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EX-32.2 - EXHIBIT 32.2 - Veoneer, Inc.vne_ex322q3201810q.htm
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EX-31.2 - EXHIBIT 31.2 - Veoneer, Inc.vneex312q3201810q.htm
EX-31.1 - EXHIBIT 31.1 - Veoneer, Inc.vneex311q3201810q.htm
EX-10.1 - EXHIBIT 10.1 - Veoneer, Inc.vneex101q32018jcemployment.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
Commission File No.: 001-38471
Veoneer, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
82-3720890
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
Klarabergsviadukten 70, Section C6
 
Box 13089, SE-103 02
 
Stockholm, Sweden
N/A
(Address of principal executive offices)
(Zip Code)
 
+46 8 527 762 00
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes:  x No: ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes:  x    No:  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
Emerging Growth Company
 
¨
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:  ¨    No:  x
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of October 19, 2018, there were 87,166,935 shares of common stock of Veoneer, Inc., par value $1.00 per share, outstanding.

Exhibit index located on page number 42


1



FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including without limitation, statements regarding management’s examination of historical operating trends and data, estimates of future sales (including estimates related to order intake), operating margin, cash flow, taxes or other future operating performance or financial results, are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “may,” “likely,” “might,” “would,” “should,” “could,” or the negative of these terms and other comparable terminology, although not all forward-looking statements contain such words. We have based these forward-looking statements on our current expectations and assumptions and/or data available from third parties about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs.
New risks and uncertainties arise from time to time, and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Factors that could cause actual results to differ materially from these forward-looking statements include, without limitation, the following: cyclical nature of automotive sales and production; changes in general industry and market conditions or regional growth or decline; our ability to achieve the intended benefits from our separation from our former parent; our ability to be awarded new business or loss of business from increased competition; higher than anticipated costs and use of resources related to developing new technologies; higher raw material, energy and commodity costs; component shortages; changes in customer and consumer preferences for end products; market acceptance of our new products; dependence on and relationships with customers and suppliers; unfavorable fluctuations in currencies or interest rates among the various jurisdictions in which we operate; costs or difficulties related to the integration of any new or acquired businesses and technologies; successful integration of acquisitions and operations of joint ventures; successful implementation of strategic partnerships and collaborations; product liability, warranty and recall claims and investigations and other litigation and customer reactions thereto; higher expenses for our pension and other post-retirement benefits, including higher funding needs for our pension plans; work stoppages or other labor issues; possible adverse results of future litigation, regulatory actions or investigations or infringement claims; our ability to protect our intellectual property rights; tax assessments by governmental authorities and changes in our tax rate; dependence on key personnel; legislative or regulatory changes impacting or limiting our business; political conditions; and other risks and uncertainties contained in this Quarterly Report on Form 10-Q, as well as the disclosures made in the Company’s Information Statement included in the current report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on July 2, 2018.
For any forward-looking statements contained in this Quarterly Report on Form 10-Q 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.

2



Veoneer, Inc.
Table of Contents
 

3



Part I – Financial Information
Item 1 – Condensed Consolidated Financial Statements
Veoneer, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(U.S. DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2018
 
2017
 
2018
 
2017
Net sales
Note 3
 
$
526

 
$
567

 
$
1,692

 
$
1,729

Cost of sales
 
 
(428
)
 
(458
)
 
(1,371
)
 
(1,387
)
Gross profit
 
 
99

 
109

 
321

 
342

Selling, general and administrative expenses
 
 
(44
)
 
(28
)
 
(112
)
 
(83
)
Research, development and engineering expenses, net
 
 
(109
)
 
(91
)
 
(334
)
 
(280
)
Amortization of intangibles
 
 
(5
)
 
(6
)
 
(16
)
 
(30
)
Other income, net
 
 
1

 

 
18

 
12

Operating loss
 
 
(58
)
 
(16
)
 
(122
)
 
(39
)
Loss from equity method investment
Note 8
 
(15
)
 
(10
)
 
(45
)
 
(18
)
Interest income
 
 
3

 

 
4

 

Interest expense
 
 

 

 
(1
)
 

Other non-operating items, net
 
 
1

 

 
1

 

Loss before income taxes
Note 14
 
(70
)
 
(26
)
 
(163
)
 
(56
)
Income tax expense
Note 6
 
(3
)
 
(10
)
 
(12
)
 
(32
)
Net loss
 
 
$
(72
)
 
$
(36
)
 
$
(175
)
 
$
(88
)
Less: Net loss attributable to non-controlling interest
 
 
(5
)
 
(3
)
 
(13
)
 
(7
)
Net loss attributable to controlling interest
 
 
$
(68
)
 
$
(33
)
 
$
(162
)
 
$
(81
)
 
 
 
 
 
 
 
 
 
 
Net loss per share - basic
Note 13
 
$
(0.78
)
 
$
(0.38
)
 
$
(1.86
)
 
$
(0.93
)
Net loss per share - diluted
 
 
$
(0.78
)
 
$
(0.38
)
 
$
(1.86
)
 
$
(0.93
)
 
 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding,
   (in millions)
 
 
87.15

 
87.13

 
87.15

 
87.13

Weighted average number of shares outstanding,
   assuming dilution (in millions)
 
 
87.15

 
87.13

 
87.15

 
87.13

 
See Notes to Unaudited Condensed Consolidated Financial Statements.


4



Veoneer, Inc.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(U.S. DOLLARS IN MILLIONS)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(72
)
 
$
(36
)
 
$
(175
)
 
$
(88
)
Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Change in cumulative translation adjustment
(2
)
 
6

 
(6
)
 
21

Net change in cash flow hedges

 
(4
)
 
1

 
(10
)
Pension liability
(1
)
 

 
(2
)
 

Other comprehensive income (loss), before tax
(3
)
 
2

 
(7
)
 
11

Expense for taxes

 

 

 

Other comprehensive income (loss), net of tax
(3
)
 
2

 
(7
)
 
11

Comprehensive loss
$
(75
)
 
$
(34
)
 
$
(182
)
 
$
(77
)
Less: Comprehensive loss attributable to non-controlling
   interest
(9
)
 
(2
)
 
(16
)
 
(4
)
Comprehensive loss attributable to controlling interest
$
(66
)
 
$
(32
)
 
$
(166
)
 
$
(73
)
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

5




Veoneer, Inc.
Condensed Consolidated Balance Sheets
(U.S. DOLLARS IN MILLIONS)
 
 
 
(unaudited)
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
 
Cash and cash equivalents
 
 
$
919

 
$

Short-term investments
 
 
5

 

Receivables, net
 
 
437

 
460

Inventories, net
Note 7
 
166

 
154

Related party receivables
Note 15
 
63

 

Prepaid expenses and contract assets
 
 
33

 
34

Other current assets
 
 
25

 

Total current assets
 
 
1,648

 
648

Property, plant and equipment, net
 
 
456

 
362

Equity method investment
Note 8
 
120

 
98

Goodwill
Note 5
 
291

 
292

Intangible assets, net
Note 5
 
102

 
122

Deferred tax assets
 
 
28

 
30

Related party notes receivables
Note 15
 

 
76

Other non-current assets
 
 
82

 
34

Total assets
 
 
$
2,728

 
$
1,662

Liabilities and equity
 
 
 

 
 

