# AUTOLIV INC (ALV) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from AUTOLIV INC's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1034670/000095017022001528/alv-20211231.htm Accession: 0000950170-22-001528 Filing date: 2022-02-22 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/ALV/ All MD&A years: /company/ALV/mda/ Next year: /company/ALV/mda/fy2022/ (FY 2022) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Important Trends The discussions and analysis in this section are focused on the Company’s results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020. Discussions of the Company's results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 can be found in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the year ended December 31, 2020, which was filed with the United States Securities and Exchange Commission on February 21, 2021. Autoliv, Inc. (the “Company”) provides automotive safety systems to the automotive industry with a broad range of product offerings, primarily passive safety systems. In the year ended December 31, 2021, a number of factors have influenced the Company’s results of operations. The most notable factors have been: • COVID-19 pandemic • Industry supply chain challenges and availability of semi-conductors limiting the light vehicle production ("LVP") recovery • Raw material price increases • Continued growth above LVP driven by higher content per vehicle and execution of strong order book • High order intake share maintained • Strategic and structural initiatives • Continued focus on operational excellence and quality [[GREPCENT_TABLE]] [["","2021","","","2020"],["YEARS ENDED DEC. 31 (DOLLARS IN MILLIONS, EXCEPT EPS)","Reported1)","","","change","","","Reported1)","","","change"],["Global light vehicle production (in thousands)","","73,425","","","","3","","%","","71,538","","","","(17",")","%"],["Consolidated net sales","$","8,230","","","","11","","%","$","7,447","","","","(13",")","%"],["Operating income","","675","","","","77","","%","","382","","","","(47",")","%"],["Operating margin, %","","8.2","","","","3.1","","pp","","5.1","","","","(3.4",")","pp"],["Net income attributable to controlling interest","","435","","","","133","","%","","187","","","","(60",")","%"],["Earnings per share2)","","4.96","","","","132","","%","","2.14","","","","(60",")","%"],["Net cash provided by operating activities","","754","","","","(11",")","%","","849","","","","32","","%"],["Return on capital employed, %","","18.3","","","","7.9","","pp","","10.4","","","","(9.3",")","pp"]] [[/GREPCENT_TABLE]] 1) Reported figures impacted by costs for capacity alignments and antitrust related matters. See section Items affecting comparability and Note 11 to the Consolidated Financial Statements included herein. 2) Assuming dilution and net of treasury shares. COVID-19 PANDEMIC The COVID-19 pandemic continued to impact the Company's business in 2021 mainly indirectly through the global semiconductor shortage and other industry supply chain disruptions which both limited the LVP by the Company's customers and resulted in significantly increased raw material prices. Supply chain disruptions also lead to lower customer demand visibility and material changes to call-offs with short notice which negatively impacted production efficiency and profitability in the year, although the situation stabilized somewhat in the latter part of the year. Rising raw material costs amounted to around 1.3pp in operating margin headwind in 2021, of which a small part was offset by commercial customer recoveries. Direct COVID-19 related costs, such as personal protective equipment, quarantine costs, premium freight and other items, were around $14 million in 2021 ($20 million in 2020). Governmental support in connection with furloughing, short-term work weeks, and other similar activities was around $2 million in 2021 ($37 million in 2020). In response to the ongoing challenging market conditions, Autoliv management continued to implement strict cost control measures in 2021. This includes footprint and capacity alignment in Europe, as well as moving overhead functions to Best Cost Countries in Americas. The Company has initiated further footprint adjustments in Japan and in the Rest of Asia. By December 31, 2021, total headcount was reduced by 11% compared to December 31, 2020. The situation is monitored closely, and further actions are being evaluated. The Company expects the current industry-wide semiconductor supply shortage to be a limiting factor for the LVP recovery in 2022. Rising raw material costs are expected to amount to around 3pp in operating margin headwind in full year 2022, with around 5pp year over year impact in the first half and around 1-2pp in the second half. Customer recoveries are expected to offset some of these expected raw material cost increases, mainly in the second half of the year. 31 GROWTH IMPACTED BY LIGHT VEHICLE PRODUCTION, SAFETY CONTENT PER VEHICLE AND STRONG ORDER BOOK The most important driver for Autoliv’s sales is the LVP. During the past ten years LVP has shown year-over-year growth with the exception of the years 2018-2020. Despite strong end-consumer demand for new vehicles, global light vehicle production (LVP) only grew by 3% in 2021 - significantly less than the 14% expected by IHS Markit in the beginning of the year. This was a result of the COVID-19 pandemic continuing to impact the availability of semiconductors as well as other parts of the global automotive supply chain. During 2021 the Company experienced a recovery of global LVP in the early parts of the year, while increased