Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the trading symbol "VNE" and our Swedish Depository Receipt ("SDRs") representing shares of our common stock are traded on Nasdaq Stockholm under the trading symbol "VNE SDB". As of February 15, 2019,12, 2021, the Company had 87,178,772111,637,658 shares of its common stock, $1.00 par value per share, outstanding, which were owned by approximately 54,00045,000 beneficial shareholders of record.record as of December 31, 2020.
Performance Graph
The following graph compares the cumulative total stockholder return from July 2, 2018, through December 31, 2018, for2020, of Veoneer's existing common stock, the S&P 500 Index and the Dow Jones U.S. Auto Parts Index. The graph belowcomparison assumes that $100 was invested on July 2, 2018, in each of the Company's common stock the stocks comprising the S&P 500 Index and the stocks comprising the Dow Jones U.S. Auto Parts Index,each index, and that all that dividends have been reinvested.
| | | | | | | | | | | | | | | | | | | | | |
| 2 July 2018 | 31 December 2018 | | 30 June 2019 | 31 December 2019 | 30 June 2020 | 31 December 2020 |
Veoneer, Inc. | $100.00 | $55.26 | | $40.59 | $36.62 | $25.06 | $49.94 |
S&P 500 | $100.00 | $91.94 | | $107.89 | $118.49 | $113.7 | $137.75 |
Dow Jones U.S. Auto & Parts Index | $100.00 | $71.67 | | $83.69 | $89.78 | $74.4 | $104.16 |
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| | | |
| 2 July 2018 | 28 September 2018 | 31 December 2018 |
Veoneer, Inc. | $100.00 | $129.12 | $55.26 |
S&P 500 | $100.00 | $106.87 | $91.94 |
Dow Jones U.S. Auto & Parts Index | $100.00 | $92.24 | $71.67 |
The above comparisons are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of the Company's common stock or the referenced indices.
Item 6. Selected Financial Data
(DOLLARS IN MILLIONS)
The following statement of operations, statement of cash flows and balance sheet data were derived from the Company's consolidated financial statements for the years ended December 31, 2020, 2019, 2018, 2017 2016, 2015 and 2014.2016. This information should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” in this Report.
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| | Year Ended December 31 |
Dollars in millions, (except where specified) | | 2020 | | 2019 | | 2018 3 | | 2017 3 | | 2016 3 |
Operating Results: | | | | | | | | | | |
Net Sales | | $ | 1,373 | | | $ | 1,902 | | | $ | 2,228 | | | $ | 2,322 | | | $ | 2,218 | |
Operating Income / (loss)1 | | $ | (367) | | | $ | (460) | | | $ | (197) | | | $ | (283) | | | $ | (25) | |
Net Income / (loss) | | $ | (544) | | | $ | (522) | | | $ | (294) | | | $ | (344) | | | $ | (60) | |
Net Income / (loss) attributable to controlling interest | | $ | (545) | | | $ | (500) | | | $ | (276) | | | $ | (217) | | | $ | (53) | |
Capital Expenditures | | $ | (91) | | | $ | (213) | | | $ | (188) | | | $ | (110) | | | $ | (103) | |
Depreciation and Amortization | | $ | (103) | | | $ | (115) | | | $ | (111) | | | $ | (119) | | | $ | (106) | |
Financial Position: | | | | | | | | | | |
Total Assets | | $ | 2,288 | | | $ | 2,743 | | | $ | 2,632 | | | $ | 1,663 | | | $ | 1,739 | |
Total Debt 2 | | $ | (181) | | | $ | (171) | | | $ | (14) | | | $ | (62) | | | $ | (15) | |
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| | | | | | | | | | | | | | | | | | | | |
| | As of and for the Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
Operating Results: | | | | | | | | | | |
Net Sales | | $ | 2,228 |
| | $ | 2,322 |
| | $ | 2,218 |
| | $ | 1,589 |
| | $ | 1,489 |
|
Operating Income / (loss)1 | | $ | (197 | ) | | $ | (283 | ) | | $ | (25 | ) | | $ | (8 | ) | | $ | 30 |
|
Net Income / (loss) | | $ | (294 | ) | | $ | (344 | ) | | $ | (60 | ) | | $ | (30 | ) | | $ | 21 |
|
Net Income / (loss) attributable to controlling interest | | $ | (276 | ) | | $ | (217 | ) | | $ | (53 | ) | | $ | (30 | ) | | $ | 21 |
|
Capital Expenditures | | $ | (188 | ) | | $ | (110 | ) | | $ | (103 | ) | | $ | (53 | ) | | $ | (64 | ) |
Depreciation and Amortization | | $ | (111 | ) | | $ | (119 | ) | | $ | (106 | ) | | $ | (53 | ) | | $ | (45 | ) |
Financial Position: | | | | | | | | | | |
Total Assets | | $ | 2,632 |
| | $ | 1,663 |
| | $ | 1,739 |
| | $ | 1,059 |
| | $ | 758 |
|
Total Debt 2 | | $ | (14 | ) | | $ | (62 | ) | | $ | (15 | ) | | $ | — |
| | $ | — |
|
1 Includes costs for goodwill impairment of $234 million in 2017.
2Includes related party short-term debt and related party long-term debt as of December 31, 2018, related party long-term debt as of December 31, 2017.
3 The Veoneer financial results for the first half of 2018 and all of 2017 and 2016 have been prepared from the financial records of Autoliv, Inc. under specific carve-out basis accounting rules.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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
•Trends, Uncertainties and Opportunities
•Market Overview
•Non-U.S. GAAP Financial Measures
•Results of Operations
•Liquidity and Capital Resources
•Off-Balance Sheet Arrangements
•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 Systemssafety systems are designed to make driving safer and easier, more comfortable and convenient for the end consumer and to intervene before a potential collision. Veoneer endeavors to prevent vehicle accidents or reduce the severity of impact in the event a crash is unavoidable. Through our customer focus, being an expert partner with our customers, we intend to develop human centric systems that benefit automotive light vehicle occupants.
Veoneer’s current product offering includes automotive radars, mono-and stereo-vision cameras, night driving assist (thermal sensing) systems, positioning systems, ADAS (advanced driver assist systems)Advanced Driver Assist Systems (ADAS) electronic control units, passive safety electronics (airbag control units, crash sensors and crash sensors)seat belt pre-tensioner electronic controllers), brake control systems, brake control electronic controllers, and a complete ADAS software offering including perception and driving policy (ArriverTM) towards highly automated driving (HAD) and eventually autonomous driving (AD). In addition, we offer driver monitoring systems, LiDAR sensors, RoadScape positioning systems and other technologies critical for ADAS, HAD and AD solutions by leveraging our partnership network and internally developed intellectual property.
Executive Overview
The fourth quarter saw an unfortunate resurgence of the COVID-19 pandemic. We continue to put the health and safety of our people first, reinforcing our measures that were first put in place in the beginning of the pandemic, and we believe that the global efforts and vaccinations that have now started will allow the situation to gradually improve throughout 2021.
In the fourth quarter of 2020 Veoneer saw organic growth for the first time, a pivotal moment for the Company. The strong growth was driven by new launches and a stronger development of the light vehicle production than anticipated in the beginning of the quarter. We further continued our strong focus on efficiencies and financial management, which allowed us to finish the year in a stronger cash position than anticipated. Despite some initial additional launch related costs, our ability to deliver new products and technologies to recently launched vehicle platforms in the current uncertain environment was an outstanding achievement.
During 2020, we experienced dramatic declines in the vehicle production during the first half, and an unprecedented rebound in the second half. This global development, which was witnessed across multiple industries, has created serious challenges for supply of electronic components. Relatively speaking, we believe we have managed this situation well, but we do expect the tightness in supply to affect the global light vehicle production during the first half of 2021. Currently, the effects are difficult to quantify, and we monitor and manage this situation daily.
During the fourth quarter we negotiated, and in January 2021 finalized an agreement with Qualcomm to build a world leading solution in ADAS and AD, which we anticipate will be ready for commercial launches in 2024. To build this business we have created Arriver™, our new software unit and brand which will be fully focused on further developing perception, fusion and drive policy software for the next generation cars. It builds on more than a decade of experience in Active Safety development and for drive policy software on previous cooperation with Volvo Cars (VCC) in the Zenuity joint venture. It will deliver an open, scalable and flexible architecture solution running on Qualcomm’s next generation Snapdragon Ride™ System on a Chip (SoC) platform. Our joint expectation is to create a leading ADAS and AD solution, which over time, will form the core of one of the leading ecosystems for automation in our industry. With Qualcomm having the lead go-to-market responsibility, we are already receiving very positive feedback from initial presentations to vehicle OEMs and Tier 1 automotive suppliers.
The trend of a changing automotive industry is stronger than ever. Veoneer is right in the middle of this development and we have recently taken critical steps to position our company for the future. We have divested our brake control business, dissolved our joint venture with VCC, and now created Arriver™. We are also revisiting our Lidar strategy as we see rapid changes in the core technology development. For example, on January 25, 2021 Veoneer received a cancellation notice from an autonomous vehicle customer due to a change in their core Lidar technology. We are evaluating several new opportunities for Veoneer as a lidar system integrator and industrialization partner for new lidar startups.
With health and safety as our first priority, our focus remains to be on flawless daily execution, winning new profitable business and building a world leading technology portfolio.
2021 Outlook and Mid-Term Targets Update
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. Due to this fluid situation, we believe the latest IHS Markit production forecast may be optimistic for the first quarter of 2021. Our indication for the first quarter of 2021 is that our organic sales (non-U.S. GAAP measure) are expected to out-perform the global LVP as compared to the same quarter in 2020 and sequentially from the fourth quarter in 2020 also out-perform the global LVP.
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 5%, both as compared to 2020. Also for full year 2021, we estimate Active Safety organic sales growth to be approximately 45%. We anticipate positive leverage on this organic sales growth during 2021 to improve our gross margin, however, this leverage improvement is expected to be more weighted toward the second half of 2021.
The current RD&E, net run rate, after the completion of various MAI program initiatives, is now expected to be in the range of $110 to $120 million per quarter as we head into 2021, 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 in terms of annual average sales and lifetime sales to increase in 2021 as compared to 2020.
Looking beyond 2021 to our mid-term targets, we expect Veoneer's strong organic sales to continue and now expect net sales to be approximately $2.5 billion in 2023, based on our strong order intake over the last several years and order book of approximately $14 billion. The Company expects to arrive to a sustainable operating profit and positive free cash flow (non-U.S. GAAP measure) during 2023.
COVID-19 Pandemic Commentary
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.
As our OEM customers recovered to more normal volumes, or higher than normal volumes 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.
During the fourth quarter, our customers in Europe and North America generally stabilized 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 fourth quarter, we experienced an even stronger increase in production ramp-ups by our customers in China, while the production in other Asian vehicle producing countries has stabilized from the initial recovery during the second quarter of 2020. The strong customer call-offs in China have continued into the first quarter of 2021 and continue to create challenges in the supply chain for certain key components in our restraint control business.
Executive OverviewWe believe our latest planning assumptions, primarily based on our customer call-offs and forecasts, reflect a lower global LVP for Q1'21 due to the fact that we foresee more customer production interruptions, due to global supply base constraints, than reflected in the latest IHS Markit projections as of January 18, 2021. The latest IHS Markit forecast indicates a YoY LVP increase of approximately 14% for Q1'21 and a 13% sequential decline from Q4'20. We continue to monitor the global supply base very closely as well as the overall COVID-19 pandemic situation for potential impacts to our business.
For 2020 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 results, in response to the pandemic, the Company continues to extend its MAIs to further mitigate the impact of the pandemic on its cash flow and operating results. The environmentactions taken by the Company to mitigate the impact, including reducing its annual RD&E, net by more than $100 million and other expenses while reducing the Company's operating loss and conserving cash in 2020, resulted in a cash balance of $758 million for the year-ending 2020.
Trends, Uncertainties and Opportunities
Trend toward Collaborative Driving
The market around us iscontinues to change rapidly, changingshifting towards a more autotech environment from the traditional automotive industry. The industry developments during the last two years have further strengthened the trend toward advanced driver support - Collaborative Driving - and we currently see a shift acrossaway from fully autonomous cars for the automotive and autotech industries. consumer based vehicle mass market.
New technologies, creating new levels of interaction and driver support are starting to revolutionizeonce again revolutionizing the driving butexperience; however we also seebelieve the driver beingwill remain actively involved for many years to come. We callWhile the industry refers to “Level 2+” or even "Level 2++" Veoneer calls this Collaborative Driving; the industry also calls it “Level 2+” driver support.Driving, and includes any Society of Automotive Engineers (SAE) level of automation. At the same time there is also 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 a reprioritizationadjusting resource priorities. As such, we believe that the market will stay mainly focused on Level 1-Level 2+ automated driving solutions for the next decade however, the impact of resources.
In the near term there is also an increased uncertainty regarding the development of global light vehicle production (LVP). During the fourth quarter of 2018 we saw a sharp decline in the LVP in China and Western Europe and we anticipate that these markets will continue to show weakness in the first half of this year. We expect the situation to improve in the second half, but we currently expect a slight decline inCOVID-19 pandemic on the global LVP for the full year 2019.
In response to the larger role in the market for Collaborative Driving, the expected delay of self-driving,economy and the weaker LVP trend, we are actively reviewing our investment priorities and the focus of our product portfolio. Our purpose is to identify the most effective way to allocate talent and capital to meet these new market realities. In December we refined our organization to create a more agile and focused company, and during 2019 we expect our renewed organization, combined with other initiatives to gradually start delivering efficiency gains and stronger customer engagement.
We expect the combined effects of a stronger LVP and new program launches in the second half of the year combined with our own efficiency and prioritization initiatives to start to lead to improved cash-flow in the latter part of the year. Assuming successful execution of these initiatives, we expect our net cash to cover our funding requirements until the Company reaches positive cash flow. However, additional funding may be required if order intake increases beyond our expectations, if the underlying near-term business conditions deteriorate further, or if we make acquisitions.
We build our 2019 plan on a strong base. In 2018, our order intake grew strongly to a record lifetime order value of close to $6 billion. Active Safety orders almost doubled, and we expanded our Active Safety customer base from 9 to 12 car manufacturers. From a product perspective, I am particularly pleased with the strong market and customer reception of our vision products based on Veoneer’s internally developed software algorithms and the fact that we won our first major commercial LiDAR order with a global OEM.
We move forward in 2019 with a strong focus on capturing the opportunities in a new industry situation. By balancing growth, cost, and effective capital allocation we are building a focused, industry leading product portfolio, all with the objective to make Veoneer the leading company in our chosen business segments.
2019 Outlook
Looking ahead into 2019 we are planning for a complex business environment. We are responding to light vehicle production fluctuations and uncertainties even as we prepare for a heavy new program launch schedule beginning in late 2019 and extending into 2020.
Our current customer call-offs and deliveries reflect a weak demand situation in China and Western Europe, which leads us to anticipate a decline in LVP during the first six months of 2019. At this time, we expect this demand to stabilize and return to growth during the second half of the year, resulting in the estimated full year LVP being slightly down in 2019 as compared to 2018.
Our sales during the first half of 2019 are expected to remain relatively flat sequentially from the second half of 2018, albeit a decline year over year,2020, and then improve sequentially in the second half of 2019. Consequently, we estimate our organic sales will be flat to decline slightly for the full year 2019 while we estimate the currency translationany potential future impact to be approximately (2)% as compared to 2018.
As a result of our sales and RD&E development, in combination with the implementation of our market adjustment initiatives during 2019, we expect a weak operating margin and cash flow during the first half of the year. The first quarter in 2019 is expected to be weaker thanpandemic on economic conditions could affect the fourth quarter in 2018, with an anticipated improvement during the second halfevolution of 2019.ADAS, Collaborative Driving and AD for consumer purchased light vehicles.
Based on the market opportunities ahead of us, we expect our 2019 order intake to be at least as strong as our performance in 2018.
Financial Results
Significant aspects of the Company's financial results for the year ended December 31, 2018, include the following.
Sales - Net sales for the full year of 2018 decreased by $95 million to $2,228 million as compared to 2017.
Gross Profit - The gross profit of $430 million for the full year of 2018 was $36 million lower as compared to 2017. The volumeGlobal Regulatory and product mix effect causing the lower organic sales was partially offset by a net favorable currency benefit of around $10 million.
Operating Loss - The operating loss of $197 million for the full year of 2018 decreased by $86 million as compared to 2017, including a net favorable currency benefit of $4 million. In 2017 the operating loss included a goodwill impairment charge related to VNBS of $234 million.
Net Loss - The net loss for the full year of 2018 of $294 million decreased by $50 million as compared to 2017. In addition to the operating loss impact, the Veoneer net loss from Zenuity increased by $32 million. The Zenuity net loss increase is mainly due to the higher net cost run-rate related to the hiring of software engineers and an additional quarter of cost in 2018, since the JV was formed in April 2017.
Interest income net increased by $6 million as compared to 2017. Income tax expense for 2018 was $42 million as compared to $30 million in 2017. The change in tax expense was primarily impacted by the change in mix of pre-tax earnings in our profitable subsidiaries and a non-cash, one-time discrete tax item of $23 million in 2018.
The non-controlling interest loss in the VNBS JV was $19 million for 2018 as compared to $127 million loss in 2017 which included the goodwill impairment charge of $113 million.
The pie charts below highlight the sales breakdown for Veoneer for the year ended December 31, 2018.
Trends, Uncertainties and OpportunitiesTest Rating Developments
Europe continues to take a pro-activeproactive role in promoting or requiring active safetyActive 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 it 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 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 partypart of the EU generalEuropean General Safety Regulation ("GSR") road-map tillthrough 2028, to make certain active safetyActive Safety features compulsory in light vehicles by 2022. Such aDuring March of 2019 the EU mandate shouldwas adopted as initially proposed by the European Commission. We believe that adoption of the mandate will significantly expand demand for our active safetyActive Safety products. If passedIndeed, 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 saw some OEMs delays in the sourcing of these technologies as proposed, certain safety features could be mandatedcustomers reconsidered how they want to architect and design, in 2022 asa scalable way to include these new vehicle models are introduced tostandard technologies. In addition, we believe that the mandate and the European market. In any case, General Safety Regulation (GSR) would have a positiveGSR generally will influence on other market regulators as they evaluate their respective vehicle test rating programs and safety legislations.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 (CNAP) where active safety features like Autonomous Emergency Braking (AEB)("AEB") are required to achieve the maximum safety rating.
In 2017 a consortiumThe Chinese Government is also aiming for half of Original Equipment Manufacturers (OEM's)the vehicles sold by 2025 to be equipped with partial self-driving technology according to their updated “Made in China 2025” program announced in November 2020. Furthermore the United States voluntarily agreedgoal is to make AEB standard equipment on all new vehicles produced no later than 2023.have “Level 2” and “Level 3” semi-autonomous driving technology installed in 70% of the cars by 2030.
On October 4, 2018, the U.S. Department of Transportation (DoT)("DoT") issued new voluntary guidelines on automated driving systems (ADS)("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 Advanced Driver Assistance Systems (ADAS)ADAS and Highly Automated Driving (HAD)HAD on the road towards Autonomous Vehicles.Vehicles ("AV").
TheOn April 2, 2020 the 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 ECEEconomic Commission for Europe created thea new Working Party to deal with regulations for Automated Vehicles (GRVA).Automated/Autonomous and Connected Vehicles. In addition to the EU and Japan, whowhich have both started to work closely fortogether to develop ADAS regulations, in the last 3three years, the U.S. and China indicated a willingness to bebecoming more 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 working fields forupcoming regulations are expected for (i) safety critical ADAS-features (e.g. AEB); (ii) Highway AV-features (Physical and Virtual Tests + Real World Test Drive + Audit); (iii) Cybersecurity & SW-Updates;Cyber-security and Software updates; and in subsequent-step for (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)Night).
Market Overview
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Millions (except where specified) IHS Markit as of January 18, 2021 | Light Vehicle Production by Region - 2020 |
China | | Japan | | Rest of Asia | | Americas | | Europe | | Other | | Total |
Full Year 2020 | 22.1 | | 7.6 | | 9.5 | | 14.2 | | 16.5 | | 1.7 | | 71.6 |
Change vs. 2019 | (5) | % | | (16) | % | | (22) | % | | (23) | % | | (22) | % | | (16) | % | | (17) | % |
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Millions (except where specified, as of January 17, 2019) | Light Vehicle Production by Region - 2018 |
China | | Japan | | Rest of Asia | | Americas | | Europe | | Other | | Total |
Full Year 2018 | 25.7 | | 9.1 | | 13.1 | | 19.1 | | 21.9 | | 2.5 | | 91.3 |
Change vs. 2017 | (3.5)% | | 0.3% | | 3.4% | | —% | | (1.3)% | | (2.2)% | | (0.9)% |
During 2018For the full year of 2020, the global light vehicle production decreased(according to IHS Markit) declined by around 1%approximately 17% as compared to 2017 mainly2019. The main driver of this sharp decline was primarily due to the production declines in Western Europe (4%), partially attributable to the introductionnegative impact of the Worldwide Harmonized Light Vehicle Procedure ("WLTP"), China (4%), likely attributableCOVID-19 pandemic. These negative pandemic effects mostly impacted North America and Europe from mid-March through May and Asia from February through mid-April. As a result all major vehicle producing countries or regions decline in 2020 as compared to weaker consumer demand2019.
This decline is approximately 16 percentage points lower than expected at the beginning of 2020, and record volumesis the largest single year decline since the financial crisis in 2017 when tax incentive on 1.6 liter vehicles were in place, along with South Korea (2%) likely attributable to fewer NAFTA exports due to production localization. Light vehicle demand in Japan and2009. Within the Americas remained relatively flat, where South America increased 3% and North America declined slightly (1)%21%, while India, included inwithin Rest of Asia increased 7% duringSouth Korea declined 10%, and lastly within Europe, Western Europe declined 25% while Eastern Europe declined 16%.
This is the year as compared with 2017.
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Millions (except where specified, as of January 17, 2019) | Light Vehicle Production by Region - 2017 |
China | | Japan | | Rest of Asia | | Americas | | Europe | | Other | | Total |
Full Year 2017 | 26.6 | | 9.0 | | 12.6 | | 19.1 | | 22.2 | | 2.6 | | 92.2 |
Change vs. 2016 | 2.3% | | 5.6% | | 1.1% | | (1.4)% | | 3.3% | | 13.7% | | 2.2% |
Duringthird consecutive annual decline in light vehicle production from 2017 thewhen a record 92 million vehicles were produced. The most recent IHS Markit 2021 outlook is for global light vehicle production increased by around 2%to rebound and increase approximately 13% from 2020 levels to 82 million vehicles in 2021. North America, Western Europe and China are expected to be the largest contributors to the increase in 2021 as compared to 2016 mainly due to the production declines in Western Europe (1%), North America (5%) and South Korea (3%) which was more than offset by increases in China of 2%, partially attributable to the tax incentive on 1.6 liter vehicles which were still in place in 2017, along with South America, Japan, Eastern Europe and India all with increases of 20%, 6%, 9% and 7%, respectively.2020.