Accounts payable
 
 
$
356

 
$
323

Related party payables
Note 15
 
3

 
5

Accrued expenses
Note 9
 
237

 
195

Income tax payable
 
 
10

 
41

Other current liabilities
 
 
24

 
26

Total current liabilities
 
 
630

 
590

Related party long-term debt
Note 15
 
12

 
62

Pension liability
Note 10
 
19

 
14

Deferred tax liabilities
 
 
16

 
17

Other non-current liabilities
 
 
11

 
22

Total non-current liabilities
 
 
58

 
115

Commitments and contingencies
Note 12
 


 


Equity
 
 
 

 
 

Common stock  (par value $1.00, 325 million shares authorized, 87 million shares issued and outstanding at September 30, 2018 and December 31, 2017)
 
 
87

 

Additional paid-in capital
 
 
1,929

 

Accumulated deficit
 
 
(68
)
 

Net Former Parent investment
 
 

 
844

Accumulated other comprehensive income (loss)
 
 
(12
)
 
(8
)
Total equity
 
 
1,936

 
836

Non-controlling interest
 
 
104

 
121

Total equity and non-controlling interest
 
 
2,040

 
957

Total liabilities, equity and non-controlling interest
 
 
$
2,728

 
$
1,662

 See Notes to Unaudited Condensed Consolidated Financial Statements.

6



Veoneer, Inc.
Condensed Consolidated Statements of Changes in Equity (Unaudited)
(U.S. DOLLARS IN MILLIONS)
 
Nine months ended September 30, 2018
 
Equity attributable to
 
Common Stock
 
Additional Paid In Capital
 
Net Former Parent
Investment
 
Accumulated deficit
 
Accumulated Other
Comprehensive Income
 
Non-controlling
Interest
 
Total
Balance at beginning of period
$

 
$

 
$
844

 

 
$
(8
)
 
$
121

 
$
957

Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 
(95
)
 
(68
)
 

 
(13
)
 
(175
)
Foreign currency translation

 

 

 

 
(3
)
 
(3
)
 
(6
)
Net change in cash flow hedges

 

 

 

 
1

 

 
1

Pension liability

 

 

 

 
(2
)
 

 
(2
)
Reclassification of Former Parent's net investment and issuance of ordinary shares in connection with separation
87

 
1,926

 
(2,002
)
 

 
 
 
 
 
11

      Stock based compensation expense

 
3

 

 

 

 

 
3

Total Comprehensive Income (Loss)
87

 
1,929

 
(2,097
)
 
(68
)
 
(4
)
 
(16
)
 
(169
)
Net transfers from Former Parent

 

 
1,253

 

 

 
(1
)
 
1,252

Balance at end of period
$
87

 
$
1,929

 
$

 
(68
)
 
$
(12
)
 
$
104

 
$
2,040

 
 
Nine months ended September 30, 2017
 
Equity attributable to
 
Net Former Parent
Investment
 
Accumulated Other
Comprehensive Loss
 
Non-controlling
Interest
 
Total
Balance at beginning of period
$
877

 
$
(29
)
 
$
242

 
$
1,090

Comprehensive Income (Loss):
 
 
 
 
 
 
 
Net loss
(81
)
 

 
(7
)
 
(88
)
Foreign currency translation

 
18

 
3

 
21

Net change in cash flow hedges

 
(10
)
 

 
(10
)
Total Comprehensive Income (Loss)
(81
)
 
8

 
(4
)
 
(77
)
Net transfers from Former Parent
180

 

 
(1
)
 
179

Balance at end of period
$
976

 
$
(21
)
 
$
237

 
$
1,193


7



Veoneer, Inc.
Condensed Consolidated Statements of Cash Flow (Unaudited)
(U.S. DOLLARS IN MILLIONS)
 
Nine Months Ended September 30,
 
2018
 
2017
Operating activities
 
 
 
Net loss
$
(175
)
 
$
(88
)
Depreciation and amortization
82

 
91

Contingent consideration write-down
(14
)
 
(13
)
Other, net
(4
)
 
(23
)
Change in operating assets and liabilities:
 
 
 
Accounts payable

 
(34
)
Related party receivables and payables, net
(58
)
 
2

Income taxes
(31
)
 
4

Accrued expenses
51

 
(8
)
Other current assets and liabilities, net
(22
)
 
1

Receivables, gross
13

 
18

Inventories, gross
(16
)
 
12

Prepaid expenses and contract assets
(7
)
 
(12
)
Net cash used in operating activities
(181
)
 
(50
)
 
 
 
 
Investing activities
 

 
 

Net decrease (increase) in related party notes receivable
76

 
(5
)
Capital expenditures
(123
)
 
(70
)
Equity method investment
(71
)
 
(112
)
Short-term investments
(5
)
 

Proceeds from sale of property, plant and equipment
3

 
5

Net cash used in investing activities
(120
)
 
(182
)
 
 
 
 
Financing activities
 

 
 

Cash provided at separation by Former Parent
980

 

Net transfers from Former Parent
275

 
179

(Decrease) / increase in related party long-term debt
(49
)
 
53

Net cash provided by financing activities
1,206

 
232

Effect of exchange rate changes on cash and cash equivalents
14

 

Increase in cash and cash equivalents
919

 

Cash and cash equivalents at beginning of year

 

Cash and cash equivalents at end of year
$
919

 
$

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

8



Veoneer, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
1. Basis of Presentation
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 one share of Veoneer common stock or one Veoneer SDR, respectively, for every one 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 two operating segments, Electronics and Brake Systems. Electronics includes all electronics resources and expertise, Restraint Control Systems and Active Safety products, and Brake Systems provides brake control and actuation systems.
The accompanying Unaudited Condensed Consolidated Financial Statements for all periods presented 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. 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 Unaudited Condensed Consolidated Financial Statements. Subsequent to the Spin-Off and the related distribution of shares, Veoneer Common stock, Additional paid-in capital and future income (losses) will be reflected in Retained earnings (Accumulated deficit). Accordingly, 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 periods hereinafter are referred to as "Condensed Consolidated Financial Statements").
The Unaudited Condensed Consolidated Financial Statements include the historical operations, assets, and liabilities that are considered to comprise the Veoneer business. All of the allocations and estimates in the Unaudited Condensed Consolidated Financial Statements are based on assumptions that management of Autoliv and Veoneer 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 future results.
The accompanying Unaudited Condensed Consolidated Financial Statements for Veoneer do not include all of the information and notes required by the accounting principles generally accepted in the U.S. (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to Veoneer’s Audited Combined Financial Statements for the year ended December 31, 2017 and corresponding notes in the Company’s Information Statement included in the current report on Form 8-K filed with the SEC on July 2, 2018. Certain amounts in the prior year’s Condensed Combined Financial Statements and related footnotes thereto have been reclassified to conform to the current year presentation.
Certain amounts in the Unaudited Condensed Consolidated Financial Statements and associated notes may not reconcile due to rounding. All percentages have been calculated using unrounded amounts.
2. Summary of Significant Accounting Policies
A summary of significant accounting policies is included in the Company’s Information Statement included in the current report on Form 8-K filed with the SEC on July 2, 2018. A discussion of cash and cash equivalents is included here as an additional significant policy which has become relevant beginning in the quarter ended June 30, 2018.

9



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 $919 million of cash and cash equivalents and $5 million of short-term investments as of September 30, 2018.
The carrying amounts reflected in the Condensed 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.

