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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 March 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 001-38471

Veoneer, Inc.
(Exact name of registrant as specified in its charter)
Delaware82-3720890
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
  
Klarabergsviadukten 70, Section C6 
Box 13089 
Stockholm Sweden
(Address of principal executive offices)
SE- 103 02
(Zip Code)
+46 8 527 762 00
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $1.00 par valueVNENew York Stock Exchange
        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:   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:      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 
 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:   
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of April 17, 2020, there were 111,554,896 shares of common stock of Veoneer, Inc., par value $1.00 per share, outstanding.
Exhibit index located on page 37



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, RD&E spend, 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: general economic conditions; the impact of the coronavirus (COVID-19) on the Company’s financial condition, business operations and liquidity; the impact of COVID-19 on our customers and their production and product launch schedules; our ability to complete the transactions contemplated by the non-binding agreements with Volvo Cars and to divest Veoneer Brake Systems("VBS"), which are subject to the negotiation and documentation of definitive agreements and closing; the cyclical nature of automotive sales and production; changes in general industry and market conditions or regional growth or decline; further decreases in light vehicle production; 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; our ability to share RD&E costs with our customers; 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 identified in Part I Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A -“Risk Factors” and in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission ("SEC") on February 21, 2020.
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
Page
 
 
 
 
 
 

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 March 31
  20202019
Net salesNote 3$362  $494  
Cost of sales (309) (409) 
Gross profit 53  85  
Selling, general and administrative expenses (44) (52) 
Research, development and engineering expenses, net (131) (156) 
Amortization of intangibles (1) (5) 
Other income, net 1    
Operating loss (122) (128) 
Gain (loss) on divestiture and assets held for sales, netNote 4(67)   
Loss from equity method investmentNote 9(18) (17) 
Interest income 4  3  
Interest expense (5)   
Loss before income taxesNote 15(208) (142) 
Income tax expenseNote 7(23) (6) 
Net loss (231) (148) 
Less: Net income (loss) attributable to non-controlling interest 2  (11) 
Net loss attributable to controlling interest $(233) $(137) 
Net loss per share - basicNote 14$(2.09) $(1.57) 
Net loss per share - diluted $(2.09) $(1.57) 
Weighted average number of shares outstanding,
   (in millions)
 111.47  87.24  
Weighted average number of shares outstanding,
   assuming dilution (in millions)
 111.47  87.24  
See notes to the unaudited condensed consolidated financial statements.

4


Veoneer, Inc.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(U.S. DOLLARS IN MILLIONS)
 Three Months Ended March 31
 20202019
Net loss$(231) $(148) 
Other comprehensive loss, before tax:
Change in cumulative translation adjustment(22) (11) 
Pension liability1    
Other comprehensive loss, before tax(21) (11) 
Expense for taxes    
Other comprehensive loss, net of tax(21) (11) 
Comprehensive loss(252) (159) 
Less: Comprehensive income (loss) attributable to non-controlling interest2  (11) 
Comprehensive loss attributable to controlling interest$(254) $(148) 
See notes to the unaudited condensed consolidated financial statements.
5


Veoneer, Inc.
Condensed Consolidated Balance Sheets
(U.S. DOLLARS IN MILLIONS)
(unaudited)
March 31, 2020December 31, 2019
Assets   
Cash and cash equivalents $970  $859  
Receivables, net 216  253  
Inventories, netNote 8135  144  
Related party receivablesNote 166  11  
Prepaid expenses and other contract assets  36  47  
Other current assets 18  18  
Assets held for saleNote 426  317  
Total current assets 1,407  1,649  
Property, plant and equipment, net 395  473  
Operating lease right-of-use assets96  100  
Equity method investmentNote 979  87  
Goodwill289  290  
Intangible assets, net12  17  
Deferred tax assets 7  7  
Investments10  9  
Other non-current assets 26  111  
Total assets $2,321  $2,743  
Liabilities and equity   
Accounts payable $233  $233  
Related party payablesNote 162  3  
Accrued expensesNote 10198  192  
Income tax payable 26  7  
Other current liabilities 41  38  
Liabilities held for saleNote 47  118  
Total current liabilities 507  591  
4.00% Convertible Senior Notes due 2024
Note 5163  160  
Pension liabilityNote 1117  17  
Deferred tax liabilities 13  13  
Operating lease non-current liabilities78  82  
Finance lease non-current liabilities34  33  
Other non-current liabilities 27  29  
Total non-current liabilities 332  334  
Equity   
Common stock  (par value $1.00, $325 million shares authorized, 111 million shares issued and outstanding as of March 31, 2020 and December 31, 2019)
 111  111  
Additional paid-in capital 2,345  2,343  
Accumulated deficit(914) (681) 
Accumulated other comprehensive loss (60) (44) 
Total equity 1,482  1,729  
Non-controlling interest   89  
Total equity and non-controlling interest 1,482  1,818  
Total liabilities, equity and non-controlling interest $2,321  $2,743  
See notes to the unaudited condensed consolidated financial statements.
6