Non-U.S. GAAP Financial Measures
Non-U.S. GAAP financial measures are reconciled throughout this report.
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 65%66% of sales, a significant amount ofits sales in currencies other than in U.S. dollars (its reporting currency) and currency rates have been and can be rather volatile. Additionally, theThe Company has historically made several acquisitions and divestitures.divestitures, although none that impacted the reporting periods in question. Organic sales and organic sales growth presentsrepresent the increase or decrease in the overall U.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 total U.S. GAAP net sales to changes in organic sales growth.
For any forward-looking statements contained in this report or any other document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we assume no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
The Company also 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. The Company also uses Segment EBITDA, a non-U.S. GAAP financial measure, which represents the Company’s EBITDA which has been further adjusted on a segment basis to exclude certain corporateamortization and other items. We believe that EBITDA and Segment EBITDA are useful measures for management, analysts and investors to evaluate operating performance on a consolidated and reportable segment basis, because it assists in comparing our performance on a consistent basis.including loss from equity method investment. The tables below provide reconciliations of net income (loss) to EBITDA and Segment EBITDA.
The Company also 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 current liabilities.capital expenditures. Management uses this measurethese measures to improve its ability to assess liquidityoperating performance at a point in time as well as the trends over time. The tabletables set forth in “Reconciliations of U.S. GAAP to non U.S. GAAP” below providesprovide a reconciliation of current assets and liabilities to net working capital.capital, cash flow before financing activities and free cash flow.
Investors should not consider these non-U.S. GAAP measures as substitutes, but rather as additions, to financial reporting measures prepared in accordance with U.S. GAAP. It should be noted that theseThese measures, as defined, may not be comparable to similarly titled measures used by other companies.
The forward lookingForward-looking non-U.S. GAAP financial measuremeasures used in this report isare provided on a non-U.S. GAAP basis. Veoneer has not provided a U.S. GAAP reconciliation of this measurethese measures because items that impact this measure,these measures, such as foreign currency exchange rates and future investing activities, cannot be reasonably predicted or determined. As a result, such reconciliation isreconciliations are not available without unreasonable efforts and Veoneer is unable to determine the probable significance of the unavailable information.
Results of Operations
Fiscal Year 20182020 compared to 20172019
The following tables show Veoneer’s performance by segment for the yearyears ended December 31, 20182020 and 20172019 along with components of change compared to the prior year. As a result of the completion of its strategic initiatives during 2020, starting in the fourth quarter of 2020 Veoneer is organized into one product area Safety Electronics, which includes Restraint Control Systems and Active Safety. Although the Company continues to sell legacy Brakes Systems to Honda as well as component Brake ECUs to ZF this is not a separate segment as it is immaterial to Veoneer's overall business
| | Electronics Segment | Year Ended December 31 | | Components of Change vs. Prior Year | Electronics Segment | Year Ended December 31 | | Components of Change vs. Prior Year |
Dollars in millions, (except where specified) | 2018 | | 2017 | | U.S. GAAP Reported | | Currency | | Organic1 | Dollars in millions, (except where specified) | 2020 | | 2019 | | U.S. GAAP Reported | | Currency | | Organic1 |
$ | | % | | $ | | % | | Chg. $ | | Chg. % | | $ | | % | | $ | | % | $ | | % | | $ | | % | | Chg. $ | | Chg. % | | $ | | % | | $ | | % |
Net Sales | $ | 1,799 |
| |
|
| | $ | 1,850 |
| |
|
| | $ | (51 | ) | | (3 | )% | | $ | 17 |
| | 1 | % | | (68 | ) | | (4 | )% | Net Sales | $ | 1,303 | | | | | $ | 1,530 | | | | | $ | (227) | | | (15) | % | | $ | 13 | | | 1 | % | | $ | (240) | | | (16) | % |
Operating Loss / Margin | $ | (116 | ) | | (6.4 | )% | | $ | (14 | ) | | (0.7 | )% | | $ | (102 | ) | | | | | | | | | | | Operating Loss / Margin | $ | (268) | | | (20.5) | % | | $ | (324) | | | (21.2) | % | | $ | 56 | | |
EBITDA1 / % | $ | (43 | ) | | (2.4 | )% | | $ | 67 |
| | 3.6 | % | | $ | (110 | ) | | | | | | | | | | | EBITDA1 / % | $ | (167) | | | (12.8) | % | | $ | (242) | | | (15.8) | % | | $ | 75 | | |
Associates | 7,105 |
| |
|
| | 5,898 |
| |
| | 1,207 |
| | | | | | | | | | | Associates | 7,380 | | | 7,384 | | (4) | | | | | | | |
Reconciliations of U.S. GAAP to non U.S. GAAP
On June 30, 2017, Veoneer committed to make a $15 million investment in Autotech 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 of December 31, 2018,2020, Veoneer contributed a total of approximately $8$12 million to the fund. As of December 31, 2020, the Company has received approximately $3 million of distributions from the fund. The initial term of the fund is set to expire on December 31, 2025. This fund focuses broadly on the automotive industry and complements the Company’s innovation strategy, particularly in the areas of active safetyActive Safety and autonomous driving.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.
| | | | | | | | | | Year Ended December 31 |
| Year Ended December 31 | |
Dollars in millions | 2018 | | 2017 | | 2016 | |
(Dollars in millions) | | (Dollars in millions) | 2020 | | 2019 |
Selected cash flow items | $ | | $ | | $ | Selected cash flow items | $ | | $ |
Net working capital1 | $ | 42 |
| | $ | 59 |
| | $ | 73 |
| Net working capital1 | (97) | | | 3 | |
Net cash provided by operating activities | $ | (179 | ) | | $ | (1 | ) | | $ | (7 | ) | Net cash provided by operating activities | (192) | | | (325) | |
Capital expenditures | $ | (188 | ) | | $ | (110 | ) | | $ | (103 | ) | Capital expenditures | (91) | | | (213) | |
Equity method investment | $ | (71 | ) | | $ | — |
| | $ | — |
| |
Net Cash Used in investing activities | $ | (185 | ) | | $ | (230 | ) | | $ | (335 | ) | |
Net Cash Provided by financing activities | $ | 1,226 |
| | $ | 232 |
| | $ | 343 |
| |
Equity method investments | | Equity method investments | 9 | | | (58) | |
Net cash provided by investing activities | | Net cash provided by investing activities | 85 | | | (265) | |
Cash flow before Financing Activities1 | | Cash flow before Financing Activities1 | (107) | | | (590) | |
Net cash provided by financing activities | | Net cash provided by financing activities | (9) | | | 636 | |
1Non-U.S. GAAP measure see reconciliation for Net Working Capital
Net Working Capital1 - The netNet working capital of $42$(97) million asdecreased by $100 million during the full year of December 31, 2018 was a decrease of $17 million and $31 million as compared with 2017 and 2016, respectively. These decreases were mainly2020 primarily due to favorable timing effectsa reduction in working capital.inventories, net and increases in accounts payable and accruals.
Net Cash Usedcash used in Operating Activitiesoperating activities - Net cash used in operating activities of $179$192 million for the full year ended December 31, 2018 increased by $178 million and $172of 2020 improved $133 million as compared with 2017 and 2016, respectively,to 2019 due to change inthe strong working capital performance and lower net loss and timing effects in working capital.
Net Cash Used in Investing Activities - Net cash used in investing activities of $185 million forwhen considering the year ended December 31, 2018 was $45 million lower and $150 million lower as compared with 2017 and 2016, respectively, mainly due to higher capital expenditures, which was more than offset by lower affiliate investments and acquisitions.
Net Cash Provided by Financing Activities - Net cash provided by financing activities for the year ended December 31, 2018 includes the net capital contribution from Autoliv at the Distribution Date.non-cash loss on divestitures.
Capital Expenditures - Capital expenditures during the year ended December 31, 2018 of $188$91 million, around 8%or 7% of sales, was $78 million and $85 million higher as compared with 2017 and 2016, respectively. This level as a percentage of sales in 2018 was in line withfor the full year expectation.of 2020 decreased by $122 million as compared to 2019 mainly due to lower investments in the Brake Systems segment, facility expansions and engineering related IT.
Net cash provided by investing activities - Net cash provided by investing activities of $85 million during the full year of 2020 increased by $350 million as compared to 2019 due to lower capital expenditures and proceeds from divestitures. |
| | | | | | | | | | | |
| | | | Year Ended December 31 |
Associates | | 2018 | | 2017 | | 2016 |
Total Associates | | 8,600 |
| | 7,484 |
| | 6,778 |
|
Whereof: | | Direct Manufacturing | | 2,083 |
| | 2,232 |
| | 2,279 |
|
| | R,D&E | | 4,676 |
| | 3,576 |
| | 2,775 |
|
| | Temporary | | 1,329 |
| | 1,151 |
| | 1,046 |
|
Cash flow before financing activities1 - The cash flow before financing activities of $(107) million for the full year of 2020 improved $483 million as compared to 2019 due to the improved operating cash flow performance, lower capital expenditures and divestiture proceeds. | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31 |
Associates | | 2020 | | 2019 |
Total Associates | | 7,543 | | 8,874 |
Whereof: | | Direct Manufacturing | | 1,452 | | 2,002 |
| | R,D&E | | 4,476 | | 4,907 |
| | Temporary | | 1,359 | | 1,396 |
Associates, -net decreased by 1,331 to 7,543 from 8,874 during the full year 2020. The numberBrake Systems divestitures effect on the decline was approximately 1,400 associates.
The underlying Veoneer increase of 69 associates, increased to 8,600 in 2018 by 1,116 compared to 2017,excluding the effect of divestitures, during the full year 2020 was mainly due to the hiringaddition of approximately 1,100 engineers to support225 associates from the Zenuity split and was partially offset by underlying reductions primarily as a result of our future sales growthMAIs program and current development programs.engineering efficiency improvements.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Contractual Obligations and Commitments
The table below reflects our contractual obligations as of December 31, 2018.2020. The Company’s future contractual obligations have not changed materially.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | Payments due by Period |
Aggregate Contractual Obligations 1 | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | | | | | | | | | |
Operating lease obligations | | 100 | | | 21 | | | 34 | | | 18 | | | 27 | |
| | | | | | | | | | |
Pension contribution requirements | | 30 | | | 2 | | | 5 | | | 6 | | | 17 | |
Finance lease obligations | | 66 | | | 6 | | | 16 | | | 12 | | | 32 | |
Other non-current liabilities reflected on the balance sheet | | 11 | | | 4 | | | 5 | | | 2 | | | — | |
4.00% Convertible Senior Notes and Financial loans | | 217 | | | 3 | | | 5 | | | 209 | | | — | |
Fixed Interest on 4.00% Convertible Senior Notes | | 28 | | | 8 | | | 17 | | | 3 | | | — | |
Total | | $ | 452 | | | $ | 44 | | | $ | 82 | | | $ | 250 | | | $ | 76 | |
|
| | | | | | | | | | | | | | | | | | | | |
Aggregate Contractual Obligations 1 | | Payments due by Period |
(DOLLARS IN MILLIONS) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Related party long-term debt | | 13 |
| | 1 |
| | 12 |
| | — |
| | — |
|
Operating lease obligations | | 88 |
| | 17 |
| | 24 |
| | 12 |
| | 34 |
|
Build-to-suit lease obligations | | 51 |
| | 3 |
| | 6 |
| | 6 |
| | 35 |
|
Pension contribution requirements | | 36 |
| | 3 |
| | 5 |
| | 6 |
| | 22 |
|
Capital lease obligations | | 15 |
| | 1 |
| | 12 |
| | 1 |
| | 1 |
|
Other non-current liabilities reflected on the balance sheet | | 9 |
| | 2 |
| | 2 |
| | — |
| | 4 |
|
Unconditional purchase obligations | | 10 |
| | 10 |
| | — |
| | — |
| | — |
|
Total | | $ | 222 |
| | $ | 37 |
| | $ | 61 |
| | $ | 25 |
| | $ | 96 |
|
1 Excludes contingent liabilities arising from litigation, arbitration, regulatory actions or income taxesContractual obligations include related party long-term debt, leaseleases and purchase obligations that are enforceable and legally binding on the Company. Non-controlling interest is not included in this table.
Related party long-term debt: The related party debt obligation relates to capital lease obligations. The capital lease obligations mainly relate to property and plants in Japan and is between Veoneer Nissin Brake Systems (a 51% owned subsidiary) and Nissin Kogyo. See Note 19, Relationship with Former Parent and Related Entities, to the consolidated financial statements included herein.
Operating lease obligations: 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 16, Commitments and Contingencies, to the consolidated financial statements included herein.
Build-to-suit lease obligations: The Company has entered into build-to-suit lease arrangements for certain buildings during 2017. See Note 16, Commitments and Contingencies, to the consolidated financial statements included herein.
Pension contribution requirements: The Company sponsors defined benefit plans that cover eligible employees in Japan, Canada, and France. In 2019,2021, the expected contribution to all plans, including direct payments to retirees, is $3$2 million, of which the major contribution is $1 million for our Canada pension plans. Due to volatility associated with future changes in interest rates and plan asset returns, the Company cannot predict with reasonable reliability the timing and amounts of future funding requirements, and therefore the above table shows expected contributions (to funded plans, or direct payments to retirees in the case of unfunded plans) for 2019,2020, but only shows benefit payments (from funded plans, or direct to retirees in the case of unfunded plans) for 20202021 and subsequent years. We may elect to make contributions in excess of the minimum funding requirements for the Japan, Canada, and France plans in response to investment performance and changes in interest rates, or when we believe that it is financially advantageous to do so and based on other capital requirements. This contribution amount does not include plans considered to be multiemployer with Autoliv. See Note 2, Summary of Significant Accounting Policies, and Note 14,17, Retirement Plans, to the consolidated financial statements included herein.
Other non-current liabilities reflected4% Convertible Senior Notes and Financial loans: On May 28, 2019, the Company issued, in a registered public offering in the U.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 on the balance sheet: The Company has $2 millionJune 1 and December 1 of deferred purchase consideration, payable at the 18-month anniversary of the closing date.relatedeach year, beginning on December 1, 2019 and will mature on June 1, 2024, unless repurchased, redeemed or converted in accordance with their terms prior to the Fotonic acquisition to be paid in 2019. See Note 4, Business Combinations, to the consolidated financial statements included herein.such date.
Unconditional purchase obligations: During the year ended December 31, 2017, the Company entered into an unconditional purchase obligation of $30 million of which $10 million was paid in each of the years ended December 31, 2017 and December 31, 2018. The remaining $10 million will be paid in 2019. This amount will be reimbursed by Zenuity. 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.
Autotech Venture Fund: On June 30, 2017, Veoneer committed to make a $15 million investment in Autotech 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 of December 31, 2018, Veoneer has in total contributed $8 million to the fund. The initial term of the fund is set to expire on December 31, 2025. This fund focuses broadly on the automotive industry and complements the Company’s innovation strategy, particularly in the areas of active safety and autonomous driving. Under the limited partnership agreement, the general partner has the sole and exclusive right to manage, control, and conduct the affairs of the fund.
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 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) and estimated at contract inception. The variable consideration calculation involves management assumptions including the volume of light vehicle production, future sales volumes for specific parts, or future 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 warrantingthat warrant capitalization. If the payments are capitalized, the amounts are amortized as the related goods are transferred. As of December 31, 2018, and 2017,2019, the Company capitalized $54$81 million and $23 million, respectively,zero as of December 31, 2020 in Other current assets and Other non-current assets related to payments to customers. The Company assesses these amounts for impairment. ThereThe assets held as of December 31, 2019 were reclassified to Assets Held for Sale during 2020 and impaired as part of the evaluation of the value less costs to sell of that asset group. See Note 6 Divestiture and Held for Sale for additional information. No impairment was no impairment.recorded in 2019 or 2018.
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. TheSubsequent to the divestiture of the majority of the Brake Systems business during 2020, the Company has twoone operating segments, Electronics and Brake Systems. Electronicssegment, Electronics. This segment includes all of electronics resources and expertise, restraint control systemsRestraint Control Systems and active safety products. Brake Systems provides brake controlActive Safety, and actuation systems. The principal activities are essentially the same for each of the segments. Both of the segments generateprimarily generates revenue from the sale of production parts and engineering services to original equipment manufacturers (“OEMs”). OEMs.
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 their stand-alone selling prices for each of the products. The stand-alone selling prices are determined based on the cost-plus margin approach.
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 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 or annual price adjustments). Customers typically pay for the production parts based on customary business practices with payment terms averaging 30 days.
Contract balances
The contract assets related 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.
As of December 31, 2019, the Company has capitalized $12 million of direct and incremental contract costs incurred in connection with obtaining a contract with a customer. These costs will be amortized as the related goods are transferred. There were no contract assets capitalized as of December 31, 2020.
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 9, Investments related to the Company’s investment in Zenuity,12,"Equity Method Investment" to the consolidated financial statements included.
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 performs an annual impairment review of goodwill in the fourth quarter of each year following the Company’s annual forecasting process. Management uses its judgment to determine the Company’s reporting units for goodwill impairment testing. The estimated fair market value of goodwill is determined by the discounted cash flow method. The Company discounts projected operating cash flows using its weighted average cost of capital. Estimating the fair value requires the Company to make judgments about appropriate discount rates, growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows. If the fair value of the reporting unit is less than its carrying amount, an impairment loss is recognized for the excess of carrying amount over the fair value of the respective reporting unit.
In the fourth quarter of 2017, in connection with the annual impairment test, the Company recorded a goodwill impairment charge of $234 million in its Electronics Segment, relating to the VNBS acquisition. For more information, see Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included herein) due to lower than originally anticipated sales development. There is no remaining goodwill related to VNBS after the impairment. There were no goodwill impairments recognized during 2018 and 2016.
The Company reviews indefinite-lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate the assets might be impaired. Similar to the goodwill impairment test described above, the Company performs a quantitative impairment test by comparing the estimated fair value of the asset, based upon its forecasted cash flows, to its carrying value. Other intangible assets with definite lives are amortized over their useful lives. The Company evaluates the carrying value and useful lives of long-lived assets other than goodwill 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 doneperformed 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 cannot beis not recorded. However, if the carrying amount of a group of assets exceeds the undiscounted cash flows, an entity must then measureestimate, 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 in October 2020.
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 generally using afor the excess of carrying amount over the fair value of the respective reporting unit.
The estimated fair value of the reporting unit is determined by the discounted cash flow model.method taking into account expected long-term operating cash-flow performance. The Company discounts projected operating cash flows using the reporting unit’s weighted average cost of capital, including a risk premium to adjust for market risk. The Company's assumptions in conducting its impairment testing include revenue growth rates, Earnings Before Income Tax ("EBIT") margin rate in the discrete and terminal period and the discount rate applied to the future cash flows. The estimated fair value is based on automotive industry volume projections which are based on third-party and internally developed forecasts and discount rate assumptions. To supplement this analysis, the Company compares the market value of its equity, calculated by reference to the quoted market prices of its shares, to the estimated fair values of its reporting units.
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.
Defined Benefit Pension Plans
Veoneer’s employees participate in defined benefit plans sponsored by Autoliv and certain defined benefit plans sponsored by Veoneer in Japan (the Japan plans), France (the France plans), and Canada (the Canada plans).
For the Japan, French, and Canada 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 by Veoneer, the most significant plans are the JapanFrance plans. These plans represent approximately 44%34% of the Company’s total pension benefit obligation. See Note 14,17, 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 the JapanFrance plans, the assumptions used for calculating the 20182020 pension expense were a discount rate of 0.5%0.9%, expected rate of increase in compensation levels of 5.0%, and an expected long-term rate of return on plan assets of 0.75%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. AsThis plan does not have assets as of December 31, 20182020 and 2017, 100% and 97% of the Japanese plan assets were invested in insurance contracts.2019.
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 6,19, Income Taxes and Note 19,22, 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 6,19, 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 16, Contingent Liabilities,"Commitment and Contingencies", to the condensed 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.
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 when Veoneer 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 at Veoneer’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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Currency Risks
Transaction Exposure and Revaluation Effects
Transaction exposure arises because the cost of a product originates in one currency and the product is sold in another currency. Revaluation effects come from valuation of assets denominated in other currencies than the reporting currency of each unit.
The Company’s gross transaction exposure for 20182020 was approximately $0.7$0.9 billion. A part of the currency flows had counter-flows in the same currency pair, which reduced the net exposure to approximately $0.6 billion. The five largest net transaction exposures were the sale of Euro against Swedish Krona, the purchase of U.S. Dollars against Swedish Krona,Dollar, the purchase of U.S. Dollar against Korean Won and the sale of U.S. DollarsEuro against Chinese Renminbi and the purchase of U.S. Dollar against Euro. Together these currenciesRomanian Leu. The five largest currency pairs accounted for approximately 76%86% of the Company’s net currency transaction exposure.
Since the Company can only effectively hedge these currency flows in the short term, periodic hedging would only reduce the impact of fluctuations temporarily. Over time, periodic hedging would postpone but not reduce the impact of fluctuations. In addition, the net exposure is limited to approximately one quarter of net sales and is made up of close to 20 different currency pairs with exposures of more than $1 million each. Veoneer generally does not hedge these flows. However, for some purchased components from external suppliers, the Company may enter into hedging from time to time. There were no foreign exchange forward contracts outstanding as of December 31, 2018.2020.
Translation Exposure in the Statement of Operations and Balance Sheet
The Company estimates that a 1% increase in the value of the U.S. dollar versus European currencies would decrease reported U.S. dollar annual net sales in 20182020 by $7approximately $6 million or by 0.3%-0.4% while it would have a positive impact on the operating loss for 20182020 by approximately 0.6%$1 million, or by about $1 million,b 0.2%, assuming reported corporate average margin.
Interest Rate Risk
As of December 31, 20182020, we also had approximately $864 million of cash and cash equivalents and $5 million of short-term investments.$758 million. As of December 31, 2018,2020, the companyCompany estimates that a 1% change of the interest rates would not significantly impact our interest expense or income.
Component Costs
Veoneer procures raw material and components from a variety of suppliers around the world. Generally, we seek to obtain mechanical components and material in the region in which our products are manufactured to limit transportation, currency risks and other costs. The most significant raw materials we use to manufacture our products are various electrical components non-ferrous metals and ferrous metals for brake systems. We have not experienced any significant shortages of raw materials and normally do not carry inventories of such raw materials more than those reasonably required to meet our production and shipping schedules. Despite this, material price changes in Veoneer’s supply chain could have a significant impact on itsproducts profitability.
Changes in most raw material prices affect the Company with a time lag. For non-ferrous metals like aluminum and zinc, we have quarterly and sometimes monthly price adjustments.