New Accounting Standards
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 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 Unaudited Condensed 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 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 Unaudited Condensed 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 entities 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 Unaudited Condensed Consolidated Statements of Operations. The Company adopted ASU 2017-07 in the first quarter of 2018 and the adoption did not have a material impact on the Unaudited Condensed Consolidated Financial Statements for any periods presented (see Note 10 Retirement Plans).
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 the Company’s Unaudited Condensed Consolidated Financial Statements.
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 Company’s Consolidated Financial Statements. The table below shows the adjustments made due to ASU 2014-09. 

10



 
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

 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Income Statement
(Dollars in millions)
As Reported
 
Balances without
adoption of
ASC 606
 
Effect of Changes
 
As Reported
 
Balances without
adoption of
ASC 606
 
Effect of Changes
Net sales
$
526

 
$
525

 
$
1

 
$
1,692

 
$
1,691

 
$
1

Cost of sales
(428
)
 
(427
)
 
(1
)
 
(1,371
)
 
(1,370
)
 
(1
)
Operating loss
(58
)
 
(58
)
 

 
(122
)
 
(122
)
 

 
 
As of September 30, 2018
Balance Sheet
(Dollars in millions)
As Reported
 
Balances without
adoption of
ASC 606
 
Effect of Changes
Assets
 
 
 
 
 
Inventories, net
$
166

 
$
173

 
$
(6
)
Prepaid expenses and contract assets
33

 
25

 
8

 
 
 
 
 
 
Equity
 
 
 
 
 
Additional paid-in capital
1,929

 
1,928

 
1

Accounting Standards Issued But Not Yet Adopted
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. This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The ASU 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. The ASU 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. The ASU 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. The ASU 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 determine the impact on its disclosures.

11



In August 2017, the FASB issued ASU 2017-12, Derivative and Hedging (Topic 815), Targeted improvements to accounting for hedging activities. The amendments in ASU 2017-12 better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ASU 2017-12 also include certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The amendments in ASU 2017-12 modify disclosures required in current GAAP. Those modifications include a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges and eliminate the requirement to disclose the ineffective portion of the change in fair value of hedging instruments. The amendments also require new tabular disclosures related to cumulative basis adjustments for fair value hedges. The amendments in ASU 2017-12 are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the annual period that an entity adopts the amendments in ASU 2017-12. The Company believes that the pending adoption of ASU 2017-12 will not have a material impact on the Unaudited Condensed Consolidated Financial Statements since the Company closed its cash flow hedges in the first quarter of 2018.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement 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 early adoption is permitted for annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of the Company’s pending adoption of ASU 2016-13 on its Condensed Consolidated Financial Statements.
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 adopt ASU 2016-02 in the annual period beginning January 1, 2019. The Company intends to apply the modified retrospective transition method and elect the transition option to use the effective date January 1, 2019, as the date of initial application. The Company will not adjust its comparative period financial statements for effects of the ASU 2016-02, or make the new required lease disclosures for periods before the effective date. The Company will recognize its cumulative effect transition adjustment as of the effective date. In addition, we intend to elect the application of permitted practical expedients under the transition guidance within the new standard, which amongst other things, will allow Veoneer to retain the historical lease classification. During the third quarter, the Company continued its process to identify leasing arrangements and to compare its accounting policies and practices to the requirements of the new standard. Further, the Company is assessing if there are any “embedded leases” in arrangements with its suppliers that may result in right-of-use assets. In addition, the Company has continued its implementation of a new system to assist with lease accounting. The Company regularly enters into operating leases, for which current GAAP does not require recognition on the balance sheet. The Company anticipates that the adoption of ASU 2016-02 will primarily result in the recognition of most operating leases on its balance sheet resulting in an increase in reported right-of-use assets and leasing liabilities. The Company will continue to assess the impact from the new standard, including consideration of control and process changes to capture lease data necessary to apply ASU 2016-02.
3. Revenue
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 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 amortized as the related goods are transferred. As of September 30, 2018, and December 31, 2017, the Company capitalized $52 million and $23 million, respectively, in Other non-current assets related to capitalized payments. The Company assesses these amounts for impairment. There was no impairment.
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.

12



Nature of goods and services
The following is a description of principal activities from which the Company generates its revenue. The Company has two operating segments, Electronics and Brake Systems. Electronics includes all of electronics resources and expertise, restraint control systems and active safety products and 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.
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.
Disaggregation of revenue
In the following tables, revenue is disaggregated by primary region and products of revenue recognition.
Net Sales by Region
(Dollars in millions)
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Electronics
 
Brake Systems
 
Total
 
Electronics
 
Brake Systems
 
Total
Asia
$
98

 
$
85

 
$
183

 
$
114

 
$
89

 
$
203

Americas
166

 
15

 
181

 
166

 
29

 
195

Europe
163

 

 
163

 
170

 

 
170

Total region sales
426

 
100

 
526

 
449

 
118

 
567

Less: intercompany sales

 

 

 

 

 

Total
$
426

 
$
100

 
$
526

 
$
449

 
$
118

 
$
567


Net Sales by Region
(Dollars in millions)
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Electronics
 
Brake Systems
 
Total
 
Electronics
 
Brake Systems
 
Total
Asia
$
314

 
$
280

 
$
594

 
$
353

 
$
264

 
$
617

Americas
517

 
45

 
562

 
525

 
98

 
624

Europe
537

 

 
537

 
491

 

 
491

Total region sales
1,367

 
325

 
1,692

 
1,369

 
363

 
1,732

Less: intercompany sales

 

 

 

 
(2
)
 
(3
)
Total
$
1,367

 
$
325

 
$
1,692

 
$
1,369

 
$
361

 
$
1,729


13



Net Sales by Products
(Dollars in millions)
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Electronics
 
Brake Systems
 
Total
 
Electronics
 
Brake Systems
 
Total
Restraint Control Systems
$
226

 
$

 
$
226

 
$
251

 
$

 
$
251

Active Safety products
201

 

 
201

 
198

 

 
198

Brake Systems

 
100

 
100

 

 
118

 
118

Total product sales
426

 
100

 
526

 
449

 
118

 
567

Less: intercompany sales

 

 

 

 

 

Total net sales
$
426

 
$
100

 
$
526

 
$
449

 
$
118

 
$
567


Net Sales by Products
(Dollars in millions)
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Electronics
 
Brake Systems
 
Total
 
Electronics
 
Brake Systems
 
Total
Restraint Control Systems
$
739

 
$

 
$
739

 
$
788

 
$

 
$
788

Active Safety products
628

 

 
628

 
581

 

 
581

Brake Systems

 
325

 
325

 

 
363

 
363

Total product sales
1,367

 
325

 
1,692

 
1,369

 
363

 
1,732

Less: intercompany sales

 

 

 

 
(2
)
 
(3
)
Total net sales
$
1,367

 
$
325

 
$
1,692

 
$
1,369

 
$
361

 
$
1,729


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.
The following tables provide information about receivables and contract assets from contracts with customers.
Contract Balances with Customers
(Dollars in millions)
As of
 
September 30, 2018
 
December 31, 2017
Receivables, net
$
437

 
$
460

Contract assets1
8

 

1 Included in prepaid expenses and contract assets
Receivables, net of allowance
(Dollars in millions)
As of
 
September 30, 2018
 
December 31, 2017
Receivables
$
440

 
$
462

Allowance at beginning of period
(2
)
 
(4
)
Net decrease/(increase) of allowance
(1
)
 
2

Allowance at end of period
(3
)
 