industry wide supply chain issues, especially semi-conductor availability, lowered global LVP in the second and especially the third quarter. In the fourth quarter of 2021, LVP rebounded as compared to the third quarter indicating improved availability of semiconductors. [[GREPCENT_TABLE]] [["Light Vehicle Production1)"],["","","2021","","","2020","","","Change 2021 vs 2020"],["","","(000\u00b4) units","","","% global","","","(000\u00b4) units","","","% global","","","(000\u00b4) units","","","%"],["Americas","","","14,507","","","","20","%","","","14,178","","","","20","%","","","330","","","","2","%"],["","North America","","11,922","","","","16","%","","","11,948","","","","17","%","","","(26",")","","","(0",")%"],["","South America","","2,586","","","","4","%","","","2,230","","","","3","%","","","356","","","","16","%"],["Europe","","","15,623","","","","21","%","","","16,454","","","","23","%","","","(831",")","","","(5",")%"],["Asia","","","41,371","","","","56","%","","","39,180","","","","55","%","","","2,191","","","","6","%"],["","China","","23,028","","","","31","%","","","21,959","","","","31","%","","","1,069","","","","5","%"],["","Japan","","7,292","","","","10","%","","","7,624","","","","11","%","","","(332",")","","","(4",")%"],["","South Korea","","3,390","","","","5","%","","","3,449","","","","5","%","","","(59",")","","","(2",")%"],["","India","","4,055","","","","6","%","","","3,234","","","","5","%","","","821","","","","25","%"],["","Other Asia","","3,605","","","","5","%","","","2,913","","","","4","%","","","692","","","","24","%"],["Other","","","1,925","","","","3","%","","","1,727","","","","2","%","","","198","","","","11","%"],["Global Total","","73,425","","","","","","","71,538","","","","","","","1,887","","","","3","%"],["1) Source: IHS Markit"]] [[/GREPCENT_TABLE]] Chinese LVP, the world’s largest automotive market, increased by 1.1 million units or by 5% from 2020 to 2021. In Europe, an important market for automotive safety systems, LVP decreased by 5% or by approximately 0.8 million light vehicles during the same period. In North America, LVP was virtually unchanged from 2020. Europe’s share of global LVP has declined to 21% from 23% while Americas share was unchanged at 20% and China’s share remained at 31%. Japan’s share declined to 10% from 11% while India's share increased to 6% from 5%. We expect light vehicle markets to grow both in the short and long term, especially in the next few years, driven by pent-up end user demand and a rebuilding of new vehicle inventories. The growth is expected to take place in all regions. Due to more stringent crash test rating requirements, by institutes such as Euro NCAP; increased government regulations and increasing consumer demand for more safety in emerging markets, the Company sees vehicle manufacturers installing more airbags and more advanced seatbelt systems in vehicles. This generally takes place when new models are introduced. The safety standards of vehicles are increasing in China, India and other growth markets such as Brazil, partially due to new government regulations and crash test rating programs. For example, the Indian government has decided on a new traffic regulation that mandates more rigid crash test standards for light vehicles. This is supporting higher installation rate of airbags and more advanced seatbelts, impacting CPV positively, partly offset by negative effects from continued pricing pressure from vehicle manufacturers. The trend of increasing CPV was negatively impacted in 2021 by the unfavorable regional LVP mix development, as LVP in higher safety content regions such as Western Europe, North America, Japan and South Korea declined, while LVP in lower safety content regions such as South America, China and India increased. This negative regional mix effect was more than offset by the overall increase in global CPV of around 2% and the execution of the Company's strong order book, leading to a record number of product launches which supported an organic growth (see section Non-U.S. GAAP Performance Measures) of 5.2pp above growth in global LVP. The average global safety CPV (airbags, pedestrian safety, seatbelts and steering wheels) amounted to around $250 in 2021. The more stringent crash rating requirements and consumer demand for more safety should enable the global automotive safety market to grow around 2pp per year faster than the global LVP during the next three years. The past years’ high order intake share have resulted in the Company's sales development outperforming the underlying LVP significantly in the past three years. In 2021, the Company's organic sales (see section Non-U.S. GAAP Performance Measures) development outpaced global LVP by around 5 percentage points, due to increased safety content per vehicle and as an effect of recent years high order intake share. The Company estimates that the sales to Plug-In Hybrids (PHEV) and Battery Electric Vehicles (BEV) amounted to more than $1.2 billion in 2021, an increase of more than 60% compared to the previous year. 32 WELL BALANCED GLOBAL FOOTPRINT The Company's regional sales mix continues to be balanced with 28% of sales in Europe, 31% in the Americas and 41% in Asia in 2021, compared to 28%, 31% and 41%, respectively, in 2020. In Asia, the Company's sales in the important Chinese market remained at 21% of total sales in 2021. The Company's sales in India increased to 3% of total sales in 2021 from 2% in 2020. The balanced regional sales mix has been achieved through timely investments and strengthening of technical and support capabilities in growth markets. CONTINUED