The Company’s strategies to offset price increases on cost of materials include working with suppliers to mitigate costs, seeking alternative product designs and material specifications, combining purchase requirements with our customers and/or suppliers, changing suppliers, and other means. However, should these actions not be sufficient to offset component price increases, our earnings could be materially impacted.
Item 8. Financial Statements and Supplementary Data
Veoneer, Inc.
Index to Consolidated Financial Statements
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Audited Consolidated Financial Statements of Veoneer, Inc. | |
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Audited Consolidated Financial Statements of Zenuity AB | |
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Veoneer, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Veoneer, Inc. (the Company) as of December 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive loss, cash flows and changes in equity for each of the three years in the period ended December 31, 20182020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2021 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases during the year ended December 31, 2019 due to the adoption of ASU No. 2016-02 Leases(Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| Estimate of variable consideration for revenue recognition |
Description of the Matter | As disclosed in Note 2 to the consolidated financial statements, the Company measures revenue based on consideration specified in a contract with a customer, adjusted for any variable consideration as estimated at contract inception. The variability in the consideration is primarily due to price concessions, payments to customers, and annual price adjustments, which may take place after some of the related products have been sold. The estimated variable consideration is based primarily on management’s best available information regarding customer negotiations, historical experience, third party industry sources, and anticipated future customer pricing strategies.
Auditing management’s estimate of variable consideration was complex because the calculation involves subjective management assumptions about expected future events, including, as applicable, the volume of light vehicle production, sales volumes for specific parts, or price concessions to be granted, among other things. Changes in those assumptions can have a material effect on the amount of revenue recognized. |
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How We Addressed the Matter in Our Audit | We obtained an understanding of the Company’s estimation methodology and evaluated the design and tested the operating effectiveness of controls over the Company’s estimation process for variable consideration. The controls included management’s review over the completeness and measurement of the estimated variable consideration, including comparisons to historical and industry-standard discounts.
To test the estimate of variable consideration, our audit procedures included, among others, testing the estimation process for certain significant assumptions by performing an analysis on historical information to assess management’s ability to accurately estimate sales volumes and future concessions. We also performed analytical procedures, reviewed new significant contracts for elements that could indicate variable consideration, and inquired about ongoing customer negotiations from relevant management. We inspected revenue journal entries for unusual or manual adjustments and examined additional supporting evidence, as necessary. We also substantively tested the completeness and accuracy of the data used in management’s estimate by agreeing it to the source. |
| Estimate of reporting unit fair value for the goodwill impairment test |
Description of the Matter | As disclosed in Notes 2 and 15 to the consolidated financial statements, the Company performs a goodwill impairment test, at least annually, on its goodwill balance, which was $314 million at December 31, 2020. In conducting its impairment testing, the Company compares the estimated fair value of the Electronics reporting unit to its carrying value. To estimate the fair value of the reporting unit, the Company discounts its projected operating cash flows using its weighted average cost of capital. Significant assumptions include revenue growth rates, margin rates in the discrete and terminal period and the discount rate applied to the future cash flows.
Auditing management’s assumptions in the estimate of fair value was complex and highly judgmental because the calculation includes significant management assumptions about future events, which can be affected by automotive industry volume projections and overall market conditions. Changes in these factors could have a material impact on the assumptions used to estimate the fair value. |
How We Addressed the Matter in Our Audit | We obtained an understanding of the Company’s estimation methodology and evaluated the design and tested the operating effectiveness of controls of the Company’s estimation process. This included testing controls over management’s review of the development of the significant assumptions used in the projected operating cash flows, including revenue growth rates and margin projections, the discount rate, and assessment of the sensitivity analyses.
To test the estimate of fair value used in the goodwill impairment test, our procedures included, among others, assessing the appropriateness of management’s methodology. We assessed the historical accuracy of management’s forecasts by comparing them to actual results, compared management’s significant assumptions to industry and economic trends, and performed sensitivity analyses to evaluate the impacts of changes in significant assumptions on the fair value of the reporting unit. In addition, we involved a specialist to assist us with the evaluation of the appropriateness of the significant assumptions and the discounted cash flow model used. We also substantively tested the completeness and accuracy of the data used in management’s estimate by agreeing it to the source. |
/s/ Ernst & Young AB
We have served as the Company’s auditor since 2017.
Stockholm, Sweden
February 22, 201919, 2021
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Veoneer, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Veoneer, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Veoneer, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, cash flows and changes in equity for each of the three years in the period ended December 31, 2020, and the related notesand our report dated February 19, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young AB
Stockholm, Sweden
February 19, 2021
Veoneer, Inc.
Consolidated Statements of Operations
(U.S. DOLLARS IN MILLIONS)
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(Dollars in millions, except per share amounts) | | | | 2020 | | 2019 | | 2018 |
Net sales | | Note 3 | | $ | 1,373 | | | $ | 1,902 | | | $ | 2,228 | |
Cost of sales | | | | (1,191) | | | (1,591) | | | (1,798) | |
Gross profit | | | | 182 | | | 311 | | | 430 | |
Selling, general and administrative expenses | | | | (165) | | | (189) | | | (156) | |
Research, development and engineering expenses, net | | | | (407) | | | (562) | | | (466) | |
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Amortization of intangibles | | Note 15 | | (6) | | | (20) | | | (23) | |
Other income, net | | | | 29 | | | 0 | | | 18 | |
Operating loss | | | | (367) | | | (460) | | | (197) | |
Gain on divestiture and assets impairment charge, net | | Note 6, 12 | | (91) | | | 0 | | | 0 | |
Loss from equity method investment | | Note 12 | | (39) | | | (70) | | | (63) | |
Interest income | | | | 9 | | | 20 | | | 7 | |
Interest expense | | | | (20) | | | (12) | | | (1) | |
Other non-operating items, net | | | | (4) | | | 1 | | | 0 | |
Loss before income taxes | | | | (512) | | | (521) | | | (253) | |
Income tax expense | | Note 19 | | (32) | | | (1) | | | (42) | |
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Net loss | | | | (544) | | | (522) | | | (294) | |
Less: Net income/(loss) attributable to non-controlling interest | | | | 1 | | | (22) | | | (19) | |
Net loss attributable to controlling interest | | | | $ | (545) | | | $ | (500) | | | $ | (276) | |
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Net loss per share - basic and diluted | | Note 20 | | $ | (4.89) | | | $ | (4.92) | | | $ | (3.17) | |
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Weighted average number of shares outstanding, (in millions) | | Note 20 | | 111.56 | | | 101.62 | | | 87.16 | |
Weighted average number of shares outstanding, assuming dilution (in millions) | | | | 111.56 | | | 101.62 | | | 87.16 | |
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| | | | 2018 | | 2017 | | 2016 |
Net sales | | Note 3 | | $ | 2,228 |
| | $ | 2,322 |
| | $ | 2,218 |
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Cost of sales | | | | (1,798 | ) | | (1,857 | ) | | (1,795 | ) |
Gross profit | | | | 430 |
| | 466 |
| | 423 |
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Selling, general and administrative expenses | | | | (156 | ) | | (110 | ) | | (110 | ) |
Research, development and engineering expenses, net | | | | (466 | ) | | (375 | ) | | (300 | ) |
Goodwill, impairment charge | | Note 11 | | — |
| | (234 | ) | | — |
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Amortization of intangibles | | Note 11 | | (23 | ) | | (37 | ) | | (35 | ) |
Other income (expense), net | | | | 18 |
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Operating loss | | | | (197 | ) | | (283 | ) | | (25 | ) |
Loss from equity method investment | | Note 9 | | (63 | ) | | (31 | ) | | — |
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Interest income | | | | 7 |
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Interest expense | | | | (1 | ) | | — |
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Other non-operating items, net | | | | — |
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Loss before income taxes | | | | (253 | ) | | (314 | ) | | (22 | ) |
Income tax expense | | Note 6 | | (42 | ) | | (30 | ) | | (38 | ) |
Net loss | | | | (294 | ) | | (344 | ) | | (60 | ) |
Less: Net loss attributable to non-controlling interest | | | | (19 | ) | | (127 | ) | | (7 | ) |
Net loss attributable to controlling interest | | | | $ | (276 | ) | | $ | (217 | ) | | $ | (53 | ) |
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Net loss per share - basic | | Note 17 | | $ | (3.17 | ) | | $ | (2.49 | ) | | $ | (0.61 | ) |
Net loss per share - diluted | | | | $ | (3.17 | ) | | $ | (2.49 | ) | | $ | (0.61 | ) |
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Weighted average number of shares outstanding, (in millions) | | Note 17 | | 87.16 |
| | 87.13 |
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Weighted average number of shares outstanding, assuming dilution (in millions) | | | | 87.16 |
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See Notes to Consolidated Financial Statements.
Veoneer, Inc.
Consolidated Statements of Comprehensive Loss
(U.S. DOLLARS IN MILLIONS)
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| | 2020 | | 2019 | | 2018 |
Net loss | | $ | (544) | | | $ | (522) | | | $ | (294) | |
Other comprehensive (loss) income, before tax: | | | | | | |
Change in cumulative translation adjustment | | 47 | | | (24) | | | (9) | |
Net change in cash flow hedges | | 0 | | | 0 | | | 1 | |
Pension liability | | (2) | | | (3) | | | (4) | |
Other comprehensive (loss) income, before tax | | 45 | | | (27) | | | (12) | |
Income tax benefit | | 1 | | | 2 | | | 1 | |
Other comprehensive (loss) income, net of tax | | 46 | | | (25) | | | (10) | |
Comprehensive loss | | (498) | | | (547) | | | (304) | |
Less: Comprehensive income/( loss) attributable to non-controlling interest | | 2 | | | (22) | | | (19) | |
Comprehensive loss attributable to controlling interest | | $ | (500) | | | $ | (525) | | | $ | (285) | |
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| | Year Ended December31 |
| | 2018 | | 2017 | | 2016 |
Net loss | | $ | (294 | ) | | $ | (344 | ) | | $ | (60 | ) |
Other comprehensive (loss) income, before tax: | | | | | | |
Change in cumulative translation adjustment | | (9 | ) | | 30 |
| | (17 | ) |
Net change in cash flow hedges | | 1 |
| | (9 | ) | | 8 |
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Pension liability | | (4 | ) | | — |
| | (4 | ) |
Other comprehensive (loss) income, before tax | | (12 | ) | | 21 |
| | (13 | ) |
Income /(expense) for taxes | | 1 |
| | — |
| | (1 | ) |
Other comprehensive (loss) income, net of tax | | (10 | ) | | 21 |
| | (14 | ) |
Comprehensive loss | | (304 | ) | | (323 | ) | | (74 | ) |
Less: Comprehensive loss attributable to non-controlling interest | | (19 | ) | | (127 | ) | | (7 | ) |
Comprehensive loss attributable to controlling interest | | $ | (285 | ) | | $ | (196 | ) | | $ | (67 | ) |
See Notes to Consolidated Financial Statements.
Veoneer, Inc.
Consolidated Balance Sheets
(U.S. DOLLARS IN MILLIONS)
| | | | As of December 31 | | As of December 31 |
| | 2018 | | 2017 | | 2020 | | 2019 |
Assets | | | | | Assets | | | | |
Cash and cash equivalents | | $ | 864 |
| | $ | — |
| Cash and cash equivalents | | $ | 758 | | | $ | 859 | |
Short-term investments | | 5 |
| | — |
| |
| Receivables, net | | Note 7 | | 376 |
| | 448 |
| Receivables, net | Note 9 | | 292 | | | 253 | |
Inventories, net | | Note 8 | | 172 |
| | 154 |
| Inventories, net | Note 10 | | 134 | | | 144 | |
Related party receivable | | Note 19 | | 64 |
| | 13 |
| Related party receivable | Note 22 | | 9 | | | 11 | |
Prepaid expenses and other contract assets | | 39 |
| | 34 |
| Prepaid expenses and other contract assets | | 36 | | | 47 | |
Other current assets | | 22 |
| | — |
| Other current assets | | 15 | | | 18 | |
Assets held for sale | | Assets held for sale | Note 6 | | 0 | | | 317 | |
Total current assets | | 1,543 |
| | 649 |
| Total current assets | | 1,244 | | | 1,649 | |
Property, plant and equipment, net | | Note 10 | | 499 |
| | 362 |
| Property, plant and equipment, net | Note 13 | | 431 | | | 473 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | Note 4 | | 89 | | | 100 | |
Equity method investment | | Note 9 | | 101 |
| | 98 |
| Equity method investment | Note 12 | | 153 | | | 96 | |
Goodwill | | Note 11 | | 291 |
| | 292 |
| Goodwill | Note 15 | | 317 | | | 290 | |
Intangible assets, net | | Note 11 | | 102 |
| | 122 |
| Intangible assets, net | Note 15 | | 21 | | | 17 | |
Deferred tax assets | | Note 6 | | 11 |
| | 30 |
| Deferred tax assets | Note 19 | | 6 | | | 7 | |
Related party notes receivable | | Note 19 | | 1 |
| | 76 |
| |
Investments | | 8 |
| | — |
| |
| Other non-current assets | | 77 |
| | 34 |
| Other non-current assets | | 27 | | | 111 | |
| Total assets | | $ | 2,632 |
| | $ | 1,663 |
| Total assets | | $ | 2,288 | | | $ | 2,743 | |
Liabilities and equity | | | | | Liabilities and equity | | | | |
Accounts payable | | $ | 369 |
| | $ | 320 |
| Accounts payable | | 257 | | | $ | 233 | |
Related party payables | | Note 19 | | 16 |
| | 8 |
| Related party payables | Note 22 | | 2 | | | 3 | |
Accrued expenses | | Note 12 | | 193 |
| | 195 |
| Accrued expenses | Note 11 | | 232 | | | 192 | |
Income tax payable | | Note 6 | | 9 |
| | 41 |
| Income tax payable | | 25 | | | 7 | |
Related party short-term debt | | Related party short-term debt | Note 22 | | 16 | | | 1 | |
Other current liabilities | | 47 |
| | 26 |
| Other current liabilities | | 55 | | | 37 | |
Related party short-term debt | | Note 19 | | 1 |
| | 0 |
| |
| Liabilities held for sale | | Liabilities held for sale | Note 6 | | 0 | | | 118 | |
Total current liabilities | | 636 |
| | 590 |
| Total current liabilities | | 587 | | | 591 | |
| 4% Convertible Senior Notes due 2024 | | 4% Convertible Senior Notes due 2024 | Note 5 | | 170 | | | 160 | |
Related party long-term debt | | Note 19 | | 13 |
| | 62 |
| Related party long-term debt | Note 22 | | 115 | | | 0 | |
Pension liability | | Note 14 | | 20 |
| | 14 |
| Pension liability | Note 17 | | 20 | | | 17 | |
Deferred tax liabilities | | Note 6 | | 13 |
| | 17 |
| Deferred tax liabilities | Note 19 | | 12 | | | 13 | |
Operating lease non-current liabilities | | Operating lease non-current liabilities | Note 4 | | 71 | | | 82 | |
Financial lease non-current liabilities | | Financial lease non-current liabilities | Note 4 | | 46 | | | 33 | |
Other non-current liabilities | | 25 |
| | 22 |
| Other non-current liabilities | | 28 | | | 29 | |
| Total non-current liabilities | | 70 |
| | 115 |
| Total non-current liabilities | | 462 | | | 334 | |
Commitments and contingencies | | Note 16 | |
| |
| |
| Equity | | | | | Equity | |
Common stock (par value $1.00, 325 million shares authorized, 87 million shares issued and outstanding at December 31, 2018 and December 31, 2017) | | 87 |
| | — |
| |
Common stock (par value $1.00, 325 million shares authorized, 111 million and 111 million shares issued and outstanding as of December 31, 2020 and 2019, respectively) | | Common stock (par value $1.00, 325 million shares authorized, 111 million and 111 million shares issued and outstanding as of December 31, 2020 and 2019, respectively) | | 111 | | | 111 | |
Additional paid-in capital | | 1,938 |
| | — |
| Additional paid-in capital | | 2,349 | | | 2,343 | |
Accumulated deficit | | (181 | ) | | — |
| Accumulated deficit | | (1,226) | | | (681) | |
Net Former Parent investment | | — |
| | 844 |
| |
Accumulated other comprehensive loss | | (19 | ) | | (8 | ) | |
| Accumulated other comprehensive income/(loss) | | Accumulated other comprehensive income/(loss) | | 5 | | | (44) | |
Total Equity | | 1,826 |
| | 836 |
| Total Equity | | 1,239 | | | 1,729 | |
Non-controlling interest | | 101 |
| | 122 |
| Non-controlling interest | | 0 | | | 89 | |
Total Equity and non-controlling interests | | 1,927 |
| | 957 |
| Total Equity and non-controlling interests | | 1,239 | | | 1,818 | |
Total liabilities, Equity and non-controlling interests | | $ | 2,632 |
| | $ | 1,663 |
| Total liabilities, Equity and non-controlling interests | | $ | 2,288 | | | $ | 2,743 | |
See Notes to Consolidated Financial Statements.
Veoneer, Inc.
Consolidated Statements of Cash Flow
(U.S. DOLLARS IN MILLIONS)
| | | | Years Ended December 31 | | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
Operating activities | | | | | | | Operating activities | | | | | |
Net loss | | $ | (294 | ) | | $ | (344 | ) | | $ | (60 | ) | Net loss | $ | (544) | | | $ | (522) | | | $ | (294) | |
Adjustments to reconcile net loss to net cash (used in) / provided by operating activities: | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
Depreciation and amortization | | 111 |
| | 119 |
| | 106 |
| Depreciation and amortization | 103 | | | 115 | | | 111 | |
Undistributed loss from equity method investments | | 63 |
| | 31 |
| | — |
| |
Stock-based compensation | | 5 |
| | 2 |
| | 3 |
| |
Gain on divestiture | | Gain on divestiture | (77) | | | 0 | | | 0 | |
Assets impairment charge | | Assets impairment charge | 168 | | | 0 | | | 0 | |
Loss from equity method investments | | Loss from equity method investments | 39 | | | 70 | | | 63 | |
Stock-based compensation expense | | Stock-based compensation expense | 6 | | | 5 | | | 5 | |
Contingent consideration write-down | | (14 | ) | | (13 | ) | | — |
| Contingent consideration write-down | 0 | | | 0 | | | (14) | |
Deferred income taxes | | 15 |
| | (11 | ) | | (11 | ) | Deferred income taxes | 1 | | | (6) | | | 15 | |
Goodwill, impairment charge | | — |
| | 234 |
| | — |
| |
| Other, net | | (29 | ) | | (29 | ) | | (12 | ) | Other, net | 15 | | | (11) | | | (29) | |
Change in operating assets and liabilities | | | | | | | Change in operating assets and liabilities | |
Receivables, gross | | 58 |
| | 12 |
| | (153 | ) | Receivables, gross | (4) | | | 43 | | | 58 | |
Accounts payable | | 10 |
| | (11 | ) | | 68 |
| Accounts payable | 18 | | | (56) | | | 10 | |
Related party receivable and payables, net | | (46 | ) | | — |
| | 5 |
| Related party receivable and payables, net | 2 | | | 35 | | | (46) | |
Income taxes | | (40 | ) | | 10 |
| | 20 |
| Income taxes | 16 | | | 3 | | | (40) | |
Inventories, gross | | (22 | ) | | 19 |
| | (8 | ) | Inventories, gross | 8 | | | 5 | | | (22) | |
Accrued expenses | | 4 |
| | (9 | ) | | 64 |
| Accrued expenses | 40 | | | 19 | | | 4 | |
Prepaid expenses and contract assets | | (6 | ) | | (1 | ) | | (19 | ) | Prepaid expenses and contract assets | 12 | | | (15) | | | (6) | |
Other current assets and liabilities, net | | 6 |
| | (9 | ) | | (11 | ) | Other current assets and liabilities, net | 5 | | | (10) | | | 6 | |
Net cash used in operating activities | | (179 | ) | | (1 | ) | | (7 | ) | Net cash used in operating activities | (192) | | | (325) | | | (179) | |
Investing activities | | | | | | | Investing activities | |
Net decrease / (increase) in related party notes receivable | | 76 |
| | (2 | ) | | (8 | ) | |
Proceeds from divestitures | | Proceeds from divestitures | 198 | | | 0 | | | 0 | |
Net decrease in related party notes receivable | | Net decrease in related party notes receivable | 0 | | | 0 | | | 76 | |
Proceeds from sale of property, plant and equipment | | 4 |
| | 7 |
| | 2 |
| Proceeds from sale of property, plant and equipment | 10 | | | 2 | | | 4 | |
Capital expenditures | | (188 | ) | | (110 | ) | | (103 | ) | Capital expenditures | (91) | | | (213) | | | (188) | |
Equity method investment | | (71 | ) | | — |
| | — |
| |
Equity method investments | | Equity method investments | 9 | | | (58) | | | (71) | |
Short-term investments | | (5 | ) | | — |
| | — |
| Short-term investments | 0 | | | 5 | | | (5) | |
| Acquisition of intangible assets | | (1 | ) | | — |
| | — |
| Acquisition of intangible assets | (10) | | | 0 | | | (1) | |
Acquisition of businesses and interest in affiliates, net of cash acquired | | — |
| | (125 | ) | | (226 | ) | Acquisition of businesses and interest in affiliates, net of cash acquired | (33) | | | 0 | | | 0 | |
Net cash used in investing activities | | (185 | ) | | (230 | ) | | (335 | ) | |
Net decrease (increase) other non-current assets | | Net decrease (increase) other non-current assets | 2 | | | (1) | | | 0 | |
Net cash from (used in) investing activities | | Net cash from (used in) investing activities | 85 | | | (265) | | | (185) | |
Financing activities | | | | | | | Financing activities | |
Issuance of common stock | | Issuance of common stock | 0 | | | 403 | | | 0 | |
Dividend paid to non-controlling interest | | Dividend paid to non-controlling interest | (5) | | | 0 | | | 0 | |
(Repayment of)/proceeds from long-term debt | | (Repayment of)/proceeds from long-term debt | (1) | | | 210 | | | 0 | |
(Repayment of)/proceeds from short-term debt | | (Repayment of)/proceeds from short-term debt | (3) | | | 22 | | | 0 | |
Cash provided at separation by Former Parent | | 980 |
| | — |
| | — |
| Cash provided at separation by Former Parent | 0 | | | 0 | | | 980 | |
Net transfers from Former Parent | | 294 |
| | 184 |
| | 327 |
| Net transfers from Former Parent | 0 | | | 0 | | | 294 | |
Net increase / (decrease) in related party short-term debt | | 1 |
| | (4 | ) | | 4 |
| |
Net increase in related party short-term debt | | Net increase in related party short-term debt | 0 | | | 1 | | | 1 | |
(Decrease)/ increase in related party long-term debt | | (49 | ) | | 51 |
| | 12 |
| (Decrease)/ increase in related party long-term debt | 0 | | | 0 | | | (49) | |
Net cash provided by financing activities | | 1,226 |
| | 232 |
| | 343 |
| Net cash provided by financing activities | (9) | | | 636 | | | 1,226 | |
Effect of exchange rate changes on cash and cash equivalents | | 2 |
| | — |
| | — |
| Effect of exchange rate changes on cash and cash equivalents | 15 | | | (16) | | | 2 | |
Increase in cash and cash equivalents | | 864 |
| | — |
| | — |
| |
(Decrease)/increase in cash and cash equivalents | | (Decrease)/increase in cash and cash equivalents | (101) | | | 30 | | | 864 | |
Cash and cash equivalents at beginning of year | | — |
| | — |
| | — |
| Cash and cash equivalents at beginning of year | 859 | | | 864 | | | 0 | |
Cash and equivalents at end of period, assets held for sale | | Cash and equivalents at end of period, assets held for sale | 0 | | | (35) | | | 0 | |
Cash and cash equivalents at end of year | | $ | 864 |
| | $ | — |
| | $ | — |
| Cash and cash equivalents at end of year | $ | 758 | | | $ | 859 | | | $ | 864 | |
Supplemental Disclosures: | | | | | | | Supplemental Disclosures: | | | | | |
Cash paid for income taxes | | $ | 39 |
| | $ | 30 |
| | $ | 19 |
| Cash paid for income taxes | $ | 8 | | | $ | 11 | | | $ | 39 | |
Cash paid for interest | | Cash paid for interest | $ | 8 | | | $ | 4 | | | $ | 0 | |
See Notes to Consolidated Financial Statements.