(2
)
Receivables, net of allowance
$
437

 
$
460









14



Changes in the contract asset balances during the period are as follows:
Change in Contract Balances with Customers1 
(Dollars in millions)
Three months ended
September 30, 2018
 
Nine months ended
September 30, 2018
 
Contract assets
 
Contract assets
Beginning balance
$
7

 
$

Increases due to cumulative catch up adjustment
1

 
8

Increases due to revenue recognized
8

 
23

Decreases due to transfer to receivables
(8
)
 
(23
)
Ending balance
$
8

 
$
8

1 The contract asset is determined at each period end, this table reflects the rollforward of the period end balance.
Contract costs
As of September 30, 2018, 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.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales. The amount of fulfillment costs was not material for any period presented.
4. 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 Unaudited Condensed Consolidated Financial Statements prospectively from their date of acquisition.
Fotonic i Norden dp AB
On November 1, 2017, Autoliv completed the acquisition of all the shares in Fotonic i Norden dp AB (Fotonic), headquartered in Stockholm and Skellefteå in Sweden which were transferred to Veoneer in connection with the Spin-Off. The final acquisition date fair value of 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 hold-back amount as stipulated in the share purchase agreement. The transaction has been accounted for as a business combination. The balance of the deferred purchase consideration remains unchanged at $2 million as of September 30, 2018.
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 final fair values of identifiable assets acquired consisted of intangible assets of $4 million and goodwill of $13 million. Acquired intangibles consisted of the fair value of background IP (patent & technical know-how). The useful life of the IP is five years and will be amortized on a straight-line basis. The recognized goodwill primary reflects the valuation of the acquired workforce of specialist engineers.
5. 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.

15



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 September 30, 2018 were foreign exchange swaps. All swaps principally match the terms and maturity of the underlying debt and no swaps have a maturity beyond six months. All derivatives are recognized in the Unaudited Condensed 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, 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 Condensed Consolidated Balance Sheets have been presented on a gross basis. Derivative financial instruments designated and non-designated as hedging instruments are included in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, as follows:
 
September 30, 2018
 
 
 
Fair Value Measurements
 
Nominal
Value
 
Derivative Asset
(Other current/non
current assets)
 
Derivative Liability
(Other current/non
current liabilities)
Derivatives not designated as hedging instruments
 
 
 
 
 
 Foreign exchange swaps, less than 6 months
$
108

 
$
1

 
$

Total derivatives not designated as hedging instruments
$
108

 
$
1

 
$

 
December 31, 2017
 
 
 
Fair Value Measurements
 
Nominal
Value
 
Derivative Asset
(Other current/non
current assets)
 
Derivative Liability
(Other current/non
current liabilities)
Derivatives designated as hedging instruments
 
 
 
 
 
 Foreign exchange forward contracts, less than
   1 year (cash flow hedge)
$
67

 
$

 
$
1

Total derivatives designated as hedging instruments
$
67

 
$

 
$
1

 
Gains and losses on derivative financial instruments for the three and nine months ended September 30, 2018 and 2017 are as follows:
 
Three months ended
 
September 30, 2018
 
September 30, 2017
 
Foreign exchange forward contracts
 
Foreign exchange
swaps
 
Foreign exchange
forward contracts
 
Foreign exchange
swaps
Foreign currency risk - Cost
   of sales:
 
 
 
 
 
 
 
Recorded into gain (loss)
$

 
$
(1
)
 
$

 
$
(1
)
Recorded gains (loss) into
   AOCI net of tax

 

 
(3
)
 

Less: reclassified from
   AOCI into gain (loss)

 

 
2

 

 
$

 
$
(1
)
 
$
(4
)
 
$
(1
)

16



 
Nine months ended
 
September 30, 2018
 
September 30, 2017
 
Foreign exchange
forward contracts
 
Foreign exchange
swaps
 
Foreign exchange
forward contracts
 
Foreign exchange
swaps
Foreign currency risk - Cost
   of sales:
 
 
 
 
 
 
 
Recorded into gain (loss)
$

 
$

 
$

 
$
1

Recorded gains (loss) into
   AOCI net of tax

 

 
(6
)
 

Less: Reclassified from
   AOCI gain (loss)
(1
)
 

 
5

 

 
$
(1
)
 
$

 
$
(10
)
 
$
1

 
Contingent consideration - The fair value of the contingent consideration relating to the M/A-COM 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 in the first quarter of 2017 based on actual revenue levels to date as well as changes in the estimated probability of different revenue scenarios for the remaining contractual earn-out period. Income of approximately $13 million was recognized within Other income in the Unaudited Condensed Consolidated Statements of Operations in the first quarter of 2017 due to the decrease in the contingent consideration liability. The remaining fair value of the earn-out liability of $14 million as of December 31, 2017 was fully released to and recognized within Other income in the first quarter of 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 September 30, 2018 and continues to believe that the fair value of the contingent consideration is $0 million.

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.
The tables below present information about certain of the Company’s long-lived assets measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017.
 
September 30, 2018
 
December 31, 2017
(Dollars in millions)
Fair value
measurements
Level 3
 
Impairment
Losses
 
Fair value
measurements
Level 3
 
Impairment
Losses
Goodwill1
$
291

 
$

 
$
292

 
$
(234
)
Intangible assets, net2
102

 

 
122

 
(12
)
1 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 the 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 September 30, 2018 and December 31, 2017 was not measured at fair value as impairment indicators did not exist.
2 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 M/A-COM 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 September 30, 2018 and December 31, 2017 was not measured at fair value as impairment indicators did not exist.

17



6. Income Taxes
The income tax provision for the three month and nine month periods ended September 30, 2018 was $3 million and $12 million, respectively. The income tax provision for the three month and nine month periods ended September 30, 2017 was $10 million and $32 million, respectively. The income tax provision in 2018 was primarily impacted by a reduction in the pre tax earnings of the Company’s profitable subsidiaries.
In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company has completed its accounting for the effects on the Company’s deferred tax balances as of the enactment date. Pursuant to the Tax Matters Agreement entered into with Autoliv in connection with the Spin-Off, Autoliv is the primary 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 Act.
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. The Company assesses all available evidence, both positive and negative, to determine the amount of any required valuation allowance. Valuation allowances have been established for the Company’s United States, Swedish, and Japanese operations and the Company’s joint venture in Japan.
The 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 April 1, 2018, are assumed to be settled with Former Parent on the last day Veoneer was part of the Autoliv group and were relieved through the Former Parent company investment. There were no material changes to the Company’s uncertain tax positions as of September 30, 2018. The Company files income tax returns in the United States federal jurisdiction, and various states and non-U.S. jurisdictions. Under local tax law, a Veoneer entity may have been required to file its income tax returns combined with an Autoliv entity up to and including the date of the Spin-Off. Subsequent to the Spin-Off, Veoneer will file its income tax returns on a stand-alone basis.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in tax expense.
7. Inventories
Inventories are stated at the lower of cost (principally on a first-in-first-out basis, "FIFO") and net realizable value. The components of inventories were as follows:
 
As of
 
September 30,  2018
 
December 31, 2017
Raw materials
$
107

 
$
90

Work in progress
11

 
21

Finished products
71

 
70

Inventories
$
189

 
$
181

Inventory valuation reserve
(23
)
 
(27
)
Total inventories, net of reserve
$
166

 
$
154

8. Equity Method Investment
As of September 30, 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 the line item Equity method investment in the Condensed Consolidated Balance Sheets. The contributed intellectual property, lab equipment, 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 Condensed Consolidated Balance Sheets. The investor would recognize a gain or loss based on the difference between