STRONG ORDER INTAKE SHARE Building on a strong base, including supplying products to more than 1,100 vehicle models and around 100 car brands, the Company estimates that it in 2021 for the seventh consecutive year recorded an order intake share of available orders that was above the Company's sales market share, which in 2021 the Company estimates increased to around 43% from 42% the prior year. The lead time from order intake to start of production is typically 18-36 months. During this period the products are engineered into the vehicle to provide the expected protection for occupants in case of a crash and to meet legal and regulatory requirements, as well as other requirements from the vehicle manufacturer. This investment in new products is the main reason for the high level of RD&E expenses, net. Additionally, the Company has to build up production capacity, in the form of new lines, to meet future product launches. The Company's order intake share for 2021 continued on a high level. The Company estimates that it booked around 50% of available order value in 2021. The estimated life-time sales for all orders booked in 2021 is around $11 billion, compared to around $10 billion in 2020. New order intake is defined as the sales value of awards for future business, received within that year. The life time value is calculated using detailed assumptions of price and volumes over the years of production and the exchange rates prevailing at the time of receiving the order. Due to the lead time from order to start of production, 2017 was the first year that the increased level of order intake began to impact the Company's sales. Over the last four years, sales have substantially outperformed the change in global LVP. In both 2021 and 2020 the outperformance was around 5pp. During 2021, growth was positively affected through recent launches of several new models, including Jeep Grand Cherokee, Toyota Sienna, Mitsubishi Outlander, Mercedes S-Class, Dacia Logan and Sandero, Genesis GV70. STRATEGIC INITIATIVES AND STRUCTURAL IMPROVEMENTS The expected 2021 light vehicle market recovery was hampered by an industry wide shortage of semi-conductors while raw material inflation resulted in significant increases in cost for purchased material. In response, Autoliv management continued to implement strict cost control measures, adapting manning levels to the demand decline. By December 31, 2021, total headcount was reduced by around 8,000 compared to December 31, 2020. In addition to continuously adjusting the labor force to short term demand fluctuations, management actions include footprint and capacity alignment in Europe, as well as moving overhead functions to Best Cost Countries in Americas, and initiating further footprint adjustments in Japan and in the Rest of Asia. Additionally, the Company has introduced several initiatives in previous years, such as the Structural Efficiency Program 1 and 2. The first program was fully implemented in 2020 and the second program is expected to be fully implemented in 2022. The provision, net of reversals, for restructuring activities in 2021 amounted to $8 million compared to $99 million in 2020. As of December 31, 2021, the Company has $88 million reserved in its balance sheet related to restructuring compared to $126 million last year. For more information, see Note 11 to the Consolidated Financial Statements included herein. In addition to the structural improvements outlined above, the Company continues to implement the strategic initiatives to improve the efficiency of its value chain from end to end, not least through the Autoliv Production System and increased digitalization and automation. With several hundred projects in implementation or undergoing development, the Company has a high pace in the planning and implementation of the strategic initiatives and structural improvements. These initiatives are key drivers to the Company's medium-term targets and building the foundation to continue to create shareholder value. 33 IMPROVED EFFICIENCIES THROUGH OPERATIONAL EXCELLENCE Pricing pressure is an inherent part of the automotive supplier business. Price reductions are generally higher on newer products with strong volume growth compared to older products, where both the possibilities to re-design the product to reduce costs and market growth are less. Price reductions can also depend on the business cycle and raw material price development. For the five-year period 2017-2021, the Company estimates the average reduction of product prices on existing programs to have been in the range of around 2-4% annually. A key strategy to meet these price reductions is to reduce labor costs, through continuously implementing productivity improvement programs, optimizing the Company's production footprint and instituting restructuring and capacity alignment activities as well as other actions to address the Company's cost structure. The Company's productivity improvement target is to achieve at least 5% savings per year. To meet this target, Autoliv has developed a set of strategies to reduce costs in manufacturing: • Autoliv production system (APS) is based on lean manufacturing methodology which aims to continuously increase output with less resources. APS provides the target conditions and tools to achieve the delivery of goods and services at the right time, in the right amount, at the required quality and at the lowest cost possible to all the Company's customers. • Autoliv One Product One Process (1P1P) strategy focuses on product and process standardization and reducing cost and complexity. The 1P1P strategy, combined