Veoneer, Inc.
Condensed Consolidated Statements of Changes in Equity (Unaudited)
(U.S. DOLLARS IN MILLIONS)
Three months ended March 31, 2020
 Equity attributable to
 Common StockAdditional Paid In CapitalAccumulated DeficitAccumulated Other
Comprehensive Loss
Non-controlling
Interest
Total
Balance at beginning of period$111  $2,343  $(681) $(44) $89  $1,818  
Net loss—  —  (233) —  2  (231) 
Foreign currency translation—  —  —  (19) —  (19) 
     Stock based compensation expense—  2  —  —  —  2  
     Business divestitures—  —  —  3  (91) (88) 
Balance at end of period$111  $2,345  $(914) $(60) $  $1,482  

Three months ended March 31, 2019
 Equity attributable to
 Common StockAdditional Paid In CapitalAccumulated DeficitAccumulated Other
Comprehensive Loss
Non-controlling
Interest
Total
Balance at beginning of period$87  $1,938  $(181) $(19) $101  $1,927  
Net loss—  —  (137) —  (11) (148) 
Foreign currency translation—  —  —  (11) —  (11) 
Stock based compensation expense—  1  —  —  —  1  
Balance at end of period$87  $1,939  $(318) $(30) $90  $1,768  

7


Veoneer, Inc.
Condensed Consolidated Statements of Cash Flow (Unaudited)
(U.S. DOLLARS IN MILLIONS)
 Three Months Ended March 31
 20202019
Operating activities  
Net loss$(231) $(148) 
Depreciation and amortization23  29  
Gain on divestitures(77)   
Assets impairment charge144    
Undistributed loss from equity method investments18  17  
Stock-based compensation2    
Deferred income taxes  3  
Other, net(4) 7  
Change in operating assets and liabilities:
Receivables, gross36  7  
Accrued expenses17  22  
Related party receivables and payables, net4  7  
Accounts payable9  (33) 
Prepaid expenses21  (6) 
Inventories, gross7  (3) 
Income taxes20  (2) 
Other current assets and liabilities, net2  10  
Net cash used in operating activities(9) (90) 
Investing activities  
Proceeds from divestitures176    
Capital expenditures(27) (59) 
Equity method investment(16)   
Short-term investments mature into cash  5  
Net cash provided by (used in) investing activities133  (54) 
Financing activities  
Dividend paid to non-controlling interest$(5) $  
(Payments for) proceeds from long-term debt(1) 1  
Payments for short-term debt(1)   
Net increase in related party short-term debt  1  
Net cash provided by (used in) financing activities(7) 2  
Effect of exchange rate changes on cash and cash equivalents(6) (7) 
Increase (decrease) in cash and cash equivalents111  (149) 
Cash and cash equivalents at beginning of period859  864  
Cash and cash equivalents at end of period$970  $715  
See notes to the unaudited condensed consolidated financial statements.
8


Veoneer, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(U.S. DOLLARS IN MILLIONS)
Note 1. Basis of Presentation
Spin-Off
On June 29, 2018 (the “Distribution Date”), Veoneer, Inc. (“Veoneer” or “the Company”) became an independent, publicly-traded company as a result of the distribution by Autoliv, Inc. (“Autoliv” or “Former Parent”) of 100 percent of the outstanding common stock of Veoneer to the stockholders of Autoliv (the “Spin-Off”). Each Autoliv stockholder and holder of Autoliv’s Swedish Depository Receipts (SDRs) of record as of certain specified dates received one share of Veoneer common stock or one Veoneer SDR, respectively, for every one share of Autoliv common stock or Autoliv SDR. 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 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.
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 Asian business of the Brake Systems segment was sold on February 3, 2020 and the majority of the Brake Systems business in North America is expected to be sold in second quarter. We do not expect the remaining Brake Systems business to be a reportable segment due to immateriality.