18



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 has been 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.
At the end of the first quarter of 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 loss attributed to the investment is shown in the line item Loss from equity method investment in the Unaudited Condensed Consolidated Statements of Operations. Veoneer’s share of Zenuity’s loss for the three and nine months ended September 30, 2018 was $15 million and $45 million, respectively. Veoneer’s share of Zenuity’s loss for the three and nine months ended September 30, 2017 was $10 million and $18 million, respectively. As of September 30, 2018, the Company’s equity investment in Zenuity amounted to $120 million after consideration of foreign exchange movements.
Certain Unaudited Summarized Income Statement information of Zenuity, for the three and nine months ended September 30, 2018 and 2017, is shown below:
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2018
 
2017
 
2018
 
2017
Net sales
$
1

 
$
2

 
$
4

 
$
4

Gross profit

 

 

 

Operating loss
(31
)
 
(20
)
 
(90
)
 
(35
)
Loss before income taxes
(30
)
 
(20
)
 
(90
)
 
(35
)
Net loss
$
(30
)
 
$
(20
)
 
$
(90
)
 
$
(35
)
9. Accrued Expenses
 
As of
 
September 30, 2018
 
December 31, 2017
Operating related accruals
$
58

 
$
55

Employee related accruals
71

 
57

Customer pricing accruals
64

 
36

Product related liabilities1
24

 
22

Other accruals
20

 
25

Total Accrued Expenses
$
237

 
$
195

1 At September 30, 2018, virtually all product related liabilities were indemnifiable losses subject to indemnification by Autoliv and an indemnification asset is included in Other current assets.
10. 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 which are comprised of plans in Germany, India, Japan, and South Korea, and Autoliv Sponsored Plans which are comprised of plans in Sweden and the U.S.
The combination of the Existing Veoneer Plans, Transferred Veoneer Plans, and Autoliv Sponsored Plans has resulted in a total pension expense of $1 million and $4 million for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2017 total pension expense was $2 million and $5 million, 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.

19



The Company’s net periodic benefit costs for the Existing Veoneer Plans for the three and nine months ended September 30, 2017 and 2018 were as follows:
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2018
 
2017
 
2018
 
2017
Service cost
$
2

 
$
1

 
$
4

 
$
3

Interest cost

 

 
1

 
1

Expected return on plan assets
(1
)
 

 
(2
)
 
(1
)
Net periodic benefit cost
$
1

 
$
1

 
$
3

 
$
3

The service cost and amortization of prior service cost components are reported among employee compensation costs in the Unaudited Condensed Consolidated Statements of Operations. The remaining components (interest cost, expected return on plan assets and amortization of actuarial loss) are reported as Other non-operating items, net in the Unaudited Condensed Consolidated Statements of Operations.
Transferred Veoneer Plans
Prior to 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, 2018, the assets, liabilities, and associated accumulated other comprehensive income (loss) of the 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 $6 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 will be re-measured in connection with the December 31, 2018 actuarial valuation.
Changes in Benefit Obligations and Plans Assets
 
As of
 
September 30, 2018
Benefit obligation as of April 1, 2018
$

Service cost

Interest cost

Benefits paid

Obligation transferred in
6

Benefit obligation at end of the period
$
6

Fair value of plan assets as of April 1, 2018

Company contributions

Benefits paid

Plan assets transferred in

Fair value of plan assets at end of the period
$

Funded status recognized in the balance sheet
$
(6
)

20



Components of Net Periodic Benefit Cost Associated with the Defined Benefit Retirement Plan
The allocated net periodic benefit costs related to transferred plans from Autoliv to Veoneer were less than $1 million for the three months ended March 31, 2018. The Company’s allocated net periodic benefit costs for these defined benefit plans were less than $1 million for the three and nine months ended September 30, 2017. Subsequent to the plan transfer on April 1, 2018, the components of net periodic benefit cost are less than $1 million for the three months ended September 30, 2018.
Components of Accumulated other Comprehensive Income Before Tax
 
As of
 
September 30, 2018
Net actuarial loss (gain)
$
(1
)
Prior service cost (credit)

Total accumulated other comprehensive income
 recognized in the balance sheet
$
(1
)
The service cost and amortization of prior service cost components are reported among employee compensation costs in the Unaudited Condensed Consolidated Statements of Operations. The remaining components (interest cost, expected return on plan assets and amortization of actuarial loss) are reported as other non-operating items, net in the Unaudited Condensed Consolidated Statements of Operations.
Autoliv Sponsored Plans
Prior to certain legal decisions or plan amendments, Veoneer employees in Sweden and in the U.S. participated in the following Autoliv-sponsored multiemployer plans:
Country
Name of Defined Benefit Plans
Sweden
ITP plan
U.S.
Autoliv ASP, Inc. Pension Plan
Autoliv ASP, Inc. Excess Pension Plan
Autoliv ASP, Inc. Supplemental Pension Plan
On April 1, 2018, it was determined that the assets, liabilities, and associated accumulated other comprehensive income (loss) of the Sweden plan for all Veoneer employees included in the Sweden plan will remain with Autoliv and benefits will be paid out of that plan in the future upon retirement. The allocation to capture the Company’s specific defined benefit plans expense and contributions prior to the plans amendment for the three months ended March 31, 2018 were less than $1 million and were less than $1 million for the three and nine months ended September 30, 2017, respectively.
On June 29, 2018, it was also determined that the assets, liabilities, and associated accumulated other comprehensive income (loss) of the U.S. plan for all Veoneer employees included in the U.S. plan will remain with Autoliv and benefits will be paid out of that plan in the future upon retirement. The Veoneer employees were considered to be participating in the Autoliv sponsored plan through June 29, 2018 at which date the plan was amended to freeze the accrual of benefits for any Veoneer employees. The U.S. plan resulted in less than $1 million of defined benefit plan expense and contributions made allocated to Veoneer for the three and nine months ended September 30, 2018 and less than $1 million of defined benefit plan expense and contributions made allocated to Veoneer for the three and nine months ended September 30, 2017.
Prior to the respective dates above for the Sweden and the U.S. plans, the Veoneer employees were considered to be participating in the Autoliv sponsored plans. Effective April 1, 2018 for the Sweden plan and June 29, 2018 for the U.S. plan the respective parties determined that Veoneer would not have additional expense or liability related to each of the existing plans.
Post-Retirement Benefits other than Pension
In addition to the existing benefit obligation from the Canadian medical plan as disclosed in the Audited Combined Financial Statements for the year ended December 31, 2017, the Company also assumed less than $1 million in benefit obligations transferred from Autoliv’s U.S. medical plan as of June 29, 2018 in connection with the Spin-Off. The net periodic benefit cost and impact on accumulated other comprehensive income related to the plans were immaterial.