with initiatives to reduce costs for components from external suppliers, ensures that the Company continuously optimize its supply base footprint, consolidate purchase volumes to fewer suppliers, improve productivity in the Company's supply chain, standardize components and redesign its products. • Strategic Initiatives including Automation, Digitalization, Supply Chain Management Effectiveness and RD&E Effectiveness. The Company's historic experience is that the continuous improvement strategies have enabled productivity improvement at or above its target of 5%. However, this was not the case in the past two years due to the COVID-19 pandemic related decline in LVP in 2020 and the high volatility in customer call-offs in 2021 driven by the industry wide supply chain instability, especially for semi-conductors. The Company foresees opportunities for further productivity on gains from LVP recovery and increased call-off stability when supply of semi-conductors eventually improves, but also from increasing use of automation in its assembly for lean manufacturing processes. Additionally, automated cells typically perform the manufacturing process with reduced variability. This results in greater control and consistency of product quality. FOCUS ON QUALITY The number of vehicle recalls in the automotive industry has risen sharply in recent years. Starting in 2015, Takata’s airbag inflators recall generated a record number of recalls in the automotive industry. The Company expects overall recall numbers to remain high for years to come and, although the Company strives for the highest quality in its processes, it cannot be ruled out that the Company may also be adversely impacted by a future recall. Quality has been and always will be the Company's number one priority, and the Company continues to sharpen its focus in this area. The Company now holds a global market share in passive safety of around 43%, while the Company has been involved in around 2% of recalls in the industry since 2010. This indicates that the Company is delivering on its quality strategy. For more information see product warranty and recalls in Note 12 to the Consolidated Financial Statements in this Annual Report. CHANGES IN COMPETITIVE LANDSCAPE During the past seven years, Autoliv experienced significant changes in its competitive landscape. In 2015, TRW, a key competitor in passive safety, was acquired by German group ZF Friedrichshafen. Combined, the new company is the second largest passive safety supplier globally. In 2016, Key Safety Systems (“KSS”) was acquired by Ningbo Joyson Electronic Corp. Beginning in 2014, Takata, Autoliv's largest competitor at the time, experienced severe issues and recalls related to malfunctioning airbag inflators, leading the company to file for bankruptcy protection in the U.S. and Japan. In 2018, Joyson substantially acquired all of Takata's global assets and operations and combined it with KSS, forming the new company JSS. Combined, the new company is the third largest passive safety supplier globally. 34 CAPITAL STRUCTURE The Company’s net debt stood at $1,052 million on December 31, 2021. This was a decrease of $163 million compared to December 31, 2020. Total interest-bearing debt at December 31, 2021 amounted to $2,008 million, a decrease of $403 million compared to December 31, 2020. Cash flow from operations was $754 million in 2021 and $849 million in 2020. Capital expenditures, net amounted to $454 million in 2021 and $340 million in 2020. During 2021 and 2020 the Company paid dividends of $165 million and $54 million, respectively. In the second quarter of 2020, the Company suspended the dividends due to the COVID-19 pandemic. The dividends where reinstated in the second quarter of 2021. It is the Company’s policy to maintain a financial leverage commensurate with a “strong investment grade credit rating”. The long-term target is to have a leverage ratio (see section Non-U.S. GAAP Performance Measures) of around 1.0x and to be within the range of 0.5x to 1.5x. At December 31, 2021, the current leverage ratio is 1.2x. The Company monitors its capital structure and the financial markets closely and intends to maintain a high level of financial flexibility while being shareholder friendly. As part of the adjustment of the capital structure, the Company historically has repurchased shares of its common stock. During 2021 and 2020, the Company did not repurchase any shares. On December 31, 2021, the stock repurchase program authorized by the Board of Directors in 2014 expired with approximately 3 million shares remaining. In November 2021, the Board of Directors approved a new stock repurchase program that authorizes the Company to repurchase up to $1.5 billion or up to 17 million shares (whichever comes first) between January 2022 and the end of 2024. Outlook for 2022 The Company's outlook indications for 2022 reflect continuing uncertainty in the automotive markets and are mainly based on the Company's customer call-offs and global LVP outlook according to IHS Markit (January 2022), indicating a full year 2022 global LVP growth of around 9%. [[GREPCENT_TABLE]] [["Financial measure","","Full year indication"],["LVP growth","","Around 9%"],["Organic sales growth","","Around 20%"],["FX","","Around -3%"],["Adjusted operating margin1)","","Around 9.5%"],["Tax rate 2)","","Around 30%"],["Operating cash flow3)","","Around $950 million"],["Capital expenditures, net % of sales","","Around 5.5%"]] [[/GREPCENT_TABLE]] 1) Excluding costs for capacity alignments, anti-trust related matters and other discrete items. 2) Excluding unusual tax items. 