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 Consolidated Financial Statements for the year ended December 31, 2019 and corresponding notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 21, 2020.
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.
Follow-on Offerings
On May 28, 2019, the Company completed follow-on public offerings of 24,000,000 shares of common stock and $207 million aggregate principal amount of 4.00% Convertible Senior Notes due 2024 (the “Notes”) (including $27 million aggregate principal amount pursuant to the underwriters’ over-allotment option to purchase additional notes). The public offering price for our common stock offering was $17.50 per share. The Company received net proceeds of approximately $403 million from the common stock offering and approximately $200 million from the Notes offering, in each case after deducting the underwriting discounts and issuance costs directly attributable to each offering.
Divestiture of Veoneer Nissin Brake System ("VNBS")
On October 30, 2019, Veoneer signed definitive agreements to sell its 51% ownership in Veoneer Nissin Brake Japan ("VNBJ") and Veoneer Nissin Brake China ("VNBZ") entities that comprise VNBS to its joint venture partner Nissin-Kogyo Co., Ltd., and Honda Motor Co., Ltd. The aggregate purchase price was $176 million. The divestiture of VNBJ and VNBZ was structured as two separate transactions each of which was completed on February 3, 2020 under the definitive agreements, and the VNBS joint venture was terminated. See Note 4 "Divestiture and held for sale" for additional information.
Assets held for sale Veoneer Brake Systems ("VBS")
Following the strategic review initially launched in April 2019, in March 2020, Veoneer decided to focus on its core Electronics business and exit the brake control business. See Note 4 "Divestiture and held for sale" for additional information.