Veoneer, Inc.
Consolidated Statements of Changes in Equity
(U.S. DOLLARS IN MILLIONS)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid In Capital
| | Net Former Parent Investment | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non-controlling Interests | | Total |
Balance at January 1, 2018 | $ | 0 | | | $ | 0 | | | $ | 844 | | | $ | 0 | | | $ | (8) | | | $ | 122 | | | $ | 957 | |
Adoption of ASC 606 | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | |
Net loss | — | | | — | | | (95) | | | (181) | | | — | | | (19) | | | (294) | |
Net change in cash flow hedges | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Foreign currency translation | — | | | — | | | — | | | — | | | (9) | | | (1) | | | (10) | |
Pension liability | — | | | — | | | — | | | — | | | (3) | | | 1 | | | (2) | |
Reclassification of parent's net investment and issuance of common shares | 87 | | | 1,935 | | | (2,003) | | | — | | | — | | | — | | | 19 | |
Stock based compensation | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
Net transfers from Former Parent | | | | | 1,253 | | | | | — | | | (1) | | | 1,252 | |
Balance at December 31, 2018 | $ | 87 | | | $ | 1,938 | | | $ | 0 | | | $ | (181) | | | $ | (19) | | | $ | 101 | | | $ | 1,927 | |
Net loss | — | | | — | | | — | | | (500) | | | — | | | (22) | | | (522) | |
| | | | | | | | | | | | | |
Foreign currency translation | — | | | — | | | — | | | — | | | (24) | | | — | | | (24) | |
Pension liability | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Stock based compensation expense | — | | | 5 | | | — | | | — | | | — | | | — | | | 5 | |
Issuance of common stock | 24 | | | 379 | | | — | | | — | | | — | | | — | | | 403 | |
Purchase of minority interest | — | | | (14) | | | — | | | — | | | — | | | 14 | | | $ | 0 | |
Equity component of issuance of convertible notes, net of taxes (Note 5) | — | | | 35 | | | — | | | — | | | — | | | — | | | 35 | |
Dividend | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
| | | | | | | | | | | | | |
Balance at December 31, 2019 | $ | 111 | | | $ | 2,343 | | | $ | 0 | | | $ | (681) | | | $ | (44) | | | $ | 89 | | | $ | 1,818 | |
Net loss | — | | | — | | | — | | | (545) | | | — | | | 1 | | | (544) | |
| | | | | | | | | | | | | |
Foreign currency translation | — | | | — | | | — | | | — | | | 47 | | | 1 | | | 48 | |
Pension liability net of tax | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Stock based compensation expense | — | | | 6 | | | — | | | — | | | — | | | — | | | 6 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Business divestiture | — | | | — | | | — | | | — | | | 3 | | | (91) | | | (88) | |
| | | | | | | | | | | | | |
Balance at December 31, 2020 | $ | 111 | | | $ | 2,349 | | | $ | 0 | | | $ | (1,226) | | | $ | 5 | | | $ | 0 | | | $ | 1,239 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid In Capital
| | Net Former Parent Investment | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non-controlling Interests | | Total |
2016 |
Balance at January 1, 2016 | $ | — |
| | $ | — |
| | $ | 606 |
| | $ | — |
| | $ | (15 | ) | | $ | — |
| | $ | 591 |
|
Comprehensive Loss: |
Net loss | — |
| | — |
| | (53 | ) | | — |
| | — |
| | (7 | ) | | (60 | ) |
Net change in cash flow hedges | — |
| | — |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (17 | ) | | (7 | ) | | (25 | ) |
Pension liability | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Total Comprehensive Loss | — |
| | — |
| | (53 | ) | | — |
| | (14 | ) | | (14 | ) | | (81 | ) |
Investment in subsidiary by non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 252 |
| | 252 |
|
Net transfers from Former Parent | | | | | 324 |
| | | |
|
| | 4 |
| | 327 |
|
Balance at December 31, 2016 | $ | — |
| | $ | — |
| | $ | 877 |
| | $ | — |
| | $ | (29 | ) | | $ | 242 |
| | $ | 1,089 |
|
2017 |
Comprehensive Income (Loss): |
Net loss | — |
| | — |
| | (217 | ) | | — |
| | — |
| | (127 | ) | | (344 | ) |
Net change in cash flow hedges | — |
| | — |
| | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | 30 |
| | 7 |
| | 37 |
|
Total Comprehensive income (Loss) | — |
| | — |
| | (217 | ) | | — |
| | 21 |
| | (120 | ) | | (316 | ) |
Net transfers from Former Parent | — |
| | — |
| | 184 |
| | — |
| | — |
| | — |
| | 184 |
|
Balance at December 31, 2017 | $ | — |
| | $ | — |
| | $ | 844 |
| | $ | — |
| | $ | (8 | ) | | $ | 122 |
| | $ | 957 |
|
2018 |
Adoption of ASC 606 | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Comprehensive Income (Loss): |
Net loss | — |
| | — |
| | (95 | ) | | (181 | ) | | — |
| | (19 | ) | | (294 | ) |
Net change in cash flow hedges | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (9 | ) | | (1 | ) | | (10 | ) |
Pension liability | — |
| | — |
| | — |
| | — |
| | (3 | ) | | 1 |
| | (2 | ) |
Reclassification of Former Parent's net investment and issuance of ordinary shares in connection with separation | 87 |
| | 1,935 |
| | (2,003 | ) | | — |
| | — |
| | — |
| | 19 |
|
Stock based compensation expense | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Total Comprehensive Income (Loss) | 87 |
| | 1,938 |
| | (2,098 | ) | | (181 | ) | | (10 | ) | | (19 | ) | | (283 | ) |
Net transfers from Former Parent | — |
| | — |
| | 1,253 |
| | — |
| | — |
| | (1 | ) | | 1,252 |
|
Balance at December 31, 2018 | $ | 87 |
| | $ | 1,938 |
| | $ | — |
| | $ | (181 | ) | | $ | (19 | ) | | $ | 101 |
| | $ | 1,927 |
|
See Notes to Consolidated Financial Statements.
63
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 1. Basis of Presentation
Spin-Off
On June 29, 2018 (the “Distribution Date”), Veoneer, Inc. (“Veoneer” or “the Company”) became an independent, publicly-traded company as a result of the distribution by Autoliv, Inc. (“Autoliv” or “Former Parent”) of 100 percent of the outstanding common stock of Veoneer to the stockholders of Autoliv (the “Spin-Off”). Each Autoliv stockholder and holder of Autoliv’s Swedish Depository Receipts (SDRs) of record as of certain specified dates received one1 share of Veoneer common stock or one1 Veoneer SDR, respectively, for every one1 share of Autoliv common stock or Autoliv SDR held as of a certain date. The Spin-Off was completed on June 29, 2018 in a tax free transaction pursuant to Section 355 of the U.S. Internal Revenue Code.
On July 2, 2018, Veoneer common stock began regular trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “VNE” and Veoneer SDRs began trading on National Association of Securities Dealers (“NASDAQ”) Stockholm under the symbol “VNE-SDB”. Agreements entered into between Veoneer and Autoliv in connection with the Spin-Off govern the relationship between the parties following the Spin-Off and provide for the allocation of various assets, liabilities, rights and obligations. These agreements also include arrangements for transition services to be provided on a temporary basis between the parties.
In advance of the Spin-Off, Autoliv completed a series of internal transactions, in which Autoliv transferred its Electronics business to Veoneer. These transactions are referred to herein as the “internal reorganization”. The internal reorganization was completed on April 1, 2018.
The Company has twohad 2 operating segments, Electronics and Brake Systems. Electronics includes all electronics resources and expertise, Restraint Control Systems and Active Safety products, andproducts. Brake Systems provides brake control and actuation systems. The Asian business of the Brake Systems segment was sold on February 3, 2020 and the majority of the Brake Systems business in North America was sold on August 10, 2020. The remaining Brake Systems business is no longer a reportable segment due to immateriality.
The accompanying consolidated financial statements as of and for the years ended December 31, 2017 and 2016 and from January 1, 2018 throughperiods prior to the Distribution Date wereSpin-Off have been prepared from Autoliv’s historical accounting records and are presented on a stand-alone basis as if the operations had been conducted independently from Autoliv. For the period from the Distribution Date through December 31, 2018, the consolidated financial statements reflect Veoneer’s stand-alone operations. Prior to the Spin-Off, Autoliv’s net investment in these operations (Former Parent equity) is shown in lieu of a controlling interest’s equity in the Consolidated Financial Statements. Subsequent to the Spin-Off and the related distribution of shares, Veoneer commonCommon stock, Additional paid-in capital and future income (losses) arewere reflected in Accumulated deficit. Accordingly, forRetained earnings (Accumulated deficit). For periods prior to June 29, 2018, the Company’s financial statements are presented on a combined basis and for the periods subsequent to June 29, 2018, they are presented on a consolidated basis (all(the financial statements for all periods hereinafter are referred to herein as "Consolidated Financial Statements""consolidated financial statements").
Prior to the Spin-Off, the Consolidated Statements of Operations include all sales and costs directly attributable to Veoneer, including costs for facilities, functions and services used by Veoneer. Certain shared costs have been directly charged to Veoneer based on usage or other allocation methods. The results of operations also include allocations of (i) costs for administrative functions and services performed on behalf of Veoneer by centralized staff groups within Autoliv, (ii) Autoliv’s general corporate expenses and (iii) certain pension and other retirement benefit costs (See Note 14, Retirement Plans for a description of the allocation methodologies employed). As more fully described in Note 6, Income Taxes, current and deferred income taxes and related tax expense have been determined based on the stand-alone results of Veoneer by applying Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 740, Income Taxes, to the Veoneer operations in each country as if it were a separate taxpayer (i.e., following the separate return methodology). Subsequent to the Spin-Off, sales, costs and taxes are reflected for Veoneer’s operations on a stand-alone company basis.
Prior to the Spin-Off, Veoneer participated in Autoliv's centralized cash management and financing programs. Accordingly, no cash and cash equivalents of Autoliv was allocated to Veoneer in the consolidated financial statements. Transactions between Autoliv and Veoneer are accounted for through Net Former Parent Investment. Autoliv’s short-term and long-term debt, including any related interest expense as well as its derivative activity, was pushed down to Veoneer’s consolidated financial statements where it is specifically identifiable to Veoneer. See Note 19, Relationship with Former Parent and Related Entities, for a further description of related party transactions between Autoliv and Veoneer. Subsequent to the Spin-Off, Veoneer has its own treasury functions.
For periods prior to the Spin-Off, all charges and allocations of cost for facilities, functions and services performed by Autoliv organizations have been deemed paid by Veoneer to Autoliv, in cash, in the period in which the cost was recorded in the Consolidated Statements of Operations.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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Theaudited consolidated financial statements include the historical operations, assets, and liabilities that arewere considered to comprise the Veoneer business. All of theThe allocations and estimates in the audited consolidated financial statements for the periods prior to the Spin-Off are based on assumptions that management of Autoliv and Veoneer management believe are reasonable. However, the historical statements of operations, comprehensive loss, balance sheets, and cash flows of Veoneer included herein may not be indicative of what they would have been had Veoneer actually been a stand-alone entity during such periods, nor are they necessarily indicative of Veoneer's future results.
Certain amountsAmount in investments in the prior year’s consolidated financial statements and related footnotes thereto have been reclassified into Equity method investment to conform to the current year presentation.
Certain amounts in the consolidated financial statements and associated notes may not reconcile due to rounding. All percentages have been calculated using unrounded amounts.
On May 28, 2019, the Company completed follow-on public offerings of 24,000,000 shares of common stock and $207 million aggregate principal amount of 4.00% Convertible Senior Notes due 2024 (the “Notes”) (including $27 million aggregate principal amount pursuant to the underwriters’ over-allotment option to purchase additional notes). The public offering price for our common stock offering was $17.50 per share. The Company received net proceeds of $403 million from the common stock offering and $200 million from the Notes offering, in each case after deducting the underwriting discounts and issuance costs directly attributable to each offering.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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Joint Venture with Nissin-Kogyo Co. Ltd. (“Nissin Kogyo”)
On June 14, 2019, the Company signed agreements with Nissin Kogyo, its joint venture partner in Veoneer Nissin Brake Systems("VNBS"), providing for certain structural changes to the joint venture and the funding of VNBS.
Pursuant to the agreements, Veoneer acquired Nissin Kogyo’s interests in the US operations of Veoneer Nissin Brake Systems ("VNBS"), referred to as Veoneer Brake Systems ("VBS"), and VNBS transferred or licensed the VNBS technologies necessary to operate the VBS business to VBS. VBS, including the transferred or licensed technologies, was a wholly-owned Veoneer business effective on the closing date, June 28, 2019.VNBS provided certain transition services to VBS.
Under the agreement, Nissin Kogyo provided guarantees for certain VNBS commercial loans corresponding to 49% of the funding Veoneer had previously unilaterally provided to VNBS. During 2019, Veoneer received approximately $20 million as debt repayment from VNBS.
Divestiture of Veoneer Nissin Brake Systems ("VNBS")
On October 30, 2019, Veoneer signed definitive agreements to sell its 51% ownership in Veoneer Nissin Brake Japan ("VNBJ") and Veoneer Nissin Brake China ("VNBZ") entities that comprise VNBS to its joint venture partner Nissin Kogyo, and Honda Motor Co., Ltd. The aggregate purchase price was $176 million. The divestiture of VNBJ and VNBZ was structured as 2 separate transactions each of which was completed on February 3, 2020, and the VNBS joint venture was terminated. See Note 6 "Divestiture and Held for Sale" for additional information.
Divestiture of Veoneer Brake Systems ("VBS")
On August 10, 2020 Veoneer signed a definitive agreement to sell the majority of the Brake Systems business in North America to ZF Active Safety US, Inc ("ZF"). The aggregate purchase price was $1. In connection with the transaction, the Company received approximately $22 million from ZF for VBS operational cost reimbursement. See Note 6 "Divestiture and Held for Sale" for additional information.
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with United States (U.S.) Generally Accepted Accounting Principles (GAAP) and include the consolidated assets, liabilities, sales, and expenses of the Veoneer business as of December 31, 20182020 and 20172019 and for the years ended December 31, 2018, 2017,2020, 2019, and 2016.2018. All intercompany accounts and transactions within the Company have been eliminated from the consolidated financial statements. See Note 19,22, Relationship with Former Parent and Related Entities, for a further description of related party transactions between Autoliv and Veoneer.
The consolidated financial statements include the accounts of the Company and its subsidiaries that are more than 50% owned and over which the Company exercises control. Investments in affiliates of greater than 20% and for which the Company does not exercise control, but does have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. All other equity investments are measured at cost, less impairment, with changes in fair value recognized in net income. Consolidation is also required when the Company has both the power to direct the activities of a variable interest entity (VIE) and the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE.
Investments in affiliated companies in which the Company exercises significant influence over the operations and financial policies, but does not control, are reported using the equity method of accounting.
Business Combinations
Transactions in which the Company obtains control of a business are accounted for according to the acquisition method as described in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations. The assets acquired and liabilities assumed are recognized and measured at their fair values as of the date control is obtained. Acquisition related costs in connection with a business combination are expensed as incurred. Contingent consideration is recognized and measured at fair value at the acquisition date and until paid is re-measured on a recurring basis. It is classified as a liability based on appropriate GAAP.in the consolidated balance sheet.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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Equity Method Investments
Investments accounted for under the equity method, means that a proportional share of the equity method investment’s net income increases the investment, and a proportional share of losses and payment of dividends decreases it. In the Consolidated Statements of Operations, the proportional share of the net loss is reported as Loss from equity method investments.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of net sales and expenses during the reporting period. The accounting estimates that require management’s most significant judgments include the estimation of retroactive price adjustments, estimations associated with purchase price allocations regarding business combinations, valuation of stock based payments, assessment of recoverability of goodwill and intangible assets, assessment of the useful lives of intangible assets, estimation of pension benefit expense based on actuarial assumptions, estimation of accruals for warranty and product liabilities, uncertain tax positions, valuation allowances and contingent liabilities. However, actual results could differ from those estimates.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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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) andas 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 amortizedrecognized as a reduction of the transaction price as the related goods are transferred. As of December 31, 2018, and 2017,2019, the Company capitalized $54$81 million and $23 million, respectively,0 as of December 31, 2020 in Other current assets and Other non-current assets related to payments to customers. The Company assesses these amounts for impairment. ThereThe assets held as of December 31, 2019 were reclassified to Assets Held for Sale during 2020 and impaired as part of the evaluation of the value less costs to sell of that asset group. See Note 6 Divestiture and Held for Sale for additional information. No impairment was no impairmentrecorded in 20182019 or 2017.2018.
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 has twohistorically had 2 operating segments, Electronics and Brake Systems. Electronics includes all of electronics resources and expertise, restraint control systems and active safety products. Brake Systems provides brake control and actuation systems. The principal activities are essentially the same for each of the segments. Both of the segments generate revenue from the sale of production parts to original equipment manufacturers (“OEMs”).
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 their stand-alone selling prices for each of the products. The stand-alone selling prices are determined based on the cost-plus margin approach.
The Company recognizes revenue for production parts primarily at a point in time.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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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, or annual price adjustments)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 relatedrelate 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 no0 impairment losses recognized related to contract assets arising from the Company’s contracts with customers.
Contract Costs
As of December 31, 2019, the Company has capitalized $12 million of direct and incremental contract costs incurred in connection with obtaining a contract with a customer. These costs will be amortized as the related goods are transferred. There were no contract assets capitalized as of December 31, 2020.
Research, Development and Engineering (R,D&E)
The Company performs research activities to identify new products, product development activities for further product evolution, and engineering activities to customize existing products for specific customers. Research and development and most engineering
Veoneer, Inc.
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expenses are expensed as incurred. These expenses are reported net of expense reimbursements from contracts to further customize existing products for specific customers. For the years ended December 31, 2020, 2019 and 2018 total cash reimbursements from customers were $202 million, $103 million and $95 million, respectively.
Certain engineering expenses related to long-term supply arrangements are capitalized when defined criteria, such as the existence of a contractual guarantee for reimbursement, are met.
Tooling is generally agreed upon as a separate contract or a separate component of an engineering contract, as a pre-production project. Capitalization of tooling costs is made only when the specific criteria for capitalization of customer funded tooling are met or the criteria for capitalization as Property, Plant & Equipment for tools owned by the Company are fulfilled. Depreciation on the Company’s own tooling is recognized in the Consolidated Statements of Operations as Cost of Sales.
Stock Based Compensation
The compensation costs for all of the Company’s stock-based compensation awards are determined based on the fair value method as defined in ASC 718, Compensation-Stock Compensation. The Company records the compensation expense for its direct and allocated portion of awards under the Veoneer Stock Incentive Plan, including restricted stock units (RSUs), performance shares (PSs) and stock options (SOs), over the respective vesting period. For further details, see Note 15,18, Stock Incentive Plans.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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Income Taxes
Prior to the spin-off,Spin-Off, Veoneer’s operations were included in the tax returns filed by Autoliv of which the Veoneer business was a part. Income tax expense and other income tax related information contained in these consolidated financial statements were presented on a separate return basis as if the Company filed its own tax returns. Income taxes as presented in the consolidated financial statements for periods prior to the spin-offSpin-Off attribute current and deferred income taxes in a manner that is systematic, rational and consistent with the asset and liability method prescribed by the accounting guidance for income taxes. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone company for the periods presented prior to the spin-off.Spin-Off. Any income tax liabilities or related net deferred tax assets or liabilities resulting from operations prior to the spin-off have been settled with the Former Parent as of the Distribution Date and are reflected in the Net Former Parent investment.
Subsequent to the Spin-Off, current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current year. In certain circumstances, payments or refunds may extend beyond twelve months, in such cases amounts would be classified as non-current taxes payable or refundable. Deferred tax liabilities or assets are recognized for the estimated future tax effects attributable to temporary differences and carryforwards that result from events that have been recognized in either the financial statements or the tax returns, but not both. The measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax laws in effect for the year the differences are expected to reverse. Deferred tax assets are reduced by the amount of any tax benefits that are not expected to be realized. A valuation allowance is recognized if, based on the weight of all available evidence, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. Evaluation of the realizability of deferred tax assets is subject to significant judgment requiring careful consideration of all facts and circumstances.
Tax benefits associated with tax positions taken in the Company’s income tax returns are initially recognized and measured in the financial statements when it is more likely than not that those tax positions will be sustained upon examination by the relevant taxing authorities. The Company’s evaluation of its tax benefits is based on the probability of the tax position being upheld if challenged by the taxing authorities (including through negotiation, appeals, settlement and litigation). Whenever a tax position does not meet the initial recognition criteria, the tax benefit is subsequently recognized and measured if there is a substantive change in the facts and circumstances that cause a change in judgment concerning the sustainability of the tax position upon examination by the relevant taxing authorities. In cases where tax benefits meet the initial recognition criterion, the Company continues, in subsequent periods, to assess its ability to sustain those positions. A previously recognized tax benefit is derecognized when it is no longer more likely than not that the tax position would be sustained upon examination. Liabilities for unrecognized tax benefits are classified as non-current unless the payment of the liability is expected to be made within the next 12 months.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Veoneer held approximately $864 million of cash and cash equivalents and $5 million of short-term investments as of December 31, 2018.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents and short-term investments approximate their fair values based on Level 1 of the fair value hierarchy.