3) Excluding unusual items. The forward-looking non-U.S. GAAP financial measures above are provided on a non-U.S. GAAP basis. Autoliv has not provided a U.S. GAAP reconciliation of these measures because items that impact these measures, such as costs related to capacity alignments and antitrust matters, cannot be reasonably predicted or determined. As a result, such reconciliation is not available without unreasonable efforts and Autoliv is unable to determine the probable significance of the unavailable information. Significant Legal Matters See Item 3. Legal Proceedings and Note 17 Contingent Liabilities to the Consolidated Financial Statements in this Annual Report. 35 results of operations Consolidated net sales in 2021 increased by 10.5 % compared to 2020. Excluding positive currency translation effects of 2.6 %, the organic sales increased (see section Non-U.S. GAAP Performance Measures) by 7.9 %. Sales by Product [[GREPCENT_TABLE]] [["","","","","","","","","","","","Components of Change in Net Sales"],["","","2021","","","2020","","","Reported change","","","Currency effects1)","","","Organic"],["Airbags products and Other2)","","$","5,380","","","$","4,824","","","","11.5","%","","","2.2","%","","","9.3","%"],["Seatbelt products2)","","","2,850","","","","2,623","","","","8.6","%","","","3.4","%","","","5.2","%"],["Total","","$","8,230","","","$","7,447","","","","10.5","%","","","2.6","%","","","7.9","%"]] [[/GREPCENT_TABLE]] 1) Effects from currency translations. 2) Including Corporate and Other sales. Sales of all airbag product categories except inflators increased organically (Non-U.S. GAAP measure, see reconciliation table above) in the full year 2021. The largest contributor to growth was steering wheels and inflatable curtains, followed by passenger airbags, driver airbags and knee airbags. Seatbelt products showed strong organic sales growth (Non-U.S. GAAP measure, see reconciliation table above) with largest contributing markets being China, South America and India, partly offset by declines in South Korea and Japan. Sales by Region [[GREPCENT_TABLE]] [["","","","","","","","","","","","Components of Change in Net Sales"],["","","2021","","","2020","","","Reported change","","","Currency effects1)","","","Organic"],["Asia","","$","3,407","","","$","3,043","","","","12.0","%","","","3.2","%","","","8.7","%"],["Whereof: China","","","1,766","","","","1,541","","","","14.6","%","","","7.1","%","","","7.5","%"],["Japan","","","733","","","","733","","","","(0.0",")%","","","(2.7",")%","","","2.7","%"],["Rest of Asia","","","908","","","","769","","","","18.0","%","","","1.0","%","","","17.0","%"],["Americas","","","2,535","","","","2,337","","","","8.5","%","","","1.1","%","","","7.3","%"],["Europe","","","2,289","","","","2,067","","","","10.7","%","","","3.5","%","","","7.2","%"],["Global","","$","8,230","","","$","7,447","","","","10.5","%","","","2.6","%","","","7.9","%"]] [[/GREPCENT_TABLE]] 1) Effects from currency translations. For 2021, Autoliv’s sales increased organically (Non-U.S. GAAP measure, see reconciliation table above) by 7.9 % compared to 2020, which was 5.2 percentage points better than LVP (according to IHS Markit, January 2022). Sales increased organically in all regions. The largest organic sales increase drivers were Americas and Europe, followed by Rest of Asia, China and Japan. The Company's organic sales development outperformed LVP in all regions - by 12 percentage points in Europe, by 7 percentage points in Japan, by 5 percentage points in Americas, by 3 percentage points in China and by 2 percentage points in Rest of Asia. [[GREPCENT_TABLE]] [["2021 Organic growth1)","","Americas","","Europe","","China","","Japan","","Rest of Asia","","Global"],["Autoliv","","7.3%","","7.2%","","7.5%","","2.7%","","17.0%","","7.9%"],["Main growth drivers","","Toyota, Stellantis, Ford","","Daimler, VW, BMW","","Geely, GM, Wuling","","Mitsubishi, Toyota, Nissan","","Mitsubishi, Toyota, Tata","","Toyota, Stellantis, Mitsubishi"],["Main decline drivers","","Honda, Subaru, Mazda","","Renault, Ford, Nissan","","VW, Hyundai/Kia, Great Wall","","Honda, Mazda","","Hyundai/Kia, SsangYong","","Honda, Great Wall, BYD"],["1) Non-U.S. GAAP Measure"]] [[/GREPCENT_TABLE]] 36 Condensed Statement of Income [[GREPCENT_TABLE]] [["","Years ended December 31"],["(Dollars in millions, except per share data)","2021","","","2020","","","Change"],["Net Sales","$","8,230","","","$","7,447","","","","10.5","%"],["Gross profit","","1,511","","","","1,247","","","","21.2","%"],["% of sales","","18.4","%","","","16.7","%","","","1.6","pp"],["S,G&A","","(432",")","","","(389",")","","","11.1","%"],["% of sales","","(5.3",")%","","","(5.2",")%","","","(0.0)pp"],["R,D&E net","","(391",")","","","(376",")","","","4.0","%"],["% of sales","","(4.7",")%","","","(5.0",")%","","","0.3","pp"],["Other income (expense), net","","(3",")","","","(90",")","","","(96.3",")%"],["Operating income","","675","","","","382","","","","76.6","%"],["% of sales","","8.2","%","","","5.1","%","","","3.1","pp"],["Adjusted operating income3)","","683","","","","482","","","","41.8","%"],["% of sales","","8.3","%","","","6.5","%","","","1.8","pp"],["Financial and non-operating items, net","","(61",")","","","(91",")","","","(33.3",")%"],["Income before taxes","","614","","","","291","","","","111","%"],["Tax rate","","28.9","%","","","35.3","%","","","(6.4)pp"],["Net income","","437","","","","188","","","","132","%"],["Earnings per share, diluted1, 2)","","4.96","","","","2.14","","","","132","%"],["Adjusted earnings per share, diluted1, 2), 3)","","5.02","","","","3.15","","","","59.4","%"]] [[/GREPCENT_TABLE]] 1) Assuming dilution and net of treasury shares. 