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Note 2. Summary of Significant Accounting Policies
A summary of significant accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 21, 2020.
Accounting for credit losses
The Company has evaluated the available adoption options of common credit loss methods that are acceptable as per FASB Accounting Standards Codification Topic 326, Credit Losses. The Company adopted the available Loss-rate method where the impairment is calculated using an estimated loss rate and multiplying it by the asset’s amortized cost at the balance sheet date. This method appropriately reflects the company´s risk pattern in relation to its accounts receivables.
The key components of the Company’s Loss-rate model are as follows:
A list of the Company´s customers credit rating and credit default risk rate from Bloomberg.
Actual write-offs or reversals of previous write-offs of accounts receivables.
Evaluation of other unusual facts and circumstances which could impact the credit loss rate, such as risk of bankruptcy or potential collectability issues.
The Company’s credit loss model includes the Company’s customer list. The customers list captures the existing customers. The list is put into a Bloomberg data query to generate customers short-term credit rating. The credit default risk rate is used to calculate the credit loss rate or estimated loss rate.
For customers that do not have credit default risk rate, management uses the six-month LIBOR rate as a credit rating and a credit default risk rate. Management believes that the six-month LIBOR rate adequately reflects the short-term nature of the Company’s trade receivables and is also in line with the Company’s invoice payment terms.
Concentration of Credit Risk
A substantial majority of the Company’s trade receivables are derived from sales to OEMs. For the three months ended March 31, 2020 and 2019, the Company’s four largest customers accounted for 61% and 58% of net sales, respectively. Additionally, as of March 31, 2020 and December 31, 2019, these four largest customers accounted for 42% and 39%, respectively, of the Company’s accounts receivables. The Company believes that the receivable balances from these largest customers do not represent a significant credit risk based on past collection experience. The Company has adopted credit policies and standards intended to accommodate industry growth and inherent risk. The Company believes that credit risks are moderated by the financial stability of the Company’s major customers.
Goodwill impairment indicator
During the first quarter of 2020 the Company determined that the economic uncertainty caused by the novel strain of coronavirus (“COVID-19”) pandemic was a trigger for an impairment review of goodwill. As a result of management’s review, we determined that no impairment charge should be recorded in the quarter. As of March 31, 2020, the goodwill asset balance was $289 million.
New Accounting Standards
Adoption of New Accounting Standards
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 earlier adoption is permitted for annual periods beginning after December 15, 2018. The Company adopted ASU 2016-13 effective January 1, 2020 and applied a loss rate model to compute the expected credit loss allowance. The adoption of ASU 2016-13 does not have a material impact on the Company's condensed consolidated financial statements.
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In November 2018, the FASB issued ASU 2018-18 Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606, which (1) clarifies that certain transactions between collaborative arrangement participants should be accounted for under ASC Topic 606, Revenue from Contracts with Customers (Topic 606), when the collaborative arrangement participant is a customer in the context of a unit of account, (2) adds unit-of-account guidance in Topic 808 to align with Topic 606 when an entity is assessing whether the collaborative arrangement, or a part of the arrangement, is within the scope of Topic 606, (3) precludes presenting transactions together with revenue when those transactions involve collaborative arrangement participants that are not directly related to third parties and are not customers. The Company is required to adopt ASU 2018-18 in the first quarter of 2020. The adoption of ASU 2018-18 does not have a material impact on the Company's condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. ASU 2018-13 requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is required to adopt ASU 2018-18 in the first quarter of 2020. The adoption of ASU 2018-13 does not have a material impact on the Company's 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. The Company adopted ASU 2016-02 in the annual period beginning January 1, 2019. The Company applied the modified retrospective transition method and elected the transition option to use the effective date January 1, 2019, as the date of initial application. The Company did not adjust its comparative period financial statements for effects of ASU 2016-02, and has not made the new required lease disclosures for periods before the effective date. The Company has recognized its cumulative effect transition adjustment as of the effective date. In addition, the Company has elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, have allowed the Company to carry forward the historical lease classification. The adoption of the new standard resulted in recording operating lease assets and lease liabilities of approximately $75 million as of January 1, 2019. The adoption of the new lease standard did not have a material impact on the Company's Condensed Consolidated Statements of Operations or Statements of Cash Flows.
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. ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. ASU 2018-14 removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the employer; and the effects of a one-percentage point change in assumed health care cost trend rates. ASU 2018-14 requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted for all entities and the amendments in this update are required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact on the Company's condensed consolidated financial statements.
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Note 3. Revenue
Disaggregation of revenue
In the following tables, revenue is disaggregated by primary region and products.
Net Sales by Region
Three Months Ended March 31, 2020Three Months Ended March 31, 2019
(Dollars in millions)ElectronicsBrake SystemsTotalElectronicsBrake SystemsTotal
Asia$58  $24  $82  $89  $72  $161  
Americas117  13  130  154  15  169  
Europe150    150  164    164  
Total net sales$325  $37  $362  $407  $87  $494  

Net Sales by Products
Three Months Ended March 31, 2020Three Months Ended March 31, 2019
(Dollars in millions)ElectronicsBrake SystemsTotalElectronicsBrake SystemsTotal
Restraint Control Systems$162  $  $162  $215  $  $215  
Active Safety products163    163  192    192  
Brake Systems  37  37    87  87  
Total net sales$325  $37  $362  $407  $87  $494  

Note 4. Divestiture and held for sale
VBS
In 2019, the Company started exploring strategic options for its non-core business in the Brake System segment. In the first quarter of 2020, management committed and approved a plan to sell VBS. The Company expects to sell the business within one year from management's approval of the plan. The business and its associated assets and liabilities met the criteria for presentation as held for sale as of March 31, 2020 and were required to be adjusted to the lower of fair value less cost to sell or carrying value. This resulted in an impairment charge of approximately $144 million which was recorded within Gain/(loss) on divestiture and assets held for sales, net on the Condensed Consolidated Statements of Operations during the period end March 31, 2020. The impairment was measured using third party sales pricing to determine fair values of the assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." The assets and liabilities associated with the transaction are separately classified as held for sale in the Condensed Consolidated Balance Sheet as of March 31, 2020 and depreciation of long-lived assets ceased on March 31, 2020. The planned divestiture did not meet the criteria for presentation as a discontinued operation.

