Volvo Group said on Monday that a settlement negotiated by its North America unit with the California Air Resources Board will reduce the company’s second-quarter operating result by $197 million.
The agreement resolves CARB allegations regarding how emission controls on 2010-2016 engines used in trucks sold in California were described, Volvo said in a statement. Under the terms, Volvo will make a series of payments and operational commitments.
The financial elements of the settlement total $197 million and break down as follows: $13 million in civil penalties; $71 million payable to CARB’s Air Pollution Control Fund; $108 million dedicated to California emissions-reduction projects; and $5 million to reimburse CARB’s costs.
In addition to the monetary payments, Volvo will implement software updates and offer a partial warranty extension that will cover about 7,200 engines in California. The company described those measures as part of the settlement obligations.
Volvo emphasized that the settlement is made without an admission of liability. The company also reported that an internal review did not find evidence of bad faith in the matters covered by the agreement.
From an accounting perspective, Volvo said the $197 million charge will be excluded from adjusted operating income. The immediate operating cash-flow effect in the ongoing quarter is expected to be $89 million, with the remaining cash payments to be disbursed over the next five years.
The Group will release its formal second-quarter results on July 17.
Summary
Volvo Group will record a $197 million operating charge in Q2 related to a settlement with the California Air Resources Board concerning descriptions of emission controls for certain 2010-2016 truck engines sold in California. The settlement comprises civil penalties, contributions to CARB funds, funding for emissions-reduction projects, reimbursement of CARB costs, and operational steps including software updates and a partial warranty extension affecting about 7,200 engines. Volvo said the settlement does not constitute an admission of liability and that its internal review found no evidence of bad faith. The company will absorb an $89 million operating cash-flow impact this quarter; other payments will be spread across five years. Quarterly results are due July 17.
Key points
- Volvo will take a $197 million hit to its second-quarter operating result tied to the CARB settlement.
- Payment components include $13 million in civil penalties, $71 million to CARB’s Air Pollution Control Fund, $108 million for emissions-reduction projects, and $5 million to reimburse CARB costs.
- Operational commitments include software updates and a partial warranty extension for about 7,200 California engines; the charge is excluded from adjusted operating income and has an $89 million operating cash-flow impact in the current quarter, with remaining outflows spread over five years.
Risks and uncertainties
- Near-term cash-flow pressure - the settlement creates an $89 million operating cash-flow impact in the current quarter, which could affect short-term liquidity planning for the group. (Impacted sectors: commercial vehicles, corporate finance)
- Ongoing payment obligations - the remainder of the cash outflows will be spread across the next five years, introducing multi-year cash commitments that may influence future operating cash flow. (Impacted sectors: commercial vehicles, capital allocation)
- Operational workload - software updates and a partial warranty extension for roughly 7,200 engines will require execution and resources from Volvo’s service and support functions in California. (Impacted sectors: after-sales service, operations)