2) Participating share awards with right to receive dividend equivalents are (under the two-class method) excluded from the EPS calculation. 3) Non-U.S. GAAP Measure. Gross Profit In 2021, Gross profit increased by $264 million and the gross margin increased by 1.6 pp compared to 2020. The gross profit increase was primarily driven by higher sales from growing LVP and execution of the Company's strong order book. Operating Income Operating income increased in 2021 by $293 million, mainly as a consequence of improvement of gross profit and other income (expense), net, partly offset by higher costs for S,G&A and R,D&E, net. Selling, General and Administrative (S,G&A) expenses increased in 2021 by $43 million, or by 11.1 %, mainly relating to higher personnel costs due to extensive furloughing the prior year, increased IT and project costs and adverse FX effects. Research, Development & Engineering (R,D&E) expenses, net increased in 2021 by $15 million, or by 4.0 %, mainly due to higher personnel costs due to extensive furloughing the prior year and adverse FX effects partly offset by higher engineering income. In relation to sales, R,D&E costs declined from 5.1% to 4.7%. Other income (expense), net decreased by $87 million in 2021 compared to the previous year, mainly due to $90 million in lower capacity alignment costs, partly offset by adverse effects from FX effects and lower government income. Financial and Non-operating Items, net Financial and non-operating items, net, costs increased by $30 million in 2021 compared to previous year, mainly due to lower interest expense, net, but also due to positive effects from currency translations and other financial items. Income Taxes The tax rate for 2021 was 28.9 %, compared to 35.3 % in 2020, mainly due to an unfavorable country mix in 2020. Net Income and Earnings Per Share Net income in 2021 increased by $249 million compared to 2020 primarily driven by the higher gross profit, lower capacity alignment costs and lower interest expense, net, as noted above. Earnings per share, diluted, increased by $2.83 where the main drivers were $1.29 from higher adjusted operating income (Non-U.S. GAAP measure, see reconciliation table below) , $0.95 from lower costs for capacity alignment and antitrust related matters, $0.40 from lower tax and $0.19 from financial items. The weighted average number of shares outstanding assuming dilution in 2021 was 87.7 million compared to 87.5 million in 2020. 37 Non-U.S. GAAP Performance Measures In this annual report the Company sometimes refers to non-U.S. GAAP measures that the Company and securities analysts use in measuring Autoliv’s performance. The Company believes that these measures assist management and investors in analyzing trends in the Company’s business for the reasons given below. Investors should not consider these non-U.S. GAAP measures as substitutes for, but rather as additions to, financial reporting measures prepared in accordance with U.S. GAAP. These non-U.S. GAAP measures have been identified, as applicable, in each section of this annual report with tabular presentations provided below, reconciling them to U.S. GAAP. It should be noted that these measures, as defined, may not be comparable to similarly titled measures used by other companies. Organic Sales The Company analyzes its sales trends and performance as changes in “organic sales growth” or “organic sales decline”, because the Company currently generates approximately three quarters of net sales in currencies other than the reporting currency (i.e. U.S. dollars) and currency rates have proven to be rather volatile. Organic sales present the increase or decrease in the overall U.S. dollar net sales on a comparable basis, allowing separate discussions of the impact of acquisitions/divestitures and exchange rates. See tabular reconciliations above, that present changes in “organic sales growth” as reconciled to the change in total U.S. GAAP net sales. Trade working capital Due to the need to optimize cash generation to create value for the Company's shareholders, management focuses on operationally derived trade working capital as defined in the table below. The reconciling items used to derive this measure are, by contrast, managed as part of the Company's overall management of cash and debt, but they are not part of the responsibilities of day-to-day operations management. Reconciliation of U.S. GAAP measure to “Trade working capital” (dollars in millions) [[GREPCENT_TABLE]] [["DECEMBER 31","","2021","","","2020"],["Receivables, net","","$","1,699","","","$","1,822"],["Inventories, net","","","777","","","","798"],["Accounts payable","","","(1,144",")","","","(1,254",")"],["Trade working capital","","$","1,332","","","$","1,366"]] [[/GREPCENT_TABLE]] Net debt As part of efficiently managing the Company’s overall cost of funds, the Company routinely enter into “debt-related derivatives” (DRD) as part of its debt management. Creditors and credit rating agencies use net debt adjusted for DRD in their analyses of the Company’s debt and therefore the Company provides this non-U.S. GAAP measure. See reconciliation table below. DRD are fair value adjustments to the carrying value of the underlying debt. Also included in the DRD is the unamortized fair value adjustment related to discontinued fair value hedges, which will be amortized over the remaining life of the debt. By adjusting for DRD, the total financial liability of net debt is disclosed without grossing debt up with currency or interest