21



11. Stock Incentive Plan
Prior to the Spin-Off, certain eligible employees of Veoneer participated in the Autoliv, Inc. 1997 Stock Incentive Plan and received Autoliv stock-based awards which include stock options, restricted stock units and performance shares. In connection with the Spin-Off, each outstanding Autoliv stock-based award as of June 29, 2018 was converted to stock awards having underlying shares of both Autoliv and Veoneer common stock.
The conversion that occurred on the Distribution Date was based on the following:
Stock Option (SOs) - A number of SOs comprising 50% of the value of the outstanding SOs calculated immediately prior to the Spin-Off continued to be applicable to Autoliv common stock. A number of SOs comprising the remaining 50% of the pre-spin value were replaced with options to acquire shares of Veoneer common stock.
Restricted Stock Units (RSUs) - A number of RSUs comprising 50% of the value of the outstanding RSU calculated immediately prior to the Spin-Off continued to be applicable to Autoliv common stock. A number of RSUs comprising the remaining 50% of the pre-spin value were replaced with RSUs with underlying Veoneer common stock.
Performance Shares (PSs) - Outstanding PSs were converted to time-based RSUs and were treated in the same manner as other outstanding RSUs (as described above) on the Distribution Date. The number of outstanding PSs were converted based on:
1)
The level of actual achievement of performance goals for each outstanding PSs for the period between the first day of the performance period and December 31, 2017 (the “Performance Measurement Date”), referred to as “Level of Performance-to-Date”, and;
2)
The greater of the Level of Performance-to-Date and estimated target performance level (i.e., 100%) for the period between the Performance Measurement Date and the last day of the performance period.
In each case above, the conversion was intended to generally preserve the intrinsic value of the original award determined as of the Distribution Date. The number of converted RSUs and SOs for Autoliv and Veoneer was based on the average of Autoliv closing stock prices for the last 5 days prior to the Spin-Off and the average of closing stock prices of Autoliv and Veoneer, respectively, for the first 5 days after the Spin-Off.
As a result of the Spin-Off and the related conversion, it was determined that the stock based awards were modified in accordance with ASC 718, Compensation – Stock Compensation. As a result, the fair value of the RSUs and SOs immediately before and after the modification was assessed in order to determine if the modification resulted in any incremental compensation cost related to the awards, including consideration of the impact of conversion using the 5 day average. Based on the valuation performed, it was determined that the conversion did not result in any incremental compensation cost for any of the outstanding awards.
With certain limited exceptions, including the freezing of the Performance Measurement Date to December 31, 2017 as noted above, the SOs and RSUs after the Spin-Off are subject to the same terms and conditions (including with respect to vesting and expiration) that were applicable to such Autoliv stock-based awards immediately prior to the conversion and as described in the Audited Combined Financial Statements for the year ended December 31, 2017 and corresponding notes included in the Company’s Information Statement included in the current report on Form 8-K filed with the SEC on July 2, 2018. There were no stock-based compensation expense related to SOs for the three and nine months ended September 30, 2018 and 2017. 
The Company recorded approximately $1 million and $4 million stock-based compensation expense related to RSUs and PSs for the three and nine months ended September 30, 2018, respectively. During the three and nine months ended September 30, 2017, the Company recorded $1 million and $2 million, respectively, of stock-based compensation expense related to RSUs and PSs.
The Veoneer, Inc. 2018 Stock Incentive Plan was established and effective on June 29, 2018 to govern the Company’s stock-based awards that will be granted in the future. The Veoneer, Inc. 2018 Stock Incentive Plan authorizes the grant of 3 million shares of Veoneer common stock for future equity awards to Veoneer employees and non-employee directors and authorizes up to 1.7 million additional shares to be used for the conversion of outstanding Autoliv stock awards in connection with the Spin-Off. Approximately 1 million shares were used for the conversion of the outstanding grants.
12. Contingent Liabilities
Legal Proceedings
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, 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

22



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 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. The table in Note 9 – Accrued Expenses summarizes the change in product related liabilities in the Condensed Consolidated Balance Sheets.
Product Related Liabilities
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 Condensed Consolidated Balance Sheets.
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
2018
 
2017
 
2018
 
2017
Reserve at beginning of the period
$
23

 
$
20

 
$
22

 
$
30

Change in reserve
1

 
5

 
10

 
5

Cash payments

 
(2
)
 
(8
)
 
(12
)
Transfers

 

 

 

Translation difference

 

 

 
1

Reserve at end of the period
$
24

 
$
23

 
$
24

 
$
23

 

23



For the three and nine months ended September 30, 2018 and 2017, provisions and cash paid primarily relate to recall and warranty related issues. The increase in the reserve balance as of September 30, 2018 compared to the prior year was mainly due to recall related issues offset by the cash payments for warranties and product liabilities.
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 September 30, 2018 the indemnification asset amounting to $23 million represents substantially all of the product related liabilities included in the Other current assets in the Condensed Consolidated Balance Sheets. On May 18, 2018, the Company was informed by one of its customers that it would undertake a recall to proactively address a higher than usual warranty return ratio on one of the Company’s products. The estimated costs associated with this recall are approximately $6 million and were accrued as of September 30, 2018. A substantial portion of these costs are subject to indemnification by Autoliv.
Guarantees
Veoneer has certain guarantees in place and as of September 30, 2018 and December 31, 2017, direct guarantees are $15 million and $13 million, respectively, of such obligations. 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.
13. Loss per share
Basic loss per share is computed by dividing net loss for the period by the weighted average number of common stock outstanding during the period. Diluted loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted loss per share by application of the treasury stock method. The calculation of diluted loss per share excludes all anti-dilutive common stock. The following table sets forth the computation of basic and diluted loss per share for the three and nine months ended September 30, 2018 and 2017.
(U.S. dollars in millions, except per share amounts)
Three Months Ended September 30
 
Nine Months Ended September 30
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Basic and diluted:
 
 
 
 
 
 
 
Net loss attributable to common shareholders
$
(68
)
 
$
(33
)
 
$
(162
)
 
$
(81
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic: Weighted average number of shares outstanding (in millions)
87.15

 
87.13

 
87.15

 
87.13

Diluted: Weighted-average number of shares outstanding, assuming dilution (in millions)1
87.15

 
87.13

 
87.15

 
87.13

 
 
 
 
 
 
 
 
Basic loss per share
(0.78)
 
(0.38)
 
(1.86)
 
(0.93)
Diluted loss per share
(0.78)
 
(0.38)
 
(1.86)
 
(0.93)
1 Shares in the diluted loss per share calculation represent basic shares due to the net loss. The shares excluded from the calculation were 815,627 for the three and nine months ended September 30, 2018 and 2017 because they are anti-dilutive.
14. Segment Information
The Company has two operating segments, Electronics and Brake Systems. Electronics includes all of electronics resources and expertise, restraint control systems and active safety products and Brake Systems provides brake control and actuation systems. The operating results of the operating segments are regularly reviewed by the Company’s chief operating decision maker to assess the performance of the individual operating segments and make decisions about resources to be allocated to the operating segments.