Receivables
Accounts receivables are recorded at the invoiced amount and do not bear interest.
The Company has guidelines for calculatingevaluated the allowance for bad debts. In determiningavailable adoption options of common credit loss methods that are acceptable as per FASB Accounting Standards Codification Topic 326, Credit Losses. The Company adopted the amountavailable 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.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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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 bad debt allowance,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 its judgment to consider factors suchthe six-month LIBOR rate as a credit rating and a credit default risk rate. Management believes that the agesix-month LIBOR rate adequately reflects the short-term nature of the Company’s trade receivables and is also in line with the Company’s prior experience with the customer, the experience of other enterprises in the same industry, the customer’s ability to pay, and/or an appraisal of current economic conditions. Collateral is typically not required. There can be no assurance that the amount ultimately realized for receivables will not be materially different than that assumed in the calculation of the allowance.invoice payment terms.
A substantial majority of the Company’s trade receivables are derived from sales to OEMs. The Company’s four largest customers accounted for 58%53% of net sales for 2018, 62% for 2017 and2020, 59% for 2016.2019 and 58% for 2018. Additionally, as of December 31, 20182020 and 2017,2019, these four largest customers accounted for 52%40% and 55%39%, respectively, of the Company’s accounts receivable.receivables. The Company believes that the receivable balances from these largest customers do not represent a significant credit risk based on past collection experience. The Company has adopted credit policies and standards intended to accommodate industry growth and inherent risk. The Company believes that credit risks are moderated by the financial stability of the Company’s major customers.
Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments, primarily forwards, options and swaps to reduce the effects of fluctuations in foreign exchange rates and the resulting variability of the Company’s operating results. On the date that a derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or (2) a hedge of the exposure of a forecasted transaction or of the variability in the cash flows of a recognized asset or liability (a cash flow hedge).
When a hedge is classified as a fair value hedge, the change in the fair value of the hedge is recognized in the Consolidated Statements of Operations along with the offsetting change in the fair value of the hedged item. When a hedge is classified as a cash flow hedge, any change in the fair value of the hedge is initially recorded in equity as a component of Other Comprehensive Income (OCI) and reclassified into the Consolidated Statements of Operations when the hedge transaction affects net earnings. The Company uses the forward rate with respect to the measurement of changes in fair value of cash flow hedges when revaluing foreign exchange forward contracts. All derivatives are recognized in the consolidated financial statements at fair value. For further details. see Note 5,8, Fair Value Measurements.
Inventories
The cost of inventories is computed according to the first-in, first-out method (FIFO). Cost includes the cost of materials, direct labor and the applicable share of manufacturing overhead. 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.
Property, Plant and Equipment
Property, Plant and Equipment are recorded at historical cost. Construction in progress generally involves short-term projects for which capitalized interest is not significant. The Company provides for depreciation of property, plant and equipment computed under the straight-line method over the assets’ estimated useful lives, or in the case of leasehold improvements over the shorter of the useful life or the lease term. Amortization on capital leases is recognized with depreciation expense in the Consolidated Statements of Operations over the shorter of the assets’ expected life or the lease contract term. Repairs and maintenance are expensed as incurred.
Veoneer, Inc.
Notes to Consolidated Financial Statements
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The Company also entered into certain “build-to-suit” lease arrangements in 2017 with continuing impact into 2018 for certain manufacturing and research buildings. During 2018, one of the “build-to-suit” lease arrangement was completed and accounted as a lease as of December 31, 2018. For the build-to-suit still under construction, the Company will be deemed the owner of the buildings for accounting purposes during the construction period due to the terms of the arrangements. As such, those amounts will be capitalized as an asset and a liability in Consolidated Balance Sheet during the construction period. As of December 31, 2018, capitalized amounts are approximately $48 million, and as of December 31, 2017, capitalized amounts were immaterial.
Long-Lived Assets Impairment
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
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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 be recorded. However, if the carrying amount of a group of assets exceeds the undiscounted cash flows, an entity must then measureestimate, generally using a discounted cash flow model the long-lived assets’ fair value to determine whether an impairment loss should be recognized, generally using a discounted cash flow model.recognized.
Intangible Assets and Goodwill
Intangible assets, principally related to acquired technology and contractual relationships, are amortized over their useful lives which range from 5 to 10 years.
Goodwill represents the excess of the fair value of consideration transferred over the fair value of net assets of businesses acquired. Goodwill is not amortized but is subject to at least an annual review for impairment.
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 on October 31, 2020.
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.
The estimated fair value of the reporting unit is determined by the discounted cash flow method taking into account expected long-term operating cash-flow performance. The Company discounts projected operating cash flows using the reporting unit’s weighted average cost of capital, including a risk premium to adjust for market risk. The Company's assumptions in conducting its impairment testing include revenue growth rates, Earnings Before Income Tax ("EBIT") margin rate in the discrete and terminal period and the discount rate applied to the future cash flows. The estimated fair value is based on automotive industry volume projections which are based on third-party and internally developed forecasts and discount rate assumptions. Significant assumptions include terminal growth rates, terminal operating margin rates, future capital expenditures and working capital requirements. To supplement this analysis, the Company compares the market value of its equity, calculated by reference to the quoted market prices of its shares, to the bookestimated fair values of its reporting units.
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 its equity.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.
InUpon determining that a disposal group meets the fourth quarter of 2017, in connection with the annual impairment test,criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale in the Consolidated Balance Sheets. Additionally, depreciation is not recorded a goodwill impairment charge of $234 million relating to its Brake Systems Segment (see Note 4, Business Combinations). There is no remaining goodwill related toduring the Brake Systems Segment afterperiod in which the impairment. There were no impairments of goodwilllong-lived assets, included in the disposal group, are classified as held for 2018 and 2016.sale.
Warranties and Recalls
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
Veoneer, Inc.
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cost of the recall, including labor to remove and replace the defective part. Insurance receivables, related to recall issues covered by the insurance, are included within other current assets in the Consolidated Balance Sheets.
Provisions for warranty claims are estimated based on prior experience, likely changes in performance of newer products and the mix and volume of products sold. The provisions are recorded on an accrual basis.
Veoneer, Inc.
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Pension and Other Post-Employment Benefits
Veoneer’s employees participate in both defined contribution plans and defined benefit plans sponsored by Veoneer in Japan (the Japan plans), Canada (the Canada plans), and France (the France plans) and certain defined benefit plans sponsored by Autoliv in Sweden (the Sweden plans) and US (the US plans). A defined contribution plan generally specifies the periodic amount that the employer must contribute to the plan and how that amount will be allocated to the eligible employees who perform services during the same period. A defined benefit pension plan is one that contains pension benefit formulas, which generally determine the amount of pension benefits that each employee will receive for services performed during a specified period of employment.
For the Japan, Canada, and France 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. The inputs to the fair value measurement of the plan assets are mainly level 2 inputs (see Note 5,8, Fair Value Measurements). Veoneer has considered the remaining plans to be part of a multiemployer plan with Autoliv and does not record a corresponding asset or liability. Pension expense was allocated and reported within Costs of sales, Selling, general and administrative expenses and Research, development and engineering expenses in the Consolidated Statements of Operations. The expense related to Veoneer employees and allocated expenses are included in these Consolidated Financial Statements.
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.
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.
The Company believes, based on currently available information, that the resolution of outstanding matters, described in Note 16, Commitments and Contingencies, after taking into account recorded liabilities and available insurance coverage, should not have a material effect on the Company’s financial position or results of operations.
However, due to the inherent uncertainty associated with such matters, there can be no assurance that the final outcomes of these matters will not be materially different than currently estimated.
Translation of Non-US Subsidiaries
The balance sheets of subsidiaries with functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates.
The statement of operations of these subsidiaries is translated into U.S. dollars using the average exchange rates for the year. Translation differences are reflected in equity as a component of OCI.
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Receivable and Liabilities in Non-Functional Currencies
Receivables and liabilities not denominated in functional currencies are converted at year-end exchange rates. Net transaction gains/(losses) that are reflected in the Consolidated Statements of Operations amounted to $(8) million, $2 million and $(2) million in 2020, 2019 and 2018, $3 million in 2017 and $1 million in 2016.respectively. These are recorded in operating income if they relate to operational receivables and liabilities or are recorded in other non-operating items, net if they relate to financial receivables and liabilities.
Other Income, Net
During 2020, Veoneer commenced arbitration against Nissin Kogyo regarding a dispute arising out of a Share Purchase Agreement (“SPA”) dated September 2015. On June 30, 2020, Veoneer agreed to settle the proceedings, along with any and all legal claims arising out of or relating to the SPA dispute, for $20 million. As of December 31, 2020 the cash settlement was received by the Company and is reported among Other income, net in the Consolidated Statements of Operations.
Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Act”). Consequently, the amendments in ASU 2018-02 eliminate
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
the stranded tax effects resulting from the Act. The amendments in ASU 2018-02 are effective for all entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. The Company adopted early ASU 2018-02 as of January 1, 2018 and the adoption did not have a material impact on the consolidated financial statements for any periods presented.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. In the first quarter of 2018, the Company elected to treat any potential GILTI inclusions as a period cost.
In January 2017,June 2016, the FASB issued ASU 2017-04, Intangibles—Goodwill2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which requires measurement and Other (Topic 350)—Simplifying the Testrecognition of expected credit losses for Goodwill Impairment, which simplifies how an entityfinancial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is required to test goodwill for impairment by eliminating step two from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. Instead, entities should perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of carrying amount over the fair value of the respective reporting unit. The amendments in ASU 2017-04 are effective for public business entities for annual or interim goodwill impairment tests in annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 effective January 1, 2017. As this standard is prospective in nature, the impact to the Company’s financial statements by not performing step two to measure the amount of any potential goodwill impairment will depend on various factors. However, the elimination of step two reduces the complexity and cost of the subsequent measurement of goodwill. This new standard was applied in conjunction with assessing Goodwill impairment as discussed in Note 2, Summary of Significant Accounting Policies.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805)—Clarifying the Definition of a Business, which provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendments in ASU 2017-01 are effective for public business entities for annual periods beginning after December 15, 2017,2019, and interim periods within those periods. ASU 2017-01 should be applied prospectively. Earlyearlier adoption is permitted. The Company early adopted ASU 2017-01 effective January 1, 2017 for new transactions that have not been reported in financial statements that have been issued or made available for issuance. As this standard is prospective in nature, the impact to the Company’s financial statements will depend on the nature of the Company’s future acquisitions. This new standard was applied in conjunction with the Zenuity joint venture and the Fotonic i Norden dp AB acquisition as discussed in Note 9, Equity Method Investment and Note 4, Business Combinations, respectively, to the consolidated financial statements for any periods presented.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost, which requires the service cost component to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the Consolidated Statements of Operations separately from the service cost component and outside operating income. The amendments in ASU 2017-07 are effective for public business entitiespermitted for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic post-retirement benefit cost in the Consolidated Statements of Operations.2018. The Company adopted ASU 2017-07 in2016-13 effective January 1, 2020 and applied a loss rate model to compute the first quarterexpected credit loss allowance. The adoption of 2018 and the adoptionASU 2016-13 did not have a material impact on the consolidated financial statements for any periods presented (see Note 14, Retirement Plans).
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, Compensation-Stock Compensation (Topic 718) – Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless (a) the fair value of the modified award is the same as the fair value of the original award, (b) the vesting conditions of the modified award are the same as the vesting conditions of the original award and (c) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in ASU 2017-09 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
financial statements have not been issued. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company early adopted ASU 2017-09 in the second quarter beginning April 1, 2017. As this standard is prospective in nature, the impact to the Company’s financial statements will depend on the nature of the Company’s future award modifications. There have been no modifications to awards to date in 2017.
In March 2016, the FASB issued ASU 2016-09, Compensation— Stock Compensation (Topic 718), which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company adopted ASU 2016-09 effective January 1, 2017 and has elected to recognize forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact on the consolidated financial statements for any periods presented.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments, which provides guidance on reducing the diversity in practice on eight cash flow classification issues and how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 are effective for public business entities for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the annual period that includes that interim period. The amendments in ASU 2016-15 should be applied using a retrospective transition method to each period presented. The Company early adopted ASU 2016-15 effective January 1, 2017. The adoption of ASU 2016-15 did not have a material impact on the consolidated financial statements for any periods presented.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Historical GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Consequently, the amendments in this ASU 2016-16 eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets included in the scope of ASU 2016-16 are intellectual property and property, plant, and equipment. The amendments in ASU 2016-16 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in ASU 2016-16 should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to equity as of the beginning of the period of adoption. The Company's adoption of ASU 2016-16 effective January 1, 2018 did not have a material impact on consolidated financial statements for any periods presented.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. In 2016, the FASB issued accounting standard updates to address implementation issues and to clarify guidance in certain areas. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. In addition, ASU 2014-09 requires certain additional disclosure around the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASU 2014-09 effective January 1, 2018 and utilized the modified retrospective (cumulative effect) transition method. The Company applied the modified retrospective transition method through a cumulative adjustment to equity. The adoption of the new revenue standard did not have a material impact on the consolidated financial statements for any periods presented. The table below shows the adjustments made due to ASU 2014-09.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
|
| | | | | | | | | | | |
Balance Sheet (Dollars in millions) | Balance at December 31, 2017 | | Adjustments due to ASU 2014-09 | | Balance at January 1, 2018 |
Assets | | | | | |
Inventories, net | $ | 154 |
| | $ | (5 | ) | | $ | 149 |
|
Prepaid expenses and contract assets | 34 |
| | 7 |
| | 41 |
|
| | | | | |
Equity | | | | | |
Net Former Parent investment | $ | 844 |
| | $ | 1 |
| | $ | 845 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, 2018 |
Income Statement (Dollars in millions) | As Reported | | Balances without adoption of ASC 606 | | Effect of Changes |
Net sales | $ | 2,228 |
| | $ | 2,227 |
| | $ | 1 |
|
Cost of sales | (1,798 | ) | | (1,797 | ) | | (1 | ) |
Operating loss | (197 | ) | | (197 | ) | | — |
|
|
| | | | | | | | | | | |
| As of December 31, 2018 |
Balance Sheet (Dollars in millions) | As Reported | | Balances without adoption of ASC 606 | | Effect of Changes |
Assets | | | | | |
Inventories, net | $ | 172 |
| | $ | 178 |
| | $ | (6 | ) |
Prepaid expenses and contract assets | 39 |
| | 31 |
| | 8 |
|
| | | | | |
Equity | | | | | |
Additional paid-in capital | $ | 1,938 |
| | $ | 1,937 |
| | $ | 1 |
|
Accounting Standards Issued But Not Yet Adopted
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which provides improvements to ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Specifically, ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20, Measured at Amortized Cost, and states that impairment of receivables arising from operating leases should be accounted for in accordance with ASC Topic 842, Leases. The Company is required to adopt ASU 2018-19 concurrently with ASU 2016-13 in the first quarter of 2020 and is currently evaluating the impact of the ASU 2018-19 of itscondensed consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18 Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606, which (1) clarifies that certain transactions between collaborative arrangement participants should be accounted for under ASC Topic 606, Revenue from Contracts with Customers (Topic 606), when the collaborative arrangement participant is a customer in the context of a unit of account, (2) adds unit-of-account guidance in Topic 808 to align with Topic 606 when an entity is assessing whether the collaborative arrangement, or a part of the arrangement, is within the scope of Topic 606, (3) precludes presenting transactions together with revenue when those transactions involve collaborative arrangement participants that are not directly related to third parties and are not customers. The Company is required to adoptadopted ASU 2018-18 in the first quarter of 2020 and is currently evaluating the impact2020. The adoption of ASU 2018-18 did not have a material impact on its consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17 Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities, which allows a private company (reporting entity) to elect not to apply variable interest entity (VIE) guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. The accounting alternative provides an accounting policy election that a private company will apply to all current and future legal entities under common control that meet the criteria for applying this alternative. If the alternative is elected, a private company should continue to apply other consolidation guidance,
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
particularly the VIE guidance, unless another scope exception applies. The Company is required to adopt ASU 2018-17 in the first quarter of 2020 and is currently evaluating the impact of ASU 2018-17 on itsCompany's condensed consolidated financial statements.
In October 2018, the FASB issued ASU 2018-16 Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which provides amendments to ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The amendments in ASU 2018-16 permit use of the Overnight Index Swap (OIS) Rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the U.S. Government (UST) Rate, the London Interbank Offered Rate (LIBOR) Swap Rate, the OIS Rate based on the Fed Funds Effective rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. The Company is required to adopt ASU 2018-16 concurrently with ASU 2017-12 in the first quarter of 2019. The Company does not expect ASU 2017-12 to have material impact to the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. ASU 2018-14 removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the employer; and the effects of a one-percentage point change in assumed health care cost trend rates. ASU 2018-14 requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted for all entities and the amendments in this update are required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact on its disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. ASU 2018-13 requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating this guidance to determineadopted ASU 2018-18 in the impact on its disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurementfirst quarter of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, 2019, and earlier adoption is permitted for annual periods beginning after December 15, 2018.2020. The Company is currently evaluating the impact of the Company’s pending adoption of ASU 2016-132018-13 did not have a material impact on the Company's condensed consolidated financial statements for any periods presented.statements.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 affects any entity that enters into a lease, with some specified scope exceptions. For public business entities, the amendments in ASU 2016-02 are effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The Company intends to adoptadopted ASU 2016-02 in the annual period beginning January 1, 2019. The Company intends to applyapplied the modified retrospective transition method and electelected the transition option to use the effective date January 1, 2019, as the date of initial application. The Company willdid not adjust its comparative period financial statements for effects of the ASU 2016-02, or makeand has not made the new required lease disclosures for periods before the effective date. The Company will recognizehas recognized its cumulative effect transition adjustment as of the effective date. In addition, we intend to electthe Company has elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow ushave allowed the Company to carry forward the historical lease classification. The Company has made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. In addition, the Company has also made an accounting policy election to combine all lease and the related non-lease components as a single component.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
During the fourth quarter, the Company continued its process to identify leasing arrangements and to compare its accounting policies and practices to the requirementsadoption of the new standard. Specifically, the Company is continuing to assess whether there are any “embedded leases” in arrangements with its suppliers and customers. In addition, the Company has identified and is implementing necessary changes to processes and controls to support recognition and disclosure under the new standard. In the first quarter of 2019, the Company will continue its testing of the updated process controls including controls specific to the new third-party software. The Company has substantially completed aggregating and evaluating lease contracts and is in the final stages of implementing a new lease accounting system to support the accounting and disclosure requirements of this standards update.
Upon adoption, the Company anticipates recording a right-of-use asset and lease liability on its Consolidated Balance Sheet similar in magnitude to the total present value of outstanding future minimum payments for operating leases and Build-To-Suit lease obligation s as shown in Note 16, Commitments and Contingencies; therefore, the Company expects this standards update willstandard did not have a material impact on our Consolidated Balance Sheets and related disclosures. The adoption of this standards update is not expected to have a material impact on ourthe Company's Consolidated Statements of Operations or Statements of Cash Flows.
Accounting Standards Issued But Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. ASU 2019-12 is effective for public business entities for annual periods beginning after December 15, 2020, and early adoption is permitted. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company plans to adopt ASU 2019-12 as of January 1, 2021. The Company has concluded that the pending adoption of ASU 2019-12 will not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. ASU 2018-14 removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the employer; and the effects of a one-percentage point change in assumed health care cost trend rates. ASU 2018-14 requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted for all entities and the amendments in this update are required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact on its disclosures.
NOTE 3. Revenue
Disaggregation of revenue
The Company has attributed net sales to the geographic area based on the location of the entity selling the final product. Of the net sales, exports from the U.S. to other regions amounted to approximately $140 million, $175 million and $356 million $159 millionin 2020, 2019 and $222 million in 2018, 2017 and 2016, respectively.
In the following tables (dollars in millions), revenue is disaggregated by primary region and products of revenue recognition.
Net Sales by Region
| | | Year Ended December 31 | | Year Ended December 31 |
| 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
| Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total |
Asia | $ | 424 |
| | $ | 370 |
| | $ | 794 |
| | $ | 489 |
| | $ | 362 |
| | $ | 851 |
| | $ | 521 |
| | $ | 276 |
| | $ | 797 |
| Asia | $ | 322 | | | $ | 25 | | | $ | 347 | | | $ | 350 | | | $ | 312 | | | $ | 662 | | | $ | 424 | | | $ | 370 | | | $ | 794 | |
Americas | 696 |
| | 58 |
| | 754 |
| | 698 |
| | 114 |
| | 812 |
| | 717 |
| | 115 |
| | 832 |
| Americas | 422 | | | 45 | | | 467 | | | 556 | | | 60 | | | 616 | | | 696 | | | 58 | | | 754 | |
Europe | 680 |
| | — |
| | 680 |
| | 663 |
| | — |
| | 663 |
| | 598 |
| | — |
| | 598 |
| Europe | 559 | | | 0 | | | 559 | | | 624 | | | 0 | | | 624 | | | 680 | | | 0 | | | 680 | |
Total region sales | 1,799 |
| | 428 |
| | 2,228 |
| | 1,850 |
| | 476 |
| | 2,326 |
| | 1,837 |
| | 391 |
| | 2,228 |
| Total region sales | 1,303 | | | 70 | | | 1,373 | | | 1,530 | | | 372 | | | 1,902 | | | 1,799 | | | 428 | | | 2,228 | |
Less: intercompany sales | — |
| | — |
| | — |
| | (1 | ) | | (3 | ) | | (4 | ) | | (1 | ) | | (8 | ) | | (9 | ) | |
| Total | $ | 1,800 |
| | $ | 428 |
| | $ | 2,228 |
| | $ | 1,849 |
| | $ | 473 |
| | $ | 2,322 |
| | $ | 1,835 |
| | $ | 383 |
| | $ | 2,218 |
| Total | $ | 1,303 | | | $ | 70 | | | $ | 1,373 | | | $ | 1,530 | | | $ | 372 | | | $ | 1,902 | | | $ | 1,800 | | | $ | 428 | | | $ | 2,228 | |
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
Net Sales by Products
| | | Year Ended December 31 | | Year Ended December 31 |
| 2018 | | 2017 | | 2016 | | 2020 | | 2019 | | 2018 |
| Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total | | Electronics | | Brake Systems | | Total |
Restraint Control Systems | $ | 974 |
| | $ | — |
| | $ | 974 |
| | $ | 1,073 |
| | $ | — |
| | $ | 1,073 |
| | $ | 1,097 |
| | $ | — |
| | $ | 1,097 |
| Restraint Control Systems | $ | 670 | | | $ | 0 | | | $ | 670 | | | $ | 822 | | | $ | 0 | | | $ | 822 | | | $ | 974 | | | $ | 0 | | | $ | 974 | |
Active Safety products | 825 |
| | — |
| | 825 |
| | 778 |
| | — |
| | 778 |
| | 740 |
| | — |
| | 740 |
| Active Safety products | 624 | | | 0 | | | 624 | | | 708 | | | 0 | | | 708 | | | 825 | | | 0 | | | 825 | |
Brake Systems | — |
| | 428 |
| | 428 |
| | — |
| | 476 |
| | 476 |
| | — |
| | 391 |
| | 391 |
| Brake Systems | 0 | | | 70 | | | 70 | | | 0 | | | 372 | | | 372 | | | 0 | | | 428 | | | 428 | |
Other | | Other | 9 | | | — | | | 9 | | | — | | | — | | | — | | | — | | | — | | | — | |
Total product sales | 1,799 |
| | 428 |
| | 2,228 |
| | 1,850 |
| | 476 |
| | 2,326 |
| | 1,837 |
| | 391 |
| | 2,228 |
| Total product sales | 1,303 | | | 70 | | | $ | 1,373 | | | 1,530 | | | 372 | | | $ | 1,902 | | | 1,799 | | | 428 | | | 2,228 | |
Less: intercompany sales | — |
| | — |
| | — |
| | (1 | ) | | (3 | ) | | (4 | ) | | (1 | ) | | (8 | ) | | (9 | ) | |
| Total net sales | $ | 1,800 |
| | $ | 428 |
| | $ | 2,228 |
| | $ | 1,849 |
| | $ | 473 |
| | $ | 2,322 |
| | $ | 1,835 |
| | $ | 383 |
| | $ | 2,218 |
| Total net sales | $ | 1,303 | | | $ | 70 | | | $ | 1,373 | | | $ | 1,530 | | | $ | 372 | | | $ | 1,902 | | | $ | 1,800 | | | $ | 428 | | | $ | 2,228 | |
The following tables provide information about receivables and contract assets from contracts with customers.