fair values. Reconciliation of U.S. GAAP measure to “Net debt” (dollars in millions) [[GREPCENT_TABLE]] [["DECEMBER 31","","2021","","","2020"],["Short-term debt","","$","346","","","$","302"],["Long-term debt","","","1,662","","","","2,110"],["Total debt","","","2,008","","","","2,411"],["Cash and cash equivalents","","","(969",")","","","(1,178",")"],["Debt issuance cost/Debt-related derivatives, net","","","13","","","","(19",")"],["Net debt","","$","1,052","","","$","1,214"]] [[/GREPCENT_TABLE]] 38 Adjusted operating income, adjusted operating margin and adjusted EPS Adjusted operating margin and adjusted EPS are non-U.S. GAAP measures the Company uses to evaluate its business, because the Company believes it assists investors and analysts in comparing the Company's performance across reporting periods on a consistent basis by excluding items that are non-operational or non-recurring in nature (such as costs related to capacity alignments, costs related to antitrust matters and for EPS unusual tax items) and that the Company does not believe are indicative of its core operating performance and underlying business trends. Adjusted operating margin and adjusted EPS, as shown in the table below, should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with U.S. GAAP, including operating margin and EPS. [[GREPCENT_TABLE]] [["Items affecting comparability"],["","","2021","","","2020"],["(DOLLARS IN MILLIONS, EXCEPT EPS)","","Reported","","","Adjust- ments1)","","","Non- U.S. GAAP","","","Reported","","","Adjust- ments1)","","","Non- U.S. GAAP"],["Operating income","","$","675","","","$","8","","","$","683","","","$","382","","","$","99","","","$","482"],["Operating margin, %","","","8.2","","","","0.1","","","","8.3","","","","5.1","","","","1.4","","","","6.5"],["Income before income taxes","","","614","","","","8","","","","622","","","","291","","","","99","","","","391"],["Net income attributable to controlling interest","","","435","","","","5","","","","440","","","","187","","","","88","","","","275"],["Capital employed","","","3,700","","","","5","","","","3,705","","","","3,637","","","","88","","","","3,725"],["Return on capital employed, % 2)","","","18.3","","","","0.2","","","","18.5","","","","10.4","","","","2.5","","","","12.9"],["Return on total equity, % 3)","","","17.1","","","","0.2","","","","17.3","","","","8.8","","","","3.9","","","","12.7"],["Earnings per share, diluted 4, 5)","","$","4.96","","","$","0.06","","","$","5.02","","","$","2.14","","","$","1.01","","","$","3.15"],["Total parent shareholders' equity per share","","$","30.10","","","$","0.06","","","$","30.15","","","$","27.56","","","$","1.01","","","$","28.57"]] [[/GREPCENT_TABLE]] 1) Represents costs for capacity alignments and antitrust related matters. See table below for a disaggregation of these costs. 2) Operating income and income from equity method investments, relative to average capital employed. 3) Net Income relative to average total equity for the year. 4) Assuming dilution and net of treasury shares. 5) Participating share awards with right to receive dividend equivalents are (under the two-class method) excluded from the EPS calculation. [[GREPCENT_TABLE]] [["Items included in Non-U.S. GAAP adjustments"],["","","2021","","","2020"],["","","Adjustment Millions","","","Adjustment Per share","","","Adjustment Millions","","","Adjustment Per share"],["Capacity alignment","","$","8","","","$","0.10","","","$","99","","","$","1.13"],["Antitrust related matters","","","\u2014","","","","\u2014","","","","1","","","","0.01"],["Total adjustments to Operating income","","","8","","","","0.10","","","","99","","","","1.14"],["Tax on Non-U.S. GAAP adjustments1)","","","(3",")","","","(0.04",")","","","(11",")","","","(0.13",")"],["Total adjustments to Net Income","","$","5","","","$","0.06","","","$","88","","","$","1.01"],["Weighted average number of shares outstanding - diluted2)","","","","","","87.7","","","","","","","87.5"],["Adjustment Return on capital employed","","$","8","","","","","","$","99"],["Adjustment Return on capital employed, %","","","0.2","%","","","","","","2.5","%"],["Adjustment Return on total equity","","$","5","","","","","","$","88"],["Adjustment Return on total equity, %","","","0.2","%","","","","","","3.9","%"]] [[/GREPCENT_TABLE]] 1) The tax is calculated based on the tax laws in the respective jurisdiction(s) of the adjustment(s). 2) Annualized average number of outstanding shares. 39 Liquidity, Capital Resources and Financial Position [[GREPCENT_TABLE]] [["","","Years ended December 31"],["(DOLLARS IN MILLIONS)","","2021","","","2020"],["Net cash provided by operating activities","","$","754","","","$","849"],["Net cash used in investing activities","","","(454",")","","","(340",")"],["Net cash (used in) provided by financing activities","","","(469",")","","","160"],["Effect of exchange rate changes on cash and cash equivalents","","","(39",")","","","64"],["(Decrease) increase in cash and cash equivalents","","","(209",")","","","733"],["Cash and cash equivalents at beginning of year","","","1,178","","","","445"],["Cash and cash equivalents at end of year","","$","970","","","$","1,178"]] [[/GREPCENT_TABLE]] NET CASH PROVIDED BY OPERATING ACTIVITIES Cash flow from operations, together with available financial resources and credit facilities, are expected to be sufficient to fund the Company’s anticipated working capital requirements, capital expenditures and future dividend payments. Net cash provided by operating activities was $754 million in 2021 compared to $849 million in 2020. The decrease of $95 million was