24



 
Three Months Ended September 30
 
Nine Months Ended September 30
(Loss) Before Income Taxes
2018
 
2017
 
2018
 
2017
Electronics
$
(36
)
 
$
(4
)
 
$
(66
)
 
$
(11
)
Brake Systems
(9
)
 
(6
)
 
(23
)
 
(11
)
Segment operating (loss)/income
(45
)
 
(10
)
 
(88
)
 
(22
)
Corporate and other
(13
)
 
(6
)
 
(34
)
 
(17
)
Interest and other non-operating items, net
4

 

 
4

 

Loss from equity method investment
(15
)
 
(10
)
 
(45
)
 
(18
)
Loss before income taxes
$
(70
)
 
$
(26
)
 
$
(163
)
 
$
(56
)
 
15. Relationship with Former Parent and Related Entities
Historically, Veoneer has been managed and operated in the normal course of business with other affiliates of Autoliv. Accordingly, certain shared costs have been allocated to Veoneer and reflected as expenses in the stand-alone Unaudited Condensed Consolidated Financial Statements. Management of Autoliv and Veoneer consider the allocation methodologies used to be reasonable and appropriate reflections of historical expenses of Autoliv attributable to Veoneer for purposes of the stand-alone Financial Statements; however, the expenses reflected in the Unaudited Condensed Consolidated Financial Statements may not be indicative of the actual expenses that would have been incurred during the periods presented if Veoneer historically operated as a separate, stand-alone entity. In addition, the expenses reflected in the Unaudited Condensed Consolidated Financial Statements may not be indicative of expenses that will be incurred in the future by Veoneer.
Prior to the Spin-Off, transactions between Autoliv and Veoneer, with the exception of sales and purchase transactions and reimbursements for payments made to third-party service providers by Autoliv on Veoneer’s behalf, are reflected in equity in the Condensed Consolidated Balance Sheets as Net Former Parent investment and in the Unaudited Condensed Consolidated Statements of Cash Flows as a financing activity in Net transfers from Former Parent.
Transactions with Autoliv Businesses
Veoneer and Autoliv entered into a Transition Services Agreement under which certain services are provided by Autoliv to Veoneer and certain services are provided by Veoneer to Autoliv. As of the three and nine months ended September 30, 2018, Veoneer recognized $2 million and $5 million of expenses, respectively, under the Transition Services Agreement.
Throughout the periods covered by the Unaudited Condensed Consolidated Financial Statements, Veoneer sold finished goods to Autoliv. Related party sales to Autoliv businesses amount to $31 million and $73 million for the three and nine months ended September 30, 2018, respectively, and $19 million and $54 million for the three and nine months ended September 30, 2017, respectively.
Related Party Balances
Amounts due to and due from related parties are summarized in the below table:
 
As of
RELATED PARTY
September 30, 2018
 
December 31, 2017
Related party receivable
$
63

 
$

Related party notes receivable

 
76

Related party payables
3

 
5

Related party long-term debt
12

 
62

 
Related party receivables are mainly driven by reseller agreements put in place in connection with the Spin-Off. The reseller agreements are between Autoliv and Veoneer and facilitate the temporary arrangement of the sale of Veoneer products manufactured for certain customers for a limited period after the Spin-Off. Autoliv will collect the customer payments and will remit the payments to Veoneer.
As of December 31, 2017, related party notes receivables relate to a long term loan between Veoneer and Autoliv entities, which was subsequently settled prior to the Spin-Off.

25



As of September 30, 2018, the related party payables mainly relate to an agreement between Veoneer-Nissin Brake Systems (VNBS) (a 51% owned subsidiary) and various Autoliv companies.
 
A portion of the related party long-term debt is subject to a long term loan agreement that was settled on June 29, 2018. As of September 30, 2018, all related party debt agreements were settled or terminated, with the exception of a capital lease arrangement at VNBS of $12 million and $11 million as of September 30, 2018 and December 31, 2017, respectively. The capital lease is with Nissin Kogyo, the 49% owner of VNBS.
In the third quarter, the Company recorded certain true-up adjustments related to amounts due to and from Autoliv with an offsetting increase to equity of $8 million. In addition, the Company recorded a true-up adjustment to its deferred tax amount of $3 million associated with the tax impacts of the legal organization prior to the Spin-Off, with an offsetting increase to equity.
Corporate Costs/Allocations
For the periods prior to April 1, 2018, the Unaudited Condensed Combined Financial Statements include corporate costs incurred by Autoliv for services that are provided to or on behalf of Veoneer. These costs consist of allocated cost pools and direct costs. Corporate costs have been directly charged to, or allocated to, Veoneer using methods management believes are consistent and reasonable. The method for allocating corporate function costs to Veoneer is based on various formulas involving allocation factors. The methods for allocating corporate administration costs to Veoneer are based on revenue, headcount, or other relevant metrics. However, the expenses reflected in the Unaudited Condensed Consolidated Financial Statements may not be indicative of the actual expenses that would have been incurred during the periods presented if Veoneer historically operated as a separate, stand-alone entity. All corporate charges and allocations have been deemed paid by Veoneer to Autoliv in the period in which the cost was recorded in the Unaudited Condensed Consolidated Statements of Operations. Effective April 1, 2018, Veoneer began performing certain functions using internal resources or third parties, and certain other services continued to be provided by Autoliv and directly charged to Veoneer. In addition, Veoneer personnel perform certain services for Autoliv, which are directly charged to Autoliv.
Allocated corporate costs included in Costs of sales, Selling, general and administrative expenses and Research, development and engineering expenses were for shared services and infrastructure provided, which includes costs such as information technology, accounting, legal, real estate and facilities, corporate advertising, risk and insurance services, treasury, shareholder services and other corporate and infrastructure services.
 
Cash Management and Financing
Prior to the Spin-Off, Veoneer participated in Autoliv’s centralized cash management and financing programs. Disbursements were made through centralized accounts payable systems operated by Autoliv. Cash receipts were transferred to centralized accounts, also maintained by Autoliv. As cash was disbursed and received by Autoliv, it was accounted for by Veoneer through the Net Former Parent investment. All short-term and long-term debt was financed by Autoliv or by Nissin Kogyo and financing decisions for wholly and majority owned subsidiaries were determined by Autoliv’s corporate treasury operations. On the Distribution Date, Veoneer held approximately $1 billion of cash and cash equivalents. Upon the Spin-Off, Veoneer created its own corporate treasury operations.

26



ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations, financial condition and cash flows of Veoneer, Inc. (“Veoneer,” the “Company,” “we,” or “our”). This MD&A should be read in conjunction with the financial statements and accompanying notes to the financial statements included elsewhere herein, as well as the risk factors and other disclosures made in the Company’s Information Statement included in the current report on Form 8-K filed with the SEC on July 2, 2018.
The historical financial statements included in this Quarterly Report on Form 10-Q may not reflect what our business, financial position or results of operations would have been had we been a publicly traded company during the periods presented or what our results of operations, financial position and cash flow will be in the future now that we are a stand-alone publicly listed company.
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 and Other Matters
Contractual Obligations and Commitments
Significant Accounting Policies and Critical Accounting Estimates
Veoneer is a Delaware corporation with its principal executive offices in Stockholm, Sweden. The Company functions as a holding corporation and owns two principal operating subsidiaries, Veoneer AB and Veoneer US, Inc. On June 29, 2018 the spin-off of Veoneer from Autoliv, Inc. ("Autoliv") was completed through the distribution by Autoliv of all the outstanding shares of common stock of Veoneer to Autoliv’s stockholders as of the close of business on June 12, 2018, the common stock record date for the distribution, in a tax-free, pro rata distribution (the "Spin-Off"). On July 2, 2018, the shares of Veoneer common stock commenced trading on the New York Stock Exchange under the symbol “VNE” and the Veoneer Swedish Depository Receipts representing shares of Veoneer common stock commenced trading on Nasdaq Stockholm under the symbol “VNE SDB.”
Veoneer is a global leader in the design, development, manufacture, and sale of automotive safety electronics with a focus on innovation, quality and manufacturing excellence. Prior to the Spin-Off, Veoneer operated for almost four years as an operating segment within Autoliv.  Veoneer's safety systems are designed to make driving safer and easier, more comfortable and convenient for the end consumer and to intervene before a collision. 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 vehicle occupants.
Veoneer’s current product offerings include automotive radars, mono and stereo vision cameras, night vision systems, positioning systems, ADAS (advanced driver assist systems) electronic control units, passive safety electronics (airbag control units and crash sensors), brake control systems and a complete ADAS software offering towards highly automated driving (HAD) and eventually autonomous driving (AD). In addition, we offer driver monitoring systems, LiDAR sensors, RoadScape positioning and other technologies critical for HAD and AD solutions by leveraging our partnership network and internally developed intellectual property.