Contract Balances with Customers
| | | | | | | | | | | |
| As of December 31 |
| 2020 | | 2019 |
Receivables, net | $ | 292 | | | $ | 253 | |
Contract assets1 | 6 | | | 6 | |
|
| | | | | | | |
| As of December 31 |
| 2018 | | 2017 |
Receivables, net | $ | 376 |
| | $ | 448 |
|
Contract assets1 | 8 |
| | — |
|
1 Included in prepaid expenses and other contract assets in the Consolidated Balance Sheets
Changes in the contract asset balances during the period are as follows:
Change in Contract Balances with Customers1
| | | | | | | | | | | |
| Year Ended December 31 |
Contract assets | 2020 | | 2019 |
Beginning balance | $ | 6 | | | $ | 8 | |
Increases due to revenue recognized | 21 | | | 25 | |
Decreases due to transfer to receivables | (21) | | | (27) | |
Ending balance | $ | 6 | | | $ | 6 | |
|
| | | | |
| | December 31, 2018 |
| | Contract assets |
Beginning balance | | $ | — |
|
Increases due to cumulative catch up adjustment | | 8 |
|
Increases due to revenue recognized | | 31 |
|
Decreases due to transfer to receivables | | (31 | ) |
Ending balance | | $ | 8 |
|
1The contract asset is determined at each period end, this table reflects the rollforward of the period end balance.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 4. Leases
The Company has operating and finance leases for offices, manufacturing and research buildings, machinery, automobiles, data processing and other equipment. The leases have remaining lease terms of 1 month to 14.6 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 month to 1 year. As of December 31, 2020 and 2019, assets recorded under finance leases included in Property, plant and equipment, net were $52 million and $35 million, respectively, and accumulated depreciation associated with finance leases was $6 million and $2 million as of December 31, 2020 and 2019, respectively.
The Company has elected the practical expedient not to separate lease components from non-lease components for all its underlying assets.
If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgment when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.
The components of lease expense for the year ended December 31, 2020 were as follows:
| | | | | | | | | | | |
| Year Ended December 31 |
(Dollars in millions) | 2020 | | 2019 |
Operating lease cost | $ | 24 | | | $ | 24 | |
Finance lease cost | | | |
Amortization of right-of-use assets | 4 | | | 3 | |
Interest on lease liabilities | 2 | | | 2 | |
Total finance lease cost | 6 | | | 5 | |
Short-term lease cost | 1 | | | 0 | |
| | | |
Total lease cost | $ | 31 | | | $ | 29 | |
Other information related to leases for the year ended December 31, 2020 was as follows:
| | | | | | | | | | | |
Supplemental Cash Flows Information | Year Ended December 31 |
(Dollars in millions) | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows used for operating leases | $ | 23 | | | $ | 22 | |
Operating cash flows used for finance leases | 2 | | | 2 | |
Financing cash flows used for finance leases | 2 | | | 2 | |
Right-of-use assets obtained in exchange for new lease obligations: | | | |
Operating leases | 17 | | | 52 | |
Finance leases | 17 | | | 33 | |
| | | | | | | | | | | |
| As of December 31 |
(Lease term in years and discount rate) | 2020 | | 2019 |
Weighted-average remaining lease term | | | |
Operating Leases | 7 | | 8 |
Finance Leases | 10 | | 11 |
Weighted-average discount rate | | | |
Operating leases | 3.4 | % | | 3.6 | % |
Finance leases | 4.95 | % | | 4.9 | % |
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows:
| | | | | | | | | | | |
(Dollars in millions) | Operating Leases | | Finance Leases |
2021 | $ | 21 | | | $ | 6 | |
2022 | 18 | | | 8 | |
2023 | 16 | | | 8 | |
2024 | 10 | | | 8 | |
2025 | 8 | | | 4 | |
Thereafter | 27 | | | 32 | |
Total lease payments | 100 | | | 66 | |
Less imputed interest | 11 | | | 16 | |
Total lease liabilities | $ | 89 | | | $ | 50 | |
Lease obligations reported as of December 31, 2020 were as follows:
| | | | | | | | | | | |
(Dollars in millions) | Operating Leases | | Finance Leases |
Other current liabilities | $ | 18 | | | $ | 4 | |
Lease liabilities - non current | 71 | | | 46 | |
| | | |
Total lease liabilities | $ | 89 | | | $ | 50 | |
As of December 31, 2018,2020 and 2019, the Company has capitalizedadditional obligations of $12 million and $1 million, respectively, relating to leases, primarily for offices, manufacturing and research buildings, machinery, automobiles, data processing and other equipment, that have not yet commenced. These leases will commence in 2021 with lease terms of 3 years to 5 years.
NOTE 5. Debt
The Company’s short and long-term debt consists of the following:
| | | | | | | | | | | |
| As of December 31 |
(Dollars in millions) | 2020 | | 2019 |
Short-Term Debt: | | | |
Short-term borrowings | $ | 4 | | | $ | 3 | |
Long-Term Debt: | | | |
4.00% Convertible Senior Notes due 2024 (Carrying value) | 170 | | | 160 | |
Other long-term borrowings | 7 | | | 8 | |
Total Debt | $ | 181 | | | $ | 171 | |
Short-Term Debt:
Short -term debt is included in Other current liabilities in the Consolidated Balance Sheet.
Long-Term Debt:
Other long-term borrowings
Other long-term borrowings is included in Other non-current liabilities in the Consolidated Balance Sheet.
4.00% Convertible Senior Notes
On May 28, 2019, the Company issued, in a registered public offering in the U.S., Convertible Senior Notes (the “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 on June 1 and December 1 of each year, beginning December 1, 2019. The Notes will mature on June 1, 2024, unless repurchased, redeemed or converted in accordance with their terms prior to such date.
The net proceeds from the offering of the Notes were approximately $200 million, after deducting issuance costs of $7 million. The Company accounted for these issuance costs as a direct deduction from the carrying amount of the Notes. These costs are being amortized into interest expense for 5 years or through June 2024.
The conversion rate is 44.8179 shares of common stock per $1,000 principal amount of the Notes (equivalent to an initial conversion price of approximately $22.3125 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and incremental contract costs incurredunpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if the Company deliver a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with obtainingsuch a contract withcorporate event or notice of redemption, as the case may be. In no event will the conversion rate per $1,000 principal amount of the Notes as a customer. These costsresult of this adjustment exceed 57.1428 shares of common stock, as stipulated in the indenture.
The Company may not redeem the Notes prior to June 1, 2022. On or after this date, the Company may redeem for cash, shares or both all or any portion of the Notes, at our option, if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If the Company undergoes a fundamental change (as defined in the indenture), holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Notes will be amortizedthe Company's general unsecured obligations and will rank senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, equal in right of payment with all of the Company's liabilities that are not so subordinated, effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2024 only under the following circumstances: (1) if the last reported sale price of the Company's common stock for at least 20 trading days, whether or not consecutive, during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the "trading price" (as defined in the indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.
On or after March 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company's election, as stipulated in the indenture.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company's own stock, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related goodsdebt liability in the Consolidated and Balance Sheet and amortized to interest expense using the effective interest method over the term of the Notes. The effective interest rate on the Notes is 10%. The equity component of the Notes of approximately $46 million is included in additional paid-in capital in the Consolidated Balance Sheet and is not remeasured as long as it continues to meet the conditions for equity classification. The Company allocated transaction costs related to the Notes using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and amortized to interest expense over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in shareholders’ equity.
The following table presents the outstanding principal amount and carrying value of the Notes:
| | | | | | | | | | | | | | |
4.00% Convertible Senior Notes due 2024 | | As of December 31 |
(Dollars in millions) | | 2020 | | 2019 |
Principal amount (face value) | | $ | 207 | | | $ | 207 | |
Unamortized issuance cost | | (4) | | | (5) | |
Unamortized debt discount | | (33) | | | (42) | |
Net Carrying value | | $ | 170 | | | $ | 160 | |
The Company recognized total interest expense related to the Notes of approximately $17 million and $10 million for the year ended December 31, 2020 and 2019, respectively.
The estimated fair value of the Notes was $255 million and $205 million as of December 31, 2020 and 2019, respectively. The estimated fair value of the Notes was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 8, Fair Value Measurements.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 6. Divestiture and Held for Sale
VBS
In 2019, the Company started exploring strategic options for its non-core business in the Brake Systems segment. In the first quarter of 2020, management committed to and approved a plan to sell VBS. The business and its associated assets and liabilities met the criteria for presentation as held for sale during 2020 and were required to be adjusted to the lower of fair value less cost to sell or carrying value. This resulted in an impairment charge of approximately $144 million which was recorded within Gain on divestiture and assets impairment charges, net on the Consolidated Statements of Operations for the year ended December 31, 2020. The impairment was measured using third party sales pricing to determine fair values of the assets. The inputs utilized in the analyses are transferred.classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." The assets and liabilities associated with the transaction were separately classified as held for sale during 2020 and depreciation of these long-lived assets ceased during first half of 2020. The divestiture did not meet the criteria for presentation as a discontinued operation.
On August 10, 2020 Veoneer signed a definitive agreement to sell the majority of the Brake Systems business in North America to ZF. The aggregate purchase price was $1. In connection with the transaction, the Company received approximately $22 million from ZF for VBS operational cost reimbursement. The transaction closed during third quarter and no additional gain or loss was recognized. VNBS
In the fourth quarter of 2019, management approved a plan to sell VNBS. The business and its associated assets and liabilities met the criteria for presentation as held for sale as of December 31, 2019, and depreciation of long-lived assets ceased. The divestiture did not meet the criteria for presentation as a discontinued operation.
On October 30, 2019, the Company entered into definitive agreements with Nissin-Kogyo Co., Ltd. and Honda Motor Co., Ltd to divest VNBS. On February 3, 2020, the Company completed the sale of VNBS. The aggregate purchase price of the transaction was $176 million, subject to certain adjustments. The net cash proceeds after adjusting for closing costs was $175 million. The Company recognized a gain on the divestiture of $77 million, net of closing costs.
Assets and liabilities held for sale are summarized as follows:
| | | | | | | |
| |
(Dollars in millions) | As of December 31 | | |
Assets held for sale | 2019 | | |
Cash and cash equivalents | 35 | | |
Receivables, net | 58 | | |
Inventories, net | 17 | | |
Property, plant and equipment, net | 126 | | |
Intangible assets, net | 66 | | |
Other current assets | 15 | | |
Total assets held for sale | $ | 317 | | | |
Liabilities held for sale | | | |
Accounts payable | 50 | | |
Accrued expenses | 20 | | |
Related party short-term debt | 12 | | |
Pension liability | 8 | | |
Other current liabilities | 28 | | |
Total liabilities held for sale | $ | 118 | | | |
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 4.7. Business Combinations
Business combinations generally take place to either gain key technology or strengthen Veoneer’s position in a certain geographical area or with a certain customer. The results of operations and cash flows from the Company’s acquisitions have been included in the Company’s consolidated financial statements prospectively from their date of acquisition.
Fotonic i Norden dp ABZenuity, Inc and Zenuity GmbH
On NovemberApril 2, 2020, the Company entered into a non-binding agreement with Volvo Cars Corporation (VCC) to separate Zenuity, a 50% ownership joint venture with VCC in order for each company to more effectively drive their respective strategies. The parties entered into definitive agreements and effected the separation on July 1, 2017, Veoneer completed2020. As part of the transaction the Company paid approximately $37 million to Zenuity for 200 software engineers and 2 business units located in Germany and the US.
The Company applied the acquisition method of allaccounting to the shares in Fotonic i Norden dp AB (Fotonic), headquartered in StockholmZenuity, Inc and Skellefteå in Sweden. The acquisition date fair value ofZenuity GmbH entities, whereby the total consideration transferred was $17 million, consisting of a $15 million cash payment and $2 million of deferred purchase consideration, payable at the 18-month anniversary of the closing date. The deferred purchase consideration reflects the holdback amount as stipulated in the share purchase agreement. The transaction has been accounted for as a business combination, with the purchase price allocation reflecting the final valuation results.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
Fotonic provides Lidar and Time of Flight camera expertise and the acquisition included 35 Lidar and Time of Flight engineering experts, in addition to defined tangible and intangible assets. The strength of the acquired competence is on the Lidar and Time of Flight camera hardware side which form a complement to Veoneer’s skillset in the Lidar software and algorithms area. Lidar technology is an enabling technology for Highly Automated Driving and considered the primary sensor by all system developers. Fotonic is being reported in the Electronics segment.
The net assets acquired as of the acquisition date amounted to $17 million. The fair values of identifiable assets acquired consisted of Intangible assets of $4 million and Goodwill of $13 million, and the fair value of liabilities assumed consisted of Other current liabilities was less than a $1 million. Acquired Intangibles consistedexcess of the fair value of background IP (patent & technical know-how).the business over the fair value of identifiable net assets was allocated to goodwill. The useful life ofgoodwill reflects the IP is five years and will be amortized on a straight-line basis.workforce. The recognized goodwill whichof $23 million recorded as part of this acquisition is included in the Electronics reportable segment and is not deductible for tax deductible primary reflectspurposes. The preliminary opening balance sheet is subject to adjustment based on final assessment of the valuationfair values of certain acquired assets, principally intangibles, and certain assumed liabilities. The Company used the historical carrying value of the assets and liabilities on acquisition date as they were determined to approximate fair value based on the age and nature of the assets and liabilities acquired. This represents a Level 3 fair value measurements, to assess the purchase price allocation. As the Company finalizes the fair value of the acquired workforce of specialist engineers.
Veoneer-Nissin Brake Systems
On March 31, 2016,assets and assumed liabilities, additional purchase price adjustments may be recorded during the measurement period. The Company acquired a 51% interestwill reflect measurement period adjustments, if any, in the entities that formed Veoneer-Nissin Brake Systems (Brake Systems) for approximately $263 millionperiod in cash. This entity compriseswhich the Company’s Brake Systems Segment. Brake Systems designs, manufactures and sells products in the brake control and actuation systems business. Nissin Kogyo retained a 49% interest in the entities that formed Brake Systems. The Company has management and operational control of Brake Systems and has consolidated the results of operations and balance sheet from Brake Systems from the date of the acquisition forward. The transaction was accounted for as a business combination.
The acquisition combined Nissin Kogyo’s expertise and technology in brake control and actuation systems with the Company’s global reach and customer base to create a global competitive offering in the growing global Brake Systems market. Brake Systems is expected to further strengthen the Company’s role as a system supplier of products and systems for autonomous driving vehicles. From the date of the acquisition through December 31, 2016, the Brake Systems business reported net sales of $391 million and a net loss attributable to controlling interest of $5 million. The net loss attributable to the non-controlling interest was $7 million. The operating loss from the date of the acquisition through December 31, 2016 included $1 million of purchase accounting inventory fair value step-up adjustments in cost of sales upon the sale of acquired inventory.occur.
Total Brake SystemsZenuity, Inc and Zenuity GmbH acquisition related costs were approximately $2$1 million for consolidated the yearperiod ended December 31, 2016.2020. These costs were reflected in Selling, general and administrative expenses in the Consolidated Statements of Operations.Operations for the year ended December 31, 2020.
The acquisition datefollowing table summarizes the estimated fair valuevalues of identifiable acquired assets and assumed liabilities:
| | | | | |
(Dollars in millions) | |
Assets | As of July 1, 2020 |
Cash and cash equivalents | $ | 4 | |
Receivable, net | 12 | |
Property, plant and equipment, net | 3 | |
Operating lease right-of-use assets | 10 | |
Goodwill | 23 | |
Total assets | $ | 52 | |
Tax payable | 2 | |
Accrued liabilities | 3 | |
Operating lease non-current liabilities | 10 | |
Total liabilities | $ | 15 | |
Net assets acquired | $ | 37 | |
Intellectual property
In addition, the consideration transferredCompany acquired the right to use VCC intellectual property in exchange for the Company’s 51% interest in the entities that formed Brake Systems was $263a payment of $10 million in a cash transaction.transaction outside of the business combination. The acquired intangible asset will be assigned a useful life of 8 years and amortized over the useful life on a straight-line basis.
Separately, the Company has licensed intellectual property for $10 million to VCC with zero cost base in a transaction outside of the business combination and recognized this amount as Other Income in the Consolidated Statements of Operations for the year ended December 31, 2020.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
The following table summarizes the finalized fair values of identifiable assets acquired and liabilities assumed:
|
| | | |
Assets: | As of March 31, 2016 |
Cash and cash equivalents | $ | 38 |
|
Receivables | 2 |
|
Inventories | 33 |
|
Other current assets | 8 |
|
Property, plant and equipment | 139 |
|
Other non-current assets | — |
|
Intangibles | 112 |
|
Goodwill | 235 |
|
Total assets | $ | 566 |
|
Liabilities: | |
Accounts payable | $ | 6 |
|
Other current liabilities | 23 |
|
Pension liabilities | 9 |
|
Other non-current liabilities | 13 |
|
Total liabilities | $ | 51 |
|
Net assets acquired | $ | 515 |
|
Less: Non-controlling interest | $ | (252 | ) |
Controlling interest | $ | 263 |
|
Acquired Intangibles primarily consisted of the fair value of customer contracts of $51 million and certain technology of $61 million. The customer contracts will be amortized straight-line over 7 years and the technology will be amortized straight-line over 10 years.
The recognized goodwill of $235 million reflects expected synergies from combining the Company's global reach and customer base with Nissin Kogyo’s expertise (including workforce) and technology in brake control and actuation systems. A portion of the goodwill is deductible for tax purposes.
Veoneer recognized related party short term debt of $4 million as of December 31, 2016, due to financing at Veoneer Nissin Brake Systems China Zhongshan (a 51% owned subsidiary). This $4 million debt facility was wholly repaid as of December 31, 2017.
NOTE 5.8. Fair Value Measurements
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.
Level 1 - Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
Level 2 - Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
Level 3 - Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
Assets which are valued at net asset value per share ("NAV"), or its equivalent, as a practical expedient are reported outside the fair value hierarchy, but are included in the total assets for reporting and reconciliation purposes.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
Items Measured at Fair Value on a Recurring Basis
Derivative instruments - The Company uses derivative financial instruments, “derivatives”, to mitigate the market risk that occurs from its exposure to changes in interest and foreign exchange rates. The Company does not enter into derivatives for trading or other speculative purposes. The Company’s use of derivatives is in accordance with the strategies contained in the Company’s overall financial risk policy. The derivatives outstanding as of December 31, 20182020 and 20172019 were foreign exchange swaps and forward contracts.swaps. All swaps principally match the terms and maturity of the underlying debtobligation and no0 swaps have a maturity beyond six months. All derivatives are recognized in the consolidated financial statements at fair value. Certain derivatives are from time to time designated either as fair value hedges or cash flow hedges in line with the hedge accounting criteria. For certain other derivatives hedge accounting is not applied either because non-hedge accounting treatment creates the same accounting result or the hedge does not meet the hedge accounting requirements, although entered into applying the same rationale concerning mitigating market risk that occurs from changes in interest and foreign exchange rates. The Company’s derivatives are classified as Level 2 of the fair value hierarchy and there were no transfers between the levels during this or comparable periods.
During the first quarter of 2018, foreign exchange forward contracts designated as cash flow hedges of certain external purchasing were terminated. The loss associated with such termination was not material.
Financial Statement Presentation
The Company enters into master netting agreements, International Swaps and Derivatives Association (ISDA) agreements with all derivative counterparties. The netting agreements allow for netting of exposures in the event of default or breach of the counterparty agreement. The fair values in the Consolidated Balance Sheets have been presented on a gross basis. Derivative financial instruments designated and non-designated as hedging instruments are includedreported in Other non-current assets and liabilities in the Consolidated Balance Sheets .Sheets. The nominal value of the derivatives not designated as hedging instruments was $103$179 million and $67$291 million as of December 31, 20182020 and 2017,2019, respectively. As of December 31, 20182020 and 2017 the liability of2019, the derivatives not designated as hedging instruments was less thana liability of $1 million and $1 million, respectively.for both periods.
Gains and losses on derivative financial instruments for the periods presented are as follows:
|
| | | | | | | | | | | |
| Year ended December 31 |
| 2018 | | 2017 | | 2016 |
| Foreign exchange forward contracts | | Foreign exchange forward contracts | | Foreign exchange forward contracts |
Foreign currency risk -Cost of sales: | | | | | |
Recorded into gain (loss) | $ | — |
| | $ | — |
| | $ | — |
|
Recorded gains (loss) into AOCI net of tax | — |
| | (4 | ) | | 9 |
|
Less: reclassified from AOCI into gain (loss) | (1 | ) | | 5 |
| | 1 |
|
| $ | 1 |
| | $ | (9 | ) | | $ | 8 |
|
Contingent consideration -The fair value of the contingent consideration relating to the MACOM acquisition on August 17, 2015 is re-measured on a recurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy. The Company adjusted the fair value of the earn-out liability to $14 million during 2017 based on actual revenue levels to date as well as changesreported in the estimated probability of different revenue scenarios for the remaining contractual earn-out period. Income of approximately $13 million was recognized within other incomeOther non-operating items, net in the Consolidated Statements of Operations, duringwere a gain of less than $1 million for the year ended December 31, 2017 due to the decrease in the contingent consideration liability. The remaining fair value2020, and a loss of $1 million for each of the earn-out liability of $14 million as of December 31, 2017 was fully released to and recognized within Other income during the yearyears ended December 31, 2018, driven by changes in the estimated probability of different revenue scenarios for the remaining contractual earn-out period such that management no longer believes that there are any scenarios under which the earn-out criteria could be met. Management has updated its analysis as of December 31, 20182019 and continues to believe that the fair value of the contingent consideration is $0 million.2018.