12


The major classes of assets and liabilities held for sale were as follows:
(Dollars in millions)As of
Assets held for saleMarch 31, 2020
Prepaid exp/accrued income$1  
Property, plant and equipment, net79  
Current deferred charges90  
Impairment of carrying value(144) 
Total assets held for sale$26  
Liabilities held for sale
Accounts payable6  
Accrued exp/prepaid income1  
Total liabilities held for sale$7  
VNBS
In the fourth quarter of 2019, management approved a plan to sell VNBS. The business and its associated assets and liabilities met the criteria for presentation as held for sale as of December 31, 2019, and depreciation of long-lived assets ceased. The divestiture did not meet the criteria for presentation as a discontinued operation.
On October 30, 2019, the Company entered into definitive agreements with Nissin-Kogyo Co., Ltd., and Honda Motor Co., Ltd to divest VNBS. On February 3, 2020, the Company completed the sale of VNBS. The aggregate purchase price of the transaction was $176 million, subject to certain adjustments. The net cash proceeds after adjusting closing fees was $175 million. The Company recognized a gain on the divestiture of $77 million, net of closing cost.
The major classes of assets and liabilities held for sale were as follows:
(Dollars in millions)As of
Assets held for saleDecember 31, 2019
Cash and cash equivalents$35  
Receivables, net58  
Inventories, net17  
Property, plant and equipment, net126  
Intangible assets, net66  
Other current assets15  
Total assets held for sale$317  
Liabilities held for sale
Accounts payable50  
Accrued expenses20  
Related party short-term debt12  
Pension liability8  
Other current liabilities28  
Total liabilities held for sale$118  

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Note 5. Debt
The Company’s short and long-term debt consists of the following:
As of
(Dollars in millions)March 31, 2020December 31, 2019
Short-Term Debt:
Short-term borrowings$3  $3  
Long-Term Debt:
4.00% Convertible Senior Notes due 2024 (Carrying value)163  160  
Other long-term borrowings6  8  
Total Debt$172  $171  
Short-Term Debt:
Short -term debt is included in Other current liabilities in the Consolidated Balance Sheet.
Long-Term Debt:
4.00% Convertible Senior Notes
On May 28, 2019, the Company issued, in a registered public offering in the U.S., Convertible Senior Notes (the “Notes”) with an aggregate principal amount of $207 million. The Notes bear interest at a rate of 4.00% per year payable semi-annually in arrears on June 1 and December 1 of each year, beginning December 1, 2019. The Notes will mature on June 1, 2024, unless repurchased, redeemed or converted in accordance with their terms prior to such date.
The net proceeds from the offering of the Notes were approximately $200 million, after deducting issuance costs of $7 million. The Company accounted for these issuance costs as a direct deduction from the carrying amount of the Notes. These costs are being amortized into interest expense for 5 years or through June 2024.
The conversion rate is 44.8179 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $22.3125 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if the Company deliver a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event or notice of redemption, as the case may be. In no event will the conversion rate per $1,000 principal amount of notes as a result of this adjustment exceed 57.1428 shares of common stock, as stipulated in the indenture.
The Company may not redeem the Notes prior to June 1, 2022. On or after this date, the Company may redeem for cash, shares or both all or any portion of the Notes, at our option, if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If the Company undergoes a fundamental change (as defined in the indenture), holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Notes are the Company's general unsecured obligations and rank senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, equal in right of payment with all of the Company's liabilities that are not so subordinated, effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2024 only under the following circumstances: (1) if the last reported sale price of the Company's common stock for at least 20 trading days, whether or not consecutive, during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion
14


price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the "trading price" (as defined in the indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events.
On or after March 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company's election, as stipulated in the indenture.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company's own stock, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the Consolidated and Condensed Balance Sheet and amortized to interest expense using the effective interest method over the term of the Notes. The effective interest rate on the Notes is 10%. The equity component of the Notes of approximately $46 million is included in additional paid-in capital in the Condensed Consolidated Balance Sheet and is not remeasured as long as it continues to meet the conditions for equity classification. The Company allocated transaction costs related to the Notes using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the Condensed Consolidated Balance Sheet and amortized to interest expense over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in shareholders’ equity.
The following table presents the outstanding principal amount and carrying value of the Notes:
 4.00% Convertible Senior Notes due 2024
As of
(Dollars in millions)March 31, 2020December 31, 2019
Principal amount (face value)$207  $207  
Unamortized issuance cost(4) (5) 
Unamortized debt discount(40) (42) 
Net Carrying value$163  $160  
The Company recognized total interest expense related to the Notes of approximately $4 million for the three months ended March 31, 2020, in the Unaudited Condensed Consolidated Statements of Operations.
The estimated fair value of the Notes was $135 million as of March 31, 2020. The estimated fair value of the Notes was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 6 "Fair Value Measurements".
Note 6. Fair Value Measurements
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.
Level 1 - Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
Level 2 - Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
Level 3 - Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
Assets which are valued at net asset value per share ("NAV"), or its equivalent, as a practical expedient are reported outside the fair value hierarchy, but are included in the total assets for reporting and reconciliation purposes.
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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 March 31, 2020 were foreign exchange swaps. All swaps principally match the terms and maturity of the underlying obligation 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.
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. The notional value of the derivatives not designated as hedging instruments was $100 million as of March 31, 2020 and $291 million as of December 31, 2019. As of March 31, 2020, the asset of the derivatives not designated as hedging instruments was $1 million, and as of December 31, 2019, the derivatives not designated as hedging instruments was a liability of $1 million.
Gains and losses on derivative financial instruments recognized in the Unaudited Condensed Consolidated Statements of Operations, were a gain of $2 million and a gain of less than $1 million for the three months ended March 31, 2020 and 2019, respectively.
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. VBS assets and liabilities classified as held for sale and the related impairment were measured using third party sales pricing to determine fair values of the assets. See Note 4 "Divestiture and held for sale" for additional information.
Investments
The Company may, as a practical expedient, estimate the fair value of certain investments using NAV of the investment as of the reporting date. This practical expedient generally deals with investments that permit an investor to redeem its investment directly with, or receive distributions from, the investee at times specified in the investee’s governing documents. Examples of these investments (often referred to as alternative investments) may include ownership interests in real assets, certain credit strategies, and hedging and diversifying strategies. They are commonly in the form of limited partnership interests. The Company uses NAV as a practical expedient when valuing investments in alternative asset classes and funds which are a limited partnership or similar investment vehicle.
On June 30, 2017, Veoneer committed to make a $15 million investment in Autotech Fund I, L.P. pursuant to a limited partnership agreement, and as a limited partner, periodically makes capital contributions toward this total commitment amount. As of March 31, 2020 and December 31, 2019, Veoneer contributed approximately $11 million and $10 million, respectively, to the investment in Autotech Fund I, L.P. For the period ended March 31, 2020 the Company has received distributions of $1 million from the fund.
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The carrying amounts reflected in the Consolidated Balance Sheet in Investments for AutoTech Fund I, L.P approximates its fair values as of December 31, 2019 as this is the most recent information available to the Company at this time.
Note 7. Income Taxes
During the three month periods ended March 31, 2020 and 2019, the Company recorded a tax provision of $23 million and $6 million, respectively. Discrete items, net were a expense of $21 million and $3 million for the three month periods ended March 31, 2020 and 2019, respectively. The discrete item in the three month period ended March 31, 2020 was primarily related to the tax impact of the divestiture of VNBS. Veoneer's effective tax rate differs from an expected statutory rate primarily due to the discrete item and losses in certain jurisdictions that are not benefited.
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, French, Japanese operations and Chinese operations.
Note 8. Inventories
Inventories are stated at the lower of cost (according to first-in-first-out basis, "FIFO") and net realizable value. The components of inventories were as follows:
As of
(Dollars in millions)March 31, 2020December 31, 2019
Raw materials$99  $99  
Work in progress9  8  
Finished products54  62  
Inventories162  169  
Inventory valuation reserve(27) (25) 
Total inventories, net of reserve$135  $144  

Note 9. Equity Method Investment
As of March 31, 2020, the Company has one equity method investment, which is Zenuity, a 50% ownership joint venture with Volvo cars.
During the first quarter of 2020, Veoneer contributed SEK 150 million (approximately $16 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 months ended March 31, 2020 and 2019 was $18 million and $17 million, respectively. As of March 31, 2020 and December 31, 2019, the Company’s equity investment in Zenuity was $79 million and $87 million, respectively.
Certain unaudited summarized income statement information of Zenuity, for the three months ended March 31, 2020 and 2019, is shown below:
Three Months Ended March 31
(Dollars in millions)20202019
Net sales$1  $  
Gross profit    
Operating loss(37) (34) 
Loss before income taxes(36) (34) 
Net loss(37) (34) 

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Note 10. Accrued Expenses
 As of
(Dollars in millions)March 31, 2020December 31, 2019
Operating related accruals$58  $43  
Employee related accruals66  76  
Customer pricing accruals34  39  
Product related liabilities1
18  15  
Other accruals22  19  
Total Accrued Expenses$198  $192  
1 As of March 30, 2020 and December 31, 2019, $11 million and $8 million, respectively, of product related liabilities were indemnifiable losses subject to indemnification by Autoliv and an indemnification asset is included in Other current assets.
Note 11. Retirement Plans
Defined Benefit Pension Plans
The defined benefit pension plans impacting Veoneer's financial results include the following:
Existing Veoneer Plans comprised of plans in Japan, Canada, and France. Transferred Veoneer Plans comprised of plans in Germany, India, Japan and South Korea.
The Company’s net periodic benefit costs for plans for the three months ended March 31, 2020 and 2019 were as follows:
 Three Months Ended March 31
(Dollars in millions)20202019
Service cost$1  $1  
Interest cost1    
Expected return on plan assets(1) (1) 
Net periodic benefit cost$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 in Other non-operating items, net in the unaudited Condensed Consolidated Statements of Operations.
Note 12. Stock Incentive Plan
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 1.5 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.
During the first quarter of 2020 under the Company’s long-term incentive (LTI) program, certain employees received restricted stock units (RSUs) without dividend equivalent rights and performance shares (PSs) without dividend equivalent rights. The allocation between RSUs and PSs for the grants made in February and March was 659,231 RSUs and 415,381 PSs at 100% target.
The RSUs were granted during the first quarter will vest on the third anniversary of the grant date, subject to the grantee’s continued employment with the Company on the vesting date and acceleration of vesting in certain circumstances. The fair value of RSUs and PSs granted in 2020 were calculated by using the closing stock price on the grant dates. The grant date fair value for the RSUs and PSs, granted in 2020 was $10 million.
The PSs were granted in 2020 and will earn out during the first quarter of 2023, upon the Compensation Committee’s certification of achievement of the applicable performance goals. The grantee may earn 0%-200% of the target number of PSs based on the Company’s achievement of specified targets. The performance target is the Company’s gross margin for the applicable performance period. Each PS represents a promise to transfer a share of the Company’s common stock to the
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employee following completion of the performance period, provided that the performance goals mentioned above are met and provided, further, that the grantee remains employed through the performance period, subject to certain limited exceptions.
Veoneer recognized total stock (RSUs PSs and Stock Options) compensation cost of $2 million and $1 million for the three months ended March 31, 2020 and 2019, respectively.
Note 13. 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 material adverse impact on the condensed 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.
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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 March 31
(Dollars in millions)20202019
Reserve at beginning of the period$15  $16  
Change in reserve6  (1) 
Cash payments(3) (2) 
Reserve at end of the period$18  $14  
For the three months ended March 31, 2020 and 2019, cash paid primarily relate to warranty related issues. The increase in the reserve balance as of March 31, 2020 compared to the prior year was due to a recall related reserve liability. 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 March 31, 2020 and December 31, 2019, $11 million and $8 million, respectively, of product related liabilities were indemnifiable losses subject to indemnification by Autoliv and an indemnification asset is included in Other current assets.
Guarantees
The Company provided lease guarantees to Zenuity of $15 million and $7 million as of March 31, 2020, and December 31, 2019, respectively. These represent the maximum potential amount of future (undiscounted) payments that Veoneer could be required to make under the guarantees in the event of default by the guaranteed parties. These guarantees will generally cease upon expiration of current lease agreements between 2020 and 2022. There are no liabilities recorded on the Condensed Consolidated Balance Sheet as of March 31, 2020 and December 31, 2019 related to these guarantees.
Note 14. Loss per share
Basic loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted loss per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted loss per share for the three months ended March 31, 2020 and 2019.
Three Months Ended March 31
(Dollars in millions, except per share amounts) 20202019
Numerator:  
Basic and diluted:  
Net loss attributable to Veoneer$(233) $(137) 
Denominator:  
Basic: Weighted average number of shares outstanding (in millions)111.47