that are not yet considered as relevant for passenger
car regulation in EU and Japan (e.g. Blind Spot or Night Vision).
Market Overview
Millions (except where Light Vehicle Production by Region - 2021
specified)
IHS Markit as of 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% and Japan 52.5%.
Light Vehicle Production by Region - 2021
Millions (except where
specified) China Japan Rest of Asia Americas Europe Other Total
IHS as of July 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% and Japan 5%. The global LVP of
approximately 78.9 million is at the same level as 2012.
Results of Operations
Three Months Ended June 30, 2021 as compared to Three Months Ended June 30, 2020
The following analysis illustrates Veoneer's overall and by segment performance
for the three months ended June 30, 2021 and 2020 along with components of
change as compared to the prior year.
Net Sales by Product
The following tables illustrate Veoneer's consolidated net sales by product for
the three months ended June 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 Sales
Net 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 of Asia which
accounts for only around 5% of net sales.
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According to IHS, the global LVP increased 50% for the quarter as compared to
2020. This increase was primarily driven by North America , Europe and Japan . It
was a reversal from Q1 where growth was driven by China . These developments led
to a sequentially significantly improved regional mix for Veoneer .
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 by North America and Europe , 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 EBITDA
Net 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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