Items Measured at Fair Value on a Non-Recurring Basis
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
Items Measured at Fair Value on a Non-Recurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy. These assets include long-lived assets, intangible assets and investments in affiliates, which may be written down to fair value as a result of impairment. The Company has determined that the fair value measurements included in each of these assets and liabilities rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlements of liabilities, as observable inputs are not available. The Company has determined that each of these fair value measurements reside within Level 3 of the fair value hierarchy. To determine the fair value of long-lived assets, the Company utilizes the projected cash flows expected to be generated by the long-lived assets, then discounts the future cash flows over the expected life of the long-lived assets.
In No such measurements were made in the fourth quarter of 2017, the Company recognized an impairment charge of the full goodwill related to VNBS, resulting in an impairment loss of $234 million, which was included in earnings for thecurrent period. The primary driver of the goodwill impairment was due to the lower expected long-term operating cash flow performance of the business unit as of the measurement date. The remaining goodwill balance as of December 31, 2018 and 2017 was not measured at fair value as impairment indicators did not exist.
In the first quarter of 2017, the Company recognized an impairment charge to amortization of intangibles of $12 million related to a contract with an OEM customer of MACOM products, which was included in earnings for the period. As of December 31, 2017, the intangible value related to this customer contract was fully amortized. The remaining intangibles balance as of December 31, 2018 and 2017 was not measured at fair value as impairment indicators did not exist.
Investments
The Company may, as a practical expedient, estimate the fair value of certain investments using NAV of the investment as of the reporting date. This practical expedient generally deals with investments that permit an investor to redeem its investment directly with, or receive distributions from, the investee at times specified in the investee’s governing documents. Examples of these investments (often referred to as alternative investments) may include ownership interests in real assets, certain credit strategies, and hedging and diversifying strategies. They are commonly in the form of limited partnership interests. The Company uses NAV as a practical expedient when valuing investments in alternative asset classes and funds which are a limited partnership or similar investment vehicle.
On June 30, 2017, Veoneer committed to make a $15 million investment in Autotech 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 of December 31, 2018, Veoneer contributed a total of $8 million to the fund.
The carrying amounts reflected in the Consolidated Balance Sheet in Investments for the AutoTech Fund I, L.P approximates its fair values.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 6. Income Taxes
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
Loss before taxes | | 2018 | | 2017 | | 2016 |
U.S. | | $ | (54 | ) | | $ | (200 | ) | | $ | (78 | ) |
Non-U.S. | | (199 | ) | | (114 | ) | | 56 |
|
Total | | $ | (253 | ) | | $ | (314 | ) | | $ | (22 | ) |
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
Provision for income taxes | | 2018 | | 2017 | | 2016 |
Current | | | | | | |
Non-U.S. | | $ | 22 |
| | $ | 40 |
| | $ | 41 |
|
Deferred | | | | | | |
U.S. federal | | (4 | ) | | (1 | ) | | 2 |
|
Non-U.S. | | 24 |
| | (9 | ) | | (4 | ) |
Total income tax expense | | $ | 42 |
| | $ | 30 |
| | $ | 38 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
Effective income tax rate | | 2018 | | 2017 | | 2016 |
U.S. federal income tax rate | | $ | (53 | ) | | $ | (110 | ) | | $ | (8 | ) |
Foreign tax rate variances | | 1 |
| | 9 |
| | (2 | ) |
State taxes, net of federal benefit | | — |
| | (2 | ) | | (1 | ) |
Tax credits | | (9 | ) | | (10 | ) | | (9 | ) |
Change in Valuation Allowances | | 79 |
| | 62 |
| | 51 |
|
Non-Controlling Interest | | 3 |
| | 21 |
| | 1 |
|
Earnings of equity investments | | 13 |
| | 7 |
| | — |
|
Withholding taxes | | 5 |
| | 4 |
| | 4 |
|
Goodwill impairment | | — |
| | 13 |
| | — |
|
Change in U.S. tax rate | | — |
| | 35 |
| | — |
|
Other, net | | 3 |
| | 2 |
| | 1 |
|
Provision for income taxes | | $ | 42 |
| | $ | 30 |
| | $ | 38 |
|
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code, including reducing the U.S. federal corporate income tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and creates new taxes on certain foreign sourced earnings. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017. SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. The Company has completed the Company’s accounting for the effects on the Company’s existing deferred tax balances. Due to the full valuation allowance related to the Company’s U.S. operations, the impact to deferred taxes had a net zero impact to the Company except as it relates to a deferred tax liability related to tax deductible goodwill which resulted in a benefit of $4 million recorded for the year ended December 31, 2018 which is reflected as a change in valuation allowances. Pursuant to the Tax Matters Agreement entered into with Autoliv in connection with the Spin-Off, Autoliv is the primarily obligor on all taxes which relate to any period prior to April 1, 2018. Consequently the Company is not liable for any transition taxes under the Tax Act.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
The Tax Act created a new requirement that certain Global Intangible Low Taxed Income (“GILTI”) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company’s measurement of deferred taxes. The Company has determined that it will treat the impact of GILTI as a period cost. The Tax Act also included other provisions effective in 2018, designated as (1) foreign derived intangible income (“FDII”), (2) interest disallowance and (3) base erosion anti-abuse tax (“BEAT”), that were considered in the income tax provision for the year ended December 31, 2018.
The tax effect of temporary differences and carryforwards that comprise significant portions of deferred tax assets and liabilities were as follows:
|
| | | | | | | | |
| | As of December 31 |
Deferred taxes | | 2018 | | 2017 |
Assets | | | | |
Provisions | | $ | 39 |
| | $ | 44 |
|
Costs capitalized for tax | | 1 |
| | 2 |
|
Acquired intangibles | | 20 |
| | 12 |
|
Tax receivables, principally net operating loss carryforward | | 74 |
| | 112 |
|
Credits | | 2 |
| | 9 |
|
Other | | 3 |
| | — |
|
Deferred tax assets before allowances | | $ | 139 |
| | $ | 179 |
|
Valuation allowances | | (125 | ) | | (150 | ) |
Total | | $ | 14 |
| | $ | 29 |
|
Liabilities | | | | |
Property, plant and equipment | | (9 | ) | | (6 | ) |
Distribution taxes | | (7 | ) | | (8 | ) |
Other | | — |
| | (2 | ) |
Total | | $ | (16 | ) | | $ | (16 | ) |
Net deferred tax asset (liability) | | $ | (2 | ) | | $ | 13 |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. On December 31, 2018, the Company had net operating loss carryforwards (NOL’s) of approximately $289 million, of which approximately $153 million have no expiration date. The remaining losses expire on various dates through 2027. The Company also has $2 million of U.S. Research and Development Credit carry forwards, which expire in 2038.
The Company assesses all available evidence, both positive and negative, to determine the amount of any required valuation allowance. In the fourth quarter of 2018, one of the Company’s Asian subsidiaries entered into a long-term development contract which will result in projected losses in that jurisdiction. While this entity has historically been profitable, the Company has determined that, given the projected losses along with indications that there may be a slowdown in this jurisdiction, it is no longer more likely than not that its deferred tax assets in the jurisdiction will be realizable and therefore has recorded a full valuation allowance against this entity’s deferred tax assets. Valuation allowances have been established for the Company’s US, Sweden, China and Japan operations and the Company’s joint venture in Japan. Such allowances are provided against each entity’s net deferred tax assets, primarily NOL’s, due to a history of cumulative losses or changes to projected future earnings which would support the recognition of the net deferred tax assets.
The Company has recorded a deferred tax asset of $11 million and $30 million as of December 31, 2018 and 2017, respectively, and $13 million and $17 million of deferred tax liabilities as of December 31, 2018 and 2017, respectively, in the Consolidated Balance Sheets.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
The following table summarizes the activity related to the Company’s valuation allowances:
|
| | | | | | | | |
| | As of December 31 |
Valuation Allowances Against Deferred Tax Assets | | 2018 | | 2017 |
Allowances at beginning of year | | $ | 150 |
| | $ | 90 |
|
Benefits reserved current year | | 83 |
| | 98 |
|
Benefits recognized current year | | — |
| | (4 | ) |
Settlement of tax matters with Former Parent1 | | (101 | ) | | — |
|
Change in Tax rate /impact of U.S. tax reform | | (4 | ) | | (35 | ) |
Translation difference | | (3 | ) | | 1 |
|
Allowances at end of year | | $ | 125 |
| | $ | 150 |
|
1Impact is reflected in equity in conjunction with the Spin-OffThe Company has reserves for income taxes that represent the Company’s best estimate of the potential liability for tax exposures. Inherent uncertainties exist in estimates of tax exposures due to changes in tax law, both legislated and concluded through the various jurisdictions’ court systems. Any income tax liabilities resulting from operations prior to the legal date of separation, were settled with Former Parent on the last day Veoneer was part of the Autoliv group and were relieved through the Former Parent company investment. The Company files income tax returns in the United States federal jurisdiction, and various states and non-U.S. jurisdictions.
Since the Company’s operations were generally part of an existing Autoliv legal entity through April 1, 2018 or June 30, 2018 (depending on the jurisdiction), the existing Autoliv legal entity was the primary obligor and is responsible for handling any income tax audit and settling any audits with the taxing authority. To the extent that the Company has accrued a liability for an uncertain tax position related to a period prior to the separation, such liabilities were settled with Former Parent on the last day the Company was part of the Former Parent’s group and were relieved through the Parent company investment.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in tax expense. As of December 31, 2018, the Company had recorded $2 million for unrecognized tax benefits. Of the total unrecognized tax benefits as of December 31, 2018, $1 million is classified as a current income tax payable and $1 million is classified as non-current tax payable included in Other Non-Current Liabilities in the Consolidated Balance Sheets. Approximately $2 million of these reserves would impact income tax expense if released into income. The Company expects a change to its unrecognized tax benefits of approximately $1 million in the next twelve months.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
| | | | | | | | |
| | As of December 31 |
Unrecognized Tax Benefits | | 2018 | | 2017 |
Unrecognized tax benefits at beginning of year | | $ | 2 |
| | $ | 1 |
|
Increases as a result of tax positions taken during the current period | | 2 |
| | 1 |
|
Settlement with net former parent | | (2 | ) | | — |
|
Total unrecognized tax benefits at end of year | | $ | 2 |
| | $ | 2 |
|
The Company deferred tax liability for unremitted foreign earnings was $7 million as of December 31, 2018. The $7 million deferred tax liability represented our estimate of the foreign tax cost associated with our preliminary estimate of $146 million of foreign earnings that are not considered to be permanently reinvested. The Company have not provided for foreign withholding or income taxes on the remaining foreign subsidiaries’ undistributed earnings because such earnings have been retained and reinvested by the subsidiaries as of December 31, 2018. Accordingly, no provision has been made for foreign withholding or income taxes, which may become payable if the remaining undistributed earnings of foreign subsidiaries were paid to us as dividends.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 7.9. Receivables
| | | | | | | | As of December 31 |
| | As of December 31 | |
| | 2018 | | 2017 | |
(Dollars in millions) | | (Dollars in millions) | | 2020 | | 2019 |
Receivables | | $ | 378 |
| | $ | 450 |
| Receivables | | $ | 295 | | | $ | 256 | |
Allowance at beginning of year | | $ | (2 | ) | | $ | (4 | ) | Allowance at beginning of year | | (3) | | | (2) | |
Current period provision for expected credit losses | | Current period provision for expected credit losses | | (1) | | | 0 | |
Reversal of allowance | | — |
| | 2 |
| Reversal of allowance | | 0 | | | 1 | |
Addition to allowance | | Addition to allowance | | 0 | | | (2) | |
Write-off against allowance | | Write-off against allowance | | 1 | | | 0 | |
Allowance at end of year | | $ | (2 | ) | | $ | (2 | ) | Allowance at end of year | | (3) | | | (3) | |
Total receivables, net of allowance | | $ | 376 |
| | $ | 448 |
| Total receivables, net of allowance | | $ | 292 | | | $ | 253 | |
The Company receives bank acceptance notes which are registered and endorsed to the Company, and generally maturesmaturing within six months from certain of its customers in China to settle trade accounts receivable. These guaranteed notes are available for discounting with banking institutions in China or transferring to suppliers to settle liabilities. The Company may hold such bank acceptance notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third party financial institutions in exchange for cash.
As of December 31, 2018,2020 and 2019, the Company has $19had entered into arrangements with financial institutions and sold $52 million and $81 million, respectively, of factored trade receivables without recourse and $25 million and $37 million, respectively, of bank acceptance notes in China,without recourse, which qualify as sales as all rights to the trade and $10notes receivable have passed to the financial institution.
As of December 31, 2020, the Company had $3 million of trade notes receivables in France which remain outstanding and will mature within the first halfquarter of 2019.2021. The collections of such bank acceptance notes and trade receivables are included in operating cash flows based on the substance of the underlying transactions, which are operating in nature. The fair value of the guaranteed notes receivables in China is determined based on Level 2 inputs including credit ratings and other criteria observable in the market. The fair value of these notes equal their carrying amounts of $9$3 million as of December 31, 2018.
During the year ended December 31, 2018, the Company entered into arrangements with financial institutions and factored trade receivables of $10 million in France and bank notes of $9 million in China. They were accounted for as secured borrowings with pledged collateral and recorded in the Consolidated Balance Sheets within “Receivable, net” and “Other current liabilities.”
NOTE 8. Inventories2020.
|
| | | | | | | | |
| | As of December 31 |
| | 2018 | | 2017 |
Raw material | | $ | 108 |
| | $ | 90 |
|
Work in progress | | 15 |
| | 21 |
|
Finished products | | 71 |
| | 70 |
|
Inventories | | $ | 194 |
| | $ | 181 |
|
Inventory reserve at beginning of year | | $ | (27 | ) | | $ | (25 | ) |
Reversal of reserve | | 1 |
| | 5 |
|
Addition to reserve | | (3 | ) | | (6 | ) |
Write-off against reserve | | 5 |
| | 1 |
|
Translation difference | | 1 |
| | (2 | ) |
Inventory reserve at end of year | | $ | (23 | ) | | $ | (27 | ) |
Total inventories, net of reserve | | $ | 172 |
| | $ | 154 |
|
NOTE 9. Equity Method Investment
As of December 31, 2018, the Company has one equity method investment.
On April 18, 2017, Autoliv and Volvo Cars completed the formation of their joint venture, Zenuity AB. Autoliv’s interest in Zenuity was transferred to Veoneer in connection with the Spin-Off. Autoliv made an initial cash contribution of SEK 1 billion (approximately $111 million as of April 18, 2017) and also contributed intellectual property, lab equipment and an assembled workforce. Veoneer and Volvo Cars each have a 50% ownership of Zenuity and neither entity has the ability to exert control over the joint venture, in form or in substance. Veoneer accounts for its investment in Zenuity under the equity method and the investment is shown in Equity method investment in the Consolidated Balance Sheets. The contributed intellectual property, lab equipment,
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 10. Inventories
and an assembled workforce have been assessed to constitute a business as defined by ASU 2017-1, Business Combinations (Topic 805) – Clarifying the Definition of a Business. FASB ASC Topic 810, Consolidation states that when a group of assets that constitute a business is derecognized, the carrying amounts of the assets and liabilities are removed from the Consolidated Balance Sheets. The investor would recognize a gain or loss based on the difference between the sum of the fair value of any consideration received less the carrying amount of the group of assets and liabilities contributed at the date of the transaction. The equity value of Zenuity on the date of the closing of the transaction of approximately $250 million was calculated using the discounted cash flow method of the income approach. Veoneer’s 50% share of the equity value, approximately $125 million, represented its investment in Zenuity, including its cash contribution at inception. | | | | | | | | | | | | | | |
| | As of December 31 |
(Dollars in millions) | | 2020 | | 2019 |
Raw material | | $ | 105 | | | $ | 99 | |
Work in progress | | 14 | | | 8 | |
Finished products | | 51 | | | 62 | |
Inventories | | $ | 170 | | | $ | 169 | |
Inventory reserve at beginning of year | | $ | (25) | | | $ | (23) | |
Reversal of reserve | | 0 | | | 1 | |
Addition to reserve | | (11) | | | (4) | |
Write-off against reserve | | 1 | | | 1 | |
Translation difference | | (1) | | | 0 | |
Inventory reserve at end of year | | $ | (36) | | | $ | (25) | |
Total inventories, net of reserve | | $ | 134 | | | $ | 144 | |
NOTE 11. Accrued Expenses
| | | | | | | | | | | | | | | | |
| | As of December 31 | | |
(Dollars in millions) | | 2020 | | 2019 | | |
Operating related accruals | | $ | 70 | | | $ | 43 | | | |
Employee related accruals | | 102 | | | 76 | | | |
Customer pricing accruals | | 20 | | | 39 | | | |
Product related liabilities1 | | 19 | | | 15 | | | |
Other accruals | | 21 | | | 19 | | | |
Total Accrued Expenses | | $ | 232 | | | $ | 192 | | | |
1As of December 31, 2018, Veoneer had contributed SEK 600 million (approximately $71 million) in cash (representing 50% of the total contribution, with the remainder made by Volvo Cars) into Zenuity to support its future operating cash flow needs.
The profit2020 and loss attributed to the investment is shown in Loss from equity method investment in the Consolidated Statements of Operations. Veoneer’s share of Zenuity’s loss for the years ended December 31, 2018 and 2017 was $632019, $9 million and $31 million, respectively. As of December 31, 2018 and 2017, the Company’s equity investment in Zenuity amounted to $101 million and $98$8 million, respectively, after consideration of foreign exchange movements.product related liabilities were indemnifiable losses subject to indemnification by Autoliv and an indemnification asset is included in Other current assets.
Certain audited Summarized Income Statement information of Zenuity is shown below:
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2018 | | 2017 | | 2016 |
Net sales | $ | 5 |
| | $ | 5 |
| | $ | — |
|
Gross profit | — |
| | — |
| | — |
|
Operating loss | (125 | ) | | (61 | ) | | — |
|
Loss before income taxes | (125 | ) | | (61 | ) | | — |
|
Net loss | $ | (125 | ) | | $ | (61 | ) | | $ | — |
|
NOTE 10. Property, Plant and Equipment12. Equity Method Investment
|
| | | | | | | | | | | | |
| | As of December 31 | | |
DECEMBER 31 | | 2018 | | 2017 | | Estimated life |
Land and land improvements | | $ | 21 |
| | $ | 20 |
| | n/a to 15 |
|
Machinery and equipment | | 662 |
| | 610 |
| | 3-8 |
|
Buildings | | 111 |
| | 76 |
| | 20 |
|
Construction in progress | | 177 |
| | 72 |
| | n/a |
|
Property, plant and equipment | | $ | 971 |
| | $ | 778 |
| | |
Less accumulated depreciation | | (472 | ) | | (416 | ) | | |
Net of accumulated depreciation | | $ | 499 |
| | $ | 362 |
| | |
| | | | | | |
| | Year Ended December 31 |
DEPRECIATION INCLUDED IN | | 2018 | | 2017 | | 2016 |
Cost of sales | | $ | 62 |
| | $ | 58 |
| | $ | 51 |
|
Selling, general and administrative expenses | | 3 |
| | 2 |
| | 1 |
|
Research, development and engineering expenses, net | | 22 |
| | 22 |
| | 19 |
|
Total | | $ | 88 |
| | $ | 82 |
| | $ | 71 |
|
In 2018As of December 31, 2020, the Company recognizedhas 2 equity method investment.
Zenuity
On April 2, 2020, the Company entered into a non-binding agreement with VCC to separate Zenuity, a 50% ownership joint venture with VCC in order for each company to more effectively drive their respective strategies. The parties entered into definitive agreements and effected the separation on July 1, 2020.
On July 1, 2020, the Company finalized the split of Zenuity. As part of the transaction the Company paid approximately $37 million to Zenuity for 200 software engineers and 2 business units located in Germany and the US. Veoneer acquired the right to use Zenuity's intellectual property for a total consideration of SEK 1,067 million (approximately $114 million) payable in ten annual installment payments, with the first payment due on July 1, 2021.
As the transaction resulted in all of the business of Zenuity being transferred to one of its two owners, the Company determined that the remaining value of that equity investment was equal only to the expected future dividends to be received. This resulted in an impairment charge of approximately $1$24 million which was recorded within Gain on divestiture and assets impairment charges, net on the Consolidated Statements of fixed assets related to Brake Systems. No significant fixed asset impairments were recognized duringOperations for the yearperiod ended December 31, 2017 or 2016.2020.
The net book value of machinery, equipment, buildingsAs the transaction was between the investor and land under capital lease contracts was $13 million and $11 million as of December 31, 2018 and 2017, respectively.
investee, the Company did not recognize any gain from the transaction.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 11. Goodwill and Intangible Assets
Intangible assets as of December 31, 2018 and 2017, were as follows:
|
| | | | | | | | | | | |
| Total | | Electronics Segment | | Brake Systems Segment |
Goodwill | | | | | |
Carrying amount at January 1, 2017 | $ | 490 |
| | $ | 278 |
| | $ | 212 |
|
Acquisition | 30 |
| | 13 |
| | 17 |
|
Goodwill impairment charge | (234 | ) | | — |
| | (234 | ) |
Translation differences | 6 |
| | — |
| | 5 |
|
Carrying amount at December 31, 2017 | 292 |
| | 292 |
| | — |
|
Translation differences | (1 | ) | | (1 | ) | | — |
|
Carrying amount at December 31, 2018 | $ | 291 |
| | $ | 291 |
| | $ | — |
|
Of the $30 million of goodwill recognized as of December 31, 2017, $13 million is related to the Fotonic acquisition in the fourth quarter of 2017 and $17 million is related to the finalizationFollowing completion of the purchase price allocation for Brake Systems acquisition in the first quartertransaction, Veoneer and VCC continue to own 50% each of 2017 (see Note 4, Business Combinations). During the year ended December 31, 2017, the Company recognized an impairment chargeZenuity AB. The joint venture was not dissolved as part of the full goodwill amounttransaction but continues as a holding company that owns the IP of $234 million, after consideration of foreign exchange movements, related to Brake Systems. The Company estimated the fair value of Brake Systems using the discounted cash flow method, taking into account expected long-term operating cash-flow performance. The primary driver of the goodwill impairment was due to the lower expected long-term operating cash flow performance of the business unit as of the measurement date. For more information regarding the Company’s impairment testing, see section “Goodwill and Intangible Assets” in Note 2, Summary of Significant Accounting Policies.
|
| | | | | | | | |
| | As of December 31 |
Amortizable Intangible | | 2018 | | 2017 |
Gross carrying amount | | $ | 260 |
| | $ | 249 |
|
Acquisition | | 3 |
| | 4 |
|
Translation differences | | 1 |
| | 7 |
|
Accumulated amortization | | (161 | ) | | (138 | ) |
Carrying value | | $ | 102 |
| | $ | 122 |
|
Zenuity.During the year ended December 31, 20172020, the Company received information relateddividend of SEK 327 million (approximately $35 million) in cash (representing 50% of the total dividend, with the remainder received by VCC) from Zenuity.