27




Executive Overview
We continue to see very rapid developments in the Active Safety market - new partnerships are being formed, new products introduced and for every model year an increasing number of new cars have Active Safety features available. It remains a dynamic and fast-growing market which means more long-term opportunities for Veoneer. However, the volatile nature of this evolving market and light vehicle fluctuations make the precise timing of its development difficult to predict. Considering this, we see the need to provide some updates on our progress towards our previously announced targets.
Based on the attractiveness of our Active Safety portfolio and strong customer relationships, we see a potential upside to our $4 billion 2022 total sales target, particularly for the $2 billion Active Safety sales target. We are encouraged by the fact that Active Safety, the growth engine of the company, continues to look very strong. In fact, Veoneer’s current total order intake for the last twelve months (LTM) is more than $1.3 billion average annual sales, with the majority coming from Active Safety.
To support the continued high order intake, the advanced system business we have already won, and further investment in long-term leadership in Active Safety, we intend to further increase our investments in RD&E. This investment decision for future growth means that we now anticipate reaching our 0-5% operating income target one to two years later than previously communicated.
In the short term, we see some delays in the start of production and slower ramp-ups of certain customer models along with some slight delays in expected business. These developments result in downside risk to our 2020 total sales target and we are therefore likely to reach $3 billion in total sales slightly later than previously anticipated. Despite this, Active Safety remains on-track to exceed $1 billion in sales in 2020.
Although the near-term slowdown in light vehicle production is affecting our 2018 sales, we saw several positive developments in the third quarter. Our order intake remained strong, we secured business for advanced future technologies and we had our first dedicated software feature sale.
We secured a contract for an advanced electronic control unit for Robo-taxis with a major global OEM and we also introduced to the market an advanced super computer “Zeus” for Autonomous Driving together with our partners Zenuity and NVIDIA.
We are well on track to fulfill our vision of being the trusted leader in mobility, while delivering long term value to our employees, customers and shareholders.
Outlook for 2018
Our full year 2018 consolidated net sales are expected to be lower than our previous indication due to declining light vehicle production (LVP) in our major markets and the continued strengthening of the US dollar during the second half of 2018.
Consequently, we are reducing our sales indication for full year 2018 to an organic sales decline of around 5% as compared to 2017, rather than a decline of around 3% in our earlier indication. In addition, the currency translation tailwind is reduced to 1% for the full year 2018 rather than around 3%. Net consolidated sales are now expected to decline 4% for full year 2018 as compared to 2017, rather than flat sales year over year.
Based on our current levels of customer call-offs and deliveries we expect fourth quarter sales to remain roughly at the same levels as third quarter and RD&E to increase around $20 million from the third quarter due to hiring 370 engineers.
Our earlier indications for Zenuity, capital expenditures and income tax expense remain unchanged. The monthly run-rate of Veoneer’s share of the net loss from the Zenuity JV is around $15 million per quarter. Veoneer capital expenditures are expected to be in the high single digits as a percentage of sales while income tax expense is expected to be around the low end of our range of $20 to $30 million for full year 2018.
We currently see some delays in the start of production and slower ramp-ups of certain customer models along with some slight delays in expected business wins.
These developments mean that we see some downside risk and are likely to reach our $3 billion total sales target for 2020 slightly later than previously anticipated, although Active Safety remains on track to exceed $1 billion in sales in 2020.
Based on the attractiveness of our Active Safety portfolio, strong customer relationships and continued strong order intake, we see a potential upside to our $4 billion 2022 total sales target, particularly the $2 billion Active Safety target.
While these signs are encouraging, we note that order intake can deviate significantly from quarter to quarter making the exact timing of the future sales growth difficult to forecast.
We intend to increase our investments in RD&E to account for the increase in engineering demands resulting from our high order intake, and the advanced nature of the system business we have already won and continue to pursue, and our need to invest further

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for long-term leadership in Active Safety toward Autonomous Driving continue to grow. This means that we now anticipate reaching our 0-5% operating income target one to two years later than previously communicated.
We expect our net cash to cover most of our funding requirements until the Company reaches a positive cash flow. However, additional funding may be required if we increase our order intake, or if the underlying business conditions change, or if we make acquisitions, or if we increase capital expenditures. If we generate more cash flow than expected, we may use this cash flow for capital investment, acquisitions, and general corporate purposes.
Trends, Uncertainties and Opportunities
Europe continues to take a pro-active role in promoting or requiring active safety technologies. The European New Car Assessment Program (“NCAP”) continuously updates its test rating program to include more active safety technologies to help the European Union reach its target of cutting road fatalities by 50% by 2030, as compared to 2020. On May 17, 2018, the European Commission proposed a new mandate, as party of the EU general Safety Regulation road-map till 2028, to make certain active safety features compulsory in light vehicles by 2022. Such a mandate should significantly expand demand for our active safety products. If passed as proposed, certain safety features could be mandated in 2022 as new vehicle models are introduced to the European market. In any case General Safety Regulation (GSR) would have a positive influence on other market regulators as they evaluate their respective vehicle test rating programs and safety legislations.
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) are required to achieve the maximum safety rating.
On October 4, 2018 the U.S. Department of Transportation (DoT) issued new voluntary guidelines on automated driving systems (ADS) under its “Preparing for the Future of Transportation: Automated Vehicles 3.0” initiative, building on its “Vision for Safety 2.0” from September 2017, which prioritized aligning federal guidance around twelve safety design elements of interest to the auto industry. This initiative should have a positive impact on the adoption of Advanced Driver Assistance Systems (ADAS) and Highly Automated Driving (HAD) on the road towards Autonomous Vehicles.
The UN ECE created the new Working Party to deal with regulations for Automated Vehicles (GRVA). In addition to the EU and Japan who started to work closely for ADAS regulations in the last 3 years, the U.S. and China indicated a willingness to be active in several working groups towards harmonization of future regulations for ADAS and AV. This would create a common umbrella for countries which follow type-approval rules (EU, Japan, Australia) and countries which are outside of type-approval system e.g., under self-certification regimes (U.S., Korea) or specific national rules (China).  
Key future working fields for regulations are expected for (i) safety critical ADAS-features (e.g. AEB); (ii) Highway AV-features (Physical Tests + Real World Test Drive + Audit); (iii) Cybersecurity & SW-Updates; and (iv) Connected Vehicles. On one hand, the agreement on minimal common base requirements will take longer time and therefore may postpone introduction of regulations. On the other hand, the harmonization would help the industry while a more active position from China may help to pull forward some safety critical ADAS technologies which are not yet considered as relevant for regulation in EU and Japan (e.g. Blind Spot or Night Vision).
Market Overview
Millions, (except where specified)
Light Vehicle Production by Region - 2018
China
 
Japan
 
Rest of Asia
 
Americas
 
Europe
 
Other
 
Total
Third Quarter (as of Oct-16-2018)
6.0
 
2.1
 
3.3
 
4.6
 
4.7
 
0.6
 
21.4
Change vs. Prior Year
-4.0%