primarily due to negative effects from changes in operating working capital partly offset by positive effects from the higher net income. At December 31, 2021, trade working capital (see section Non-U.S. GAAP Performance Measures above) amounted to $1,332 million corresponding to 16% of net sales compared to $1,366 million and 14% at December 31, 2020. Receivables outstanding in relation to sales (see Glossary and Definitions for definition) were 20% December 31, 2021, compared to 18% in 2020. Factoring agreements did not have any material impact on receivables outstanding for 2021 or 2020. Inventory in relation to sales (see Glossary and Definitions for definition) were 9% at December 31, 2021, compared to 8% in 2020. Payables outstanding in relation to sales (see Glossary and Definitions for definition) were 14% at December 31, 2021 compared to 13% in 2020. NET CASH USED IN INVESTING ACTIVITIES In 2021 and 2020 net cash used in investing activities amounted to $454 million and $340 million, respectively. The Company's investing activities primarily consists of investments in property, plant and equipment, net of cash. Net cash generated by operating activities continued to sufficiently cover capital expenditures for property, plant and equipment. Capital expenditures, net was $454 million in 2021 and $340 million in 2020. The increase of $114 million mainly reflects that the level in the prior year was still low due to the pandemic. In relation to net sales, capital expenditures, net was 5.5% in 2021 and 4.6% in 2020. Depreciation and amortization totaled $394 million in 2021 compared to $371million in 2020. During the years 2021 and 2020, a majority of the Company's investments were for production capacity to support new product launches and automation projects for improved efficiency. Major investments were mainly made in China, Europe and North America. In 2021, investments in China were made to support revenue growth and to expand capacity and capabilities of textile production. In Europe investments were mainly related to new product launches and automatizations. In North America, the investments were mainly related to capacity expansions. NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES Net cash (used in) provided by financing activities amounted to $(469) million and $160 million for the years 2021 and 2020, respectively. In 2021, the Company paid dividends of $165 million after reinstated the dividends in the second quarter of 2021. In 2020, the Company paid dividends of $54 million in the first quarter and then suspended the dividends due to the COVID-19 pandemic for the remaining quarters. INCOME TAXES The Company has reserves for taxes that may become payable in future periods as a result of tax audits. At any given time, the Company is undergoing tax audits covering multiple years in several tax jurisdictions. Ultimate outcomes are uncertain but could, in future periods, have a significant impact on the Company’s cash flows. See discussions of income taxes under Significant Accounting Policies in this section, Note 2 and Note 5 to the Consolidated Financial Statements included herein. 40 PENSION ARRANGEMENTS The Company has defined benefit pension plans covering nearly half of the U.S. employees. As of December 31, 2021, the main U.S defined benefit plan was frozen for further benefits. Many of the Company’s non-U.S. employees are also covered by pension arrangements. At December 31, 2021, the Company’s net pension liability (i.e. the actual funded status) for its U.S. and non-U.S. plans was $197 million compared to $248 million at December 31, 2020. The plans had a net unamortized actuarial loss before tax of $68 million recorded in Accumulated Other Comprehensive (Loss) Income in the Consolidated Statement of Equity at December 31, 2021, compared to $107 million at December 31, 2020. The decrease in the actuarial loss was mainly due to a decrease in the discount rate for the U.S. plans. The amortization of this loss is expected to be $1 million in 2022. The decrease in the total net pension liability in 2021 of $51 million was mainly due to the increase in discount rates. Pension expense associated with the defined benefit plans was $24 million in 2021 and $33 million in 2020, and is expected to be $4 million in 2022. The $9 million decrease in 2021 pension expense was mainly due to lower discount rates, a decrease in the cost of plan settlements in the U.S. and a higher expected return on assets due to the growth in the size of the assets. The Company contributed $25 million to its defined benefit plans in 2021 and $26 million in 2020. The Company expects to contribute $22 million to these plans in 2022 and is currently projecting a yearly funding at approximately the same level in the subsequent years. For further information about retirement plans see Note 18 to the Consolidated Financial Statements included herein. SHAREHOLDER RETURNS Total cash dividends paid were $165 million in 2021 and $54 million in 2020. The Company cancelled its dividends from the second quarter 2020 due to the COVID-19 pandemic. In the second quarter of 2021 the Board of Directors reinstated quarterly dividends. EQUITY During 2021, total equity increased by $225 million to $2,648 million. The change was mainly due to $437 million from net income, partially offset by dividends of $166 million and $86 million from negative foreign exchange effects. TREASURY ACTIVITES DEBT AND CREDIT ARRANGEMENTS The Company's total debt as of December 31, 2021 and 2020 was $2,008 million and $2,411 million, respectively. The Company had a net debt position (