During the year ended December 31, 2020, prior to a contractthe transfer of Zenuity’s business to its 2 owners, Veoneer contributed SEK 240 million (approximately $25 million) in cash (representing 50% of the total contribution, with an OEM customerthe remainder made by VCC) into Zenuity to support its future operating cash flow needs.
During the year ended December 31, 2019, Veoneer contributed SEK 550 million (approximately $58 million) in cash (representing 50% of MACOM productsthe total contribution, with the remainder made by Volvo Cars) into Zenuity to support its future operating cash flow needs.
During the year ended December 31, 2018, Veoneer contributed SEK 600 million (approximately $71 million) in cash (representing 50% of the total contribution, with the remainder made by Volvo Cars) into Zenuity to support its future operating cash flow needs.
The profit and as a resultloss attributed to the Company recognized an impairment charge to amortization of intangiblesinvestment is shown in Loss from equity method investment in the Consolidated Statements of Operations for a customer contractOperations. Veoneer’s share of $12 million.
Of the carrying value of $102 million as of December 31, 2018, $71 million was related to the technology asset category and $31 million was related to the contractual relationships' asset category. Of the carrying value of $122 million at December 31, 2017, $80 million was related to the technology asset category and $38 million was related to the contractual relationships' asset category.
The Company recorded approximately $23 million, $37 million and $35 million of amortization expense related to definite-lived intangible assetsZenuity’s loss for the years ended December 31, 2020, 2019 and 2018 2017was $39 million, $70 million and 2016,$63 million, respectively.
AutoTechFund I, L.P
The Company currently estimated future amortization expense be $22has investments interest with Autotech Fund I, L.P of less than 20% which is accounted for under the equity method as the Company’s beneficial ownership interest in Autotech Fund I, L.P is similar to partnership interest.
On June 30, 2017, Veoneer committed to make a $15 million investment in Autotech 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 of December 31, 2020 and 2019, Veoneer has contributed a total of $12 million and $10 million, respectively, to the fund. As of December 31, 2020 the Company has received a distribution of $3 million from the fund.
The carrying amounts reflected in the Consolidated Balance Sheet in equity method for the AutoTech Fund I, L.P approximates its fair value as of September 30, 2020 as this is the most recent information available to the Company at this time.
As of December 31, 2020 and 2019, $21the Company’s equity investment in Zenuity and AutoTech amounted to $153 million for 2020, $19and $96 million, for 2021, $17 million for 2022 and $8 million for 2023. Indefinite-lived intangible assets are not amortized but are tested for impairment at least annually, or earlier when events and circumstances indicate that it is more likely than not that such assets have been impaired.
respectively, after consideration of foreign exchange movements.
86
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
NOTE 13. Property, Plant and Equipment
| | | | | | | | | | | | | | | | | |
| As of December 31 | | |
(Dollars in millions) | 2020 | | 2019 | | Estimated life (years) |
| | | | | |
Machinery and equipment | 825 | | | 634 | | | 3-8 |
Buildings | 134 | | | 103 | | | 20 |
Construction in progress | 63 | | | 195 | | | n/a |
Property, plant and equipment | $ | 1,022 | | | $ | 932 | | | |
Less accumulated depreciation | (591) | | | (459) | | | |
Net of accumulated depreciation | $ | 431 | | | $ | 473 | | | |
| | | | | |
| Year Ended December 31 |
DEPRECIATION INCLUDED IN (Dollars in millions) | 2020 | | 2019 | | 2018 |
Cost of sales | $ | 54 | | | $ | 59 | | | $ | 62 | |
Selling, general and administrative expenses | 4 | | | 4 | | | 3 | |
Research, development and engineering expenses, net | 39 | | | 32 | | | 22 | |
Total | $ | 97 | | | $ | 95 | | | $ | 88 | |
The net book value of machinery, equipment, buildings and land under finance lease contracts was $47 million and $33 million as of December 31, 2020 and 2019, respectively.
NOTE 12. Accrued Expenses14. Other Comprehensive Loss
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
(Dollars in millions) | | 2020 | | 2019 | | 2018 |
Other Comprehensive Loss1 | | | | | | |
Cumulative translation adjustments | | $ | 15 | | | $ | (34) | | | $ | (10) | |
| | | | | | |
Pension liability, net of tax | | (10) | | | (10) | | | (9) | |
Total ending balance | | $ | 5 | | | $ | (44) | | | $ | (19) | |
Deferred taxes on the pension liability | | 3 | | | 3 | | | 1 | |
1The components of Other Comprehensive Loss are net of any related income tax effects.
|
| | | | | | | | |
| | As of December 31 |
| | 2018 | | 2017 |
Operating related accruals | | $ | 55 |
| | $ | 55 |
|
Employee related accruals | | 66 |
| | 57 |
|
Customer pricing accruals | | 39 |
| | 36 |
|
Product related liabilities1 | | 16 |
| | 22 |
|
Other accruals | | 18 |
| | 25 |
|
Total Accrued Expenses | | $ | 193 |
| | $ | 195 |
|
NOTE 15. Goodwill and Intangible AssetsIntangible assets as of December 31, 2020 and 2019 were as follows (dollars in millions):
| | | | | | | | | |
1
| As of December 31, 2018, $14 million of product related liabilities were indemnifiable losses subject to indemnification by Autoliv and an indemnification asset is included in Other current assets, and there were no indemnification assets as of December 31, 2017. |
NOTE 13. Other Comprehensive Loss
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
Other Comprehensive Loss1 | | | | | | |
Cumulative translation adjustments | | $ | (10 | ) | | $ | (2 | ) | | $ | (31 | ) |
Net gain (loss) of cash flow hedge derivatives | | — |
| | (1 | ) | | 8 |
|
Pension liability | | (9 | ) | | (6 | ) | | (6 | ) |
Total (ending balance) | | $ | (19 | ) | | $ | (8 | ) | | $ | (29 | ) |
Deferred taxes on the pension liability | | 1 |
| | — |
| | — |
|
| Electronics Segment | | |
1 Goodwill | The components of Other Comprehensive Loss are net of any related income tax effects. | | | | |
Carrying amount at January 1, 2019 | | | $ | 291 | | | |
| | | | | |
| | | | | |
Translation differences | | | (1) | | | |
Carrying amount at December 31, 2019 | | | 290 | | | |
Acquisition | | | 23 | | | |
Translation differences | | | 4 | | | |
Carrying amount at December 31, 2020 | | | $ | 317 | | | |
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
| | | | | | | | | | | | | | |
| | As of December 31 |
Amortizable Intangible | | 2020 | | 2019 |
Gross carrying amount | | $ | 145 | | | $ | 147 | |
Transfer | | (3) | | | 0 | |
Addition | | 11 | | | 0 | |
Translation differences | | 2 | | | (1) | |
Accumulated amortization | | (134) | | | (129) | |
Carrying value | | $ | 21 | | | $ | 17 | |
As of December 31, 2020 and 2019, the carrying value of the amortizable intangible of $21 million and $17 million, respectively, was related to the technology asset category. The estimated weighted average useful life for these assets is 4.3 years.
The Company recorded approximately $6 million, $20 million and $23 million of amortization expense related to definite-lived intangible assets for the years ended December 31, 2020, 2019 and 2018, respectively. The Company currently estimates future amortization expenses to be $7 million for 2021, $5 million for 2022, $2 million for 2023, $2 million for 2024 and $2 million for 2025.
NOTE 14.16. Commitments and Contingencies
Legal Proceedings
Veoneer is subject to various claims, lawsuits and proceedings are pending or threatened against the Company, covering a range of matters that arise in the ordinary course of its business activities with respect to commercial, product liability and other matters. Litigation is subject to many uncertainties, and the outcome of any litigation cannot be assured. After discussions with counsel, with the exception of any potential losses resulting from the issue described below, it is the opinion of management that the various legal proceedings and investigations to which the Company currently is a party will not have a material adverse impact on the Consolidated financial position of Veoneer, but the Company cannot provide assurance that Veoneer will not experience material litigation, product liability or other losses in the future.
Product Warranty, Recalls and Intellectual Property
Veoneer is exposed to various claims for damages and compensation if its products fail to perform as expected. Such claims can be made, and result in costs and other losses to the Company, even where the product is eventually found to have functioned properly. Where a product (actually or allegedly) fails to perform as expected or is defective, the Company may face warranty and recall claims. Where such (actual or alleged) failure or defect results, or is alleged to result, in bodily injury and/or property damage, the Company may also face product liability and other claims. There can be no assurance that the Company will not experience material warranty, recall or product (or other) liability claims or losses in the future, or that the Company will not incur significant costs to defend against such claims. The Company may be required to participate in a recall involving its products. Each vehicle manufacturer has its own practices regarding product recalls and other product liability actions relating to its suppliers. As suppliers become more integrally involved in the vehicle design process and assume more of the vehicle assembly functions, vehicle manufacturers are increasingly looking to their suppliers for contribution when faced with recalls and product liability claims. Government safety regulators may also play a role in warranty and recall practices. A warranty, recall or product-liability claim brought against the Company in excess of its insurance may have a material adverse effect on the Company’s business. Vehicle manufacturers are also increasingly requiring their outside suppliers to guarantee or warrant their products and bear the costs of repair and replacement of such products under new vehicle warranties. A vehicle manufacturer may attempt to hold the Company responsible for some, or all, of the repair or replacement costs of products when the product supplied did not perform as represented by the Company or expected by the customer. Accordingly, the future costs of warranty claims by the customers may be material. However, the Company believes its established reserves are adequate. Veoneer’s warranty reserves are based upon the Company’s best estimates of amounts necessary to settle future and existing claims. The Company regularly evaluates the adequacy of these reserves, and adjusts them when appropriate. However, the final amounts actually due related to these matters could differ materially from the Company’s recorded estimates.
In addition, as vehicle manufacturers increasingly use global platforms and procedures, quality performance evaluations are also conducted on a global basis. Any one or more quality, warranty or other recall issue(s) (including those affecting few units
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
and/or having a small financial impact) may cause a vehicle manufacturer to implement measures such as a temporary or prolonged suspension of new orders, which may have a material impact on the Company’s results of operations.
The Company carries insurance for potential recall and product liability claims at coverage levels based on the Company’s prior claims experience. Veoneer cannot assure that the level of coverage will be sufficient to cover every possible claim that can arise in the Company’s businesses, now or in the future, or that such coverage always will be available should the Company, now or in the future, wish to extend, increase or otherwise adjust the Company’s insurance.
In its products, the Company utilizes technologies which may be subject to intellectual property rights of third parties. While the Company does seek to procure the necessary rights to utilize intellectual property rights associated with its products, it may fail to do so. Where the Company so fails, the Company may be exposed to material claims from the owners of such rights. Where the Company has sold products which infringe upon such rights, its customers may be entitled to be indemnified by the Company for the claims they suffer as a result thereof. Such claims could be material.
Product Related Liabilities
The Company is exposed to product liability and warranty claims in the event that the Company’s products fail to perform as represented and such failure results, or is alleged to result, in bodily injury, and/or property damage or other loss. The Company has reserves for product risks. Such reserves are related to product performance issues including recall, product liability and warranty issues.
The Company records liabilities for product related risks when probable claims are identified and when it is possible to reasonably estimate costs. Provisions for warranty claims are estimated based on prior experience, likely changes in performance of newer products, and volume of the products sold. The provisions are recorded on an accrual basis.
The table below summarizes the change in product related liabilities in the Consolidated Balance Sheets.
| | | | | | | | | | | | | | |
| | As of December 31 |
(Dollars in millions) | | 2020 | | 2019 |
Reserve at beginning of the year | | $ | 15 | | | $ | 16 | |
Change in reserve | | 11 | | | 1 | |
Cash settlements | | (8) | | | (2) | |
| | | | |
Translation difference | | 1 | | | 0 | |
Reserve at end of the year | | $ | 19 | | | $ | 15 | |
As of December 31, 2020 and 2019, provisions and cash paid primarily relate to warranty related issues. The increase in the reserve balance as of December 31, 2020 compared to the prior year was mainly due to warranty related issues. Agreements entered into between Autoliv and Veoneer in connection with the Spin-Off provide for Autoliv to indemnify Veoneer for certain liabilities related to electronics products manufactured before April 1, 2018. As of December 31, 2020 and 2019, $9 million and $8 million, respectively, of product related liabilities were indemnifiable losses subject to indemnification by Autoliv and an indemnification asset is included in Other current assets.
Guarantees
The Company provided lease guarantees to Zenuity of $7 million as of December 31, 2019. These represent the maximum potential amount of future undiscounted payments that Veoneer could be required to make under the guarantees in the event of default by the guaranteed parties. These guarantees will generally cease upon expiration of current lease agreements between 2020 and 2022. There are no liabilities recorded in the Consolidated Balance Sheet as of December 31, 2019 related to these guarantees. There were no guarantees as of December 31, 2020.
NOTE 17. Retirement Plans
Defined Benefit Pension Plans
The defined benefit pension plans impacting the Veoneer financial results include the following:
Existing Veoneer Plans which are comprised of plans in Japan, Canada, and France, Transferred Veoneer Plans whicharecomprisedofplansinGermany,India,Japan,andSouthKorea,and Autoliv Sponsored Plans whichare comprisedofplansinSwedenandtheU.S.
The combination of the Existing Veoneer Plans and Transferred Veoneer Plans has resulted in a total pension expense of $4 million, $5 million and $4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Existing Veoneer Plans
The defined benefit pension plans for eligible participants in Japan, Canada, and France prior to the Spin-Off continue to provide pension retirement benefits to the Company’s employees subsequent to the Spin-Off.
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
Transferred Veoneer Plans
Prior toFor the plan transfers to Veoneer legal entities on April 1, 2018, eligible Veoneer employees participated in the following Autoliv-sponsored plans:
|
| |
Country | Name of Defined Benefit Plans |
Germany | Direct Pension Promises Plan |
India | Gratuity Plan |
Japan | Retirement Allowances Plan |
Defined Benefit Corporate Plan |
South Korea | Severance Pay Plan (statutory plan) |
On April 1,years ended December 31, 2020, 2019 and 2018, the assets, liabilities, and associated accumulated other comprehensive income (loss) of theCompany's total pension plans in Germany, India, Japan, and South Korea related to active Veoneer employees were transferred to pension plans sponsored by various Veoneer legal entities. Benefit plan obligations of $6expense was $4 million were recorded by Veoneer related to these plans in connection with the April 1, 2018 transfer. Plan assets in the transferred plans are immaterial. The amounts recorded for the transfer of the Veoneer plans were based on the assumptions incorporated into the plan measurements as of December 31, 2017; however, management determined that there were no material changes in assumptions from December 31, 2017 to April 1, 2018. The plans were re-measured in connection with the December 31, 2018 actuarial valuation.each period.
Changes in Benefit Obligations and Plan Assets
|
| | | | | | | | |
| | As of December 31 |
| | 2018 | | 2017 |
Benefit obligation at beginning of year | | $ | 74 |
| | $ | 66 |
|
Service cost | | 5 |
| | 5 |
|
Interest cost | | 2 |
| | 1 |
|
Actuarial (gain) loss | | (2 | ) | | 1 |
|
Benefits paid | | (2 | ) | | (1 | ) |
Curtailments | | — |
| | (3 | ) |
Settlement | | (3 | ) | | — |
|
Acquisition | | — |
| | 1 |
|
Other | | 4 |
| | — |
|
Translation difference | | (2 | ) | | 4 |
|
Benefit obligation at end of year | | $ | 76 |
| | $ | 74 |
|
Fair value of plan assets at beginning of year | | $ | 60 |
| | $ | 51 |
|
Actual return on plan assets | | (2 | ) | | 3 |
|
Company contributions | | 4 |
| | 6 |
|
Benefits paid | | (2 | ) | | (1 | ) |
Settlements | | (3 | ) | | (3 | ) |
Acquisition | | — |
| | 1 |
|
Other | | (1 | ) | | — |
|
Translation difference | | (2 | ) | | 3 |
|
Fair value of plan assets at year end | | $ | 54 |
| | $ | 60 |
|
Funded status recognized in the balance sheet | | $ | (22 | ) | | $ | (14 | ) |
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
| | | | | | | | | | | | | | |
| | As of December 31 |
(Dollars in millions) | | 2020 | | 2019 |
Benefit obligation at beginning of year | | $ | 54 | | | $ | 76 | |
Service cost | | 4 | | | 4 | |
Interest cost | | 1 | | | 1 | |
Actuarial (gain) loss | | (7) | | | 6 | |
Benefits paid | | (3) | | | (2) | |
| | | | |
| | | | |
Net of Held for sales add back/Divestiture | | 7 | | | 0 | |
| | | | |
Translation difference | | 4 | | | 1 | |
Held for sale | | 0 | | | (32) | |
Benefit obligation at end of year | | $ | 60 | | | $ | 54 | |
Fair value of plan assets at beginning of year | | $ | 37 | | | $ | 54 | |
Actual return on plan assets | | 3 | | | 6 | |
Company contributions | | 3 | | | 2 | |
Benefits paid | | (3) | | | (2) | |
| | | | |
Net of Held for sales add back/Divestiture | | (1) | | | 0 | |
| | | | |
Translation difference | | 1 | | | 1 | |
Held for sale | | 0 | | | (24) | |
Fair value of plan assets at year end | | $ | 40 | | | $ | 37 | |
Funded status recognized in the balance sheet | | $ | (20) | | | $ | (17) | |
Components of Net Periodic Benefit Cost Associated with the Defined Benefit Retirement Plan
| | | | | | | | | | Year Ended December 31 |
| | Year Ended December 31 | |
| | 2018 | | 2017 | | 2016 | |
(Dollars in millions) | | (Dollars in millions) | | 2020 | | 2019 | | 2018 |
Service cost | | $ | 5 |
| | $ | 5 |
| | $ | 4 |
| Service cost | | $ | 4 | | | $ | 4 | | | $ | 5 | |
Interest cost | | 2 |
| | 1 |
| | 1 |
| Interest cost | | 1 | | | 1 | | | 2 | |
Expected return on plan assets | | (2 | ) | | (2 | ) | | (2 | ) | Expected return on plan assets | | (2) | | | (2) | | | (2) | |
| Amortization of actuarial loss | | Amortization of actuarial loss | | 1 | | | 1 | | | 0 | |
| Net periodic benefit cost | | $ | 4 |
| | $ | 5 |
| | $ | 4 |
| Net periodic benefit cost | | $ | 4 | | | $ | 4 | | | $ | 4 | |
The service cost and amortization of prior service cost components are reported among employee compensation costs in the Consolidated Statements of Operations. The remaining components (interest cost, expected return on plan assets and amortization of actuarial loss) are reported in Other non-operating items, net in the Consolidated Statements of Operations.
The estimated prior service cost and net actuarial loss that will be amortized from other comprehensive income into net benefit cost over the next fiscal year is immaterial. The estimated net periodic benefit cost for 20192021 is $6$4 million.
Components of Accumulated other Comprehensive Income Before Tax
| | | | | | | | | | | | | | |
| | As of December 31 |
(Dollars in millions) | | 2020 | | 2019 |
Net actuarial loss | | $ | 15 | | | $ | 7 | |
| | | | |
Total accumulated other comprehensive loss recognized in the balance sheet | | $ | 15 | | | $ | 7 | |
|
| | | | | | | | |
| | As of December 31 |
| | 2018 | | 2017 |
Net actuarial loss (gain) | | $ | 9 |
| | $ | 6 |
|
Prior service cost (credit) | | — |
| | 1 |
|
Total accumulated other comprehensive income recognized in the balance sheet | | $ | 10 |
| | $ | 7 |
|
Veoneer, Inc.
Notes to Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
Changes in Accumulated Other Comprehensive Income Before Tax
| | | | | | | | As of December 31 |
(Dollars in millions) | | (Dollars in millions) | | 2020 | | 2019 |
Total retirement benefit recognized in accumulated other comprehensive income at beginning of year | | Total retirement benefit recognized in accumulated other comprehensive income at beginning of year | | $ | 13 | | | $ | 10 | |
Held for sale | | Held for sale | | 0 | | | 2 | |
| Add back Held for sale | | Add back Held for sale | | (2) | | | 0 | |
Effect of plan combinations | | Effect of plan combinations | | 11 | | | 0 | |
Net actuarial loss (gain) | | Net actuarial loss (gain) | | (8) | | | 2 | |
| | As of December 31 | |
| | 2018 | | 2017 | |
Total retirement benefit recognized in accumulated other comprehensive income at beginning of year | | $ | 7 |
| | $ | 7 |
| |
Net actuarial loss (gain) | | 3 |
| | (1 | ) | |
Amortization of actuarial loss | | Amortization of actuarial loss | | (1) | | | (1) | |
Translation difference | | (1 | ) | | 1 |
| Translation difference | | 2 | | | 0 | |
Other | | 1 |
| | — |
| |
| Total retirement benefit recognized in accumulated other comprehensive income at end of year | | $ | 10 |
| | $ | 7 |
| Total retirement benefit recognized in accumulated other comprehensive income at end of year | | $ | 15 | | | $ | 13 | |
The accumulated benefit obligation for the Veoneer defined benefit pension plans as of December 31, 20182020 and 20172019 was $67$54 million and $33$48 million, respectively.
Pension Plans for Which Accumulated Benefit Obligation (ABO) Exceeds the Fair Value of Plan Assets
| | | | | | | | As of December 31 |
| | As of December 31 | |
| | 2018 | | 2017 | |
(Dollars in millions) | | (Dollars in millions) | | 2020 | | 2019 |
Projected Benefit Obligation (PBO) | | $ | 76 |
| | $ | 39 |
| Projected Benefit Obligation (PBO) | | $ | 60 | | | $ | 54 | |
Accumulated Benefit Obligation | | $ | 67 |
| | $ | 33 |
| Accumulated Benefit Obligation | | $ | 54 | | | $ | 48 | |
Fair value of plan assets | | $ | 54 |
| | $ | 26 |
| Fair value of plan assets | | $ | 40 | | | $ | 37 | |
Veoneer, in consultation with its actuarial advisors, determines certain key assumptions to be used in calculating the projected benefit obligation and annual net periodic benefit cost.