Commitments and Contingencies

Legal Proceedings

Veoneer is subject to various claims, lawsuits and proceedings are pending or threatened against the Company, covering a range of matters that arise in the ordinary course of its business activities with respect to commercial, product liability and other matters. Litigation is subject to many uncertainties, and the outcome of any litigation cannot be assured. After discussions with counsel, with the exception of any potential losses resulting from the issue described below, it is the opinion of management that the various legal proceedings and investigations to which the Company currently is a party will not have a material adverse impact on the Consolidated financial position of Veoneer, but the Company cannot provide assurance that Veoneer will not experience material litigation, product liability or other losses in the future.

Product Warranty, Recalls and Intellectual Property

Veoneer is exposed to various claims for damages and compensation if its products fail to perform as expected. Such claims can be made, and result in costs and other losses to the Company, even where the product is eventually found to have functioned properly. Where a product (actually or allegedly) fails to perform as expected or is defective, the Company may face warranty and recall claims. Where such (actual or alleged) failure or defect results, or is alleged to result, in bodily injury and/or property damage, the Company may also face product liability and other claims. There can be no assurance that the Company will not experience material warranty, recall or product (or other) liability claims or losses in the future, or that the Company will not incur significant costs to defend against such claims. The Company may be required to participate in a recall involving its products. Each vehicle manufacturer has its own practices regarding product recalls and other product liability actions relating to its suppliers. As suppliers become more integrally involved in the vehicle design process and assume more of the vehicle assembly functions, vehicle manufacturers are increasingly looking to their suppliers for contribution when faced with recalls and product liability claims. Government safety regulators may also play a role in warranty and recall practices. A warranty, recall or product-liability claim brought against the Company in excess of its insurance may have a material adverse effect on the Company’s business. Vehicle manufacturers are also increasingly requiring their outside suppliers to guarantee or warrant their products and bear the costs of repair and replacement of such products under new vehicle warranties. A vehicle manufacturer may attempt to hold the Company responsible for some, or all, of the repair or replacement costs of products when the product supplied did not perform as represented by the Company or expected by the customer. Accordingly, the future costs of warranty claims by the customers may be material. However, the Company believes its established reserves are adequate. Veoneer’s warranty reserves are based upon the Company’s best estimates of amounts necessary to settle future and existing claims. The Company regularly evaluates the adequacy of these reserves, and adjusts them when appropriate. However, the final amounts actually due related to these matters could differ materially from the Company’s recorded estimates.

In addition, as vehicle manufacturers increasingly use global platforms and procedures, quality performance evaluations are also conducted on a global basis. Any one or more quality, warranty or other recall issue(s) (including those affecting few units and/or having a small financial impact) may cause a vehicle manufacturer to implement measures such as a temporary or prolonged suspension of new orders, which may have a material impact on the Company’s results of operations.

The Company carries insurance for potential recall and product liability claims at coverage levels based on the Company’s prior claims experience. Veoneer cannot assure that the level of coverage will be sufficient to cover every possible claim that can arise in the Company’s businesses, now or in the future, or that such coverage always will be available should the Company, now or in the future, wish to extend, increase or otherwise adjust the Company’s insurance.

In its products, the Company utilizes technologies which may be subject to intellectual property rights of third parties. While the Company does seek to procure the necessary rights to utilize intellectual property rights associated with its products, it may fail to do so. Where the Company so fails, the Company may be exposed to material claims from the owners of such rights. Where the Company has sold products which infringe upon such rights, its customers may be entitled to be indemnified by the Company for the claims they suffer as a result thereof. Such claims could be material.

Product Related Liabilities

The Company is exposed to product liability and warranty claims in the event that the Company’s products fail to perform as represented and such failure results, or is alleged to result, in bodily injury, and/or property damage or other loss. The Company has reserves for product risks. Such reserves are related to product performance issues including recall, product liability and warranty issues.

The Company records liabilities for product related risks when probable claims are identified and when it is possible to reasonably estimate costs. Provisions for warranty claims are estimated based on prior experience, likely changes in performance of newer products, and volume of the products sold. The provisions are recorded on an accrual basis.

The table below summarizes the change in product related liabilities in the Consolidated Balance Sheets.



	As of December 31
	2018			2017
Reserve at beginning of the year	$	22		$	30
Change in reserve	10			8
Cash settlements	(15		)	(16		)
Transfers	(1		)	—
Translation difference	—			1
Reserve at end of the year	$	16		$	22

As of December 31, 2018 and 2017, provisions and cash paid primarily relate to recall and warranty related issues. The decrease in the reserve balance as of December 31, 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 December 31, 2018, the indemnification asset included in the Other current assets in the Consolidated Balance Sheets amounting to $14 million represents substantially all of the product related liabilities included in the Other current assets in the Consolidated Balance Sheets. A substantial portion of these costs are subject to indemnification by Autoliv.

A majority of the Company’s recall related issues are covered by insurance. Insurance receivables are included within prepaid expenses and other contract assets in the Consolidated Balance Sheets.

Guarantees

The Company provide lease guarantees to Zenuity of $8 million as of December 31, 2018 and 2017. 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.

Commitments

Operating Leases

The Company leases certain offices, manufacturing and research buildings, machinery, automobiles, data processing and other equipment under operating lease contracts. The operating leases, some of which are non-cancellable and include renewals, expire at various dates through 2034. The Company pays most maintenance, insurance and tax expenses relating to leased assets. Rental expense for operating leases for the year ended December 31, 2018, 2017 and 2016 was $13 million, $7 million and $6 million, respectively.

As of December 31, 2018, future minimum lease payments for non-cancellable operating leases totaled $88 million and are payable as follows: 2019: $17 million; 2020: $14 million; 2021: $10 million; 2022: $7 million; 2023: $5 million; 2024 and thereafter: $34 million.

Build-To-Suit Lease

The Company has entered into “build-to-suit” lease arrangements, in addition to the operating leases above, for certain manufacturing and research buildings. The Company is deemed the owner of the buildings for accounting purposes during the construction period due to the terms of the arrangements.

As of December 31, 2018, future minimum lease payments for non-cancellable build-to-suit lease obligations totaled $51 million and are payable as follows: 2019: $3 million; 2020: $3 million; 2021: $3 million; 2022: $3 million; 2023: $3 million; 2024 and thereafter: $36 million.

Capital Leases

The Company leases certain property, plant and equipment under capital lease contracts. The capital leases expire at various dates through 2027.

As of December 31, 2018, future minimum lease payments for non-cancellable capital leases totaled $15 million and are payable as follows: 2019: $1 million; 2020: $1 million; 2021: $12 million; 2022: $0 million; 2023: $0 million; 2024 and thereafter: $1 million.

Unconditional Purchase Obligation and Other Non-current liabilities

During the year ended December 31, 2017, the Company entered into an unconditional purchase obligation whereof the outstanding balance as of December 31, 2018 is $10 million which will be paid in 2019. This amount will be reimbursed by Zenuity. There are no obligations other than short-term obligations related to inventory, services, tooling, and property, plant and equipment purchased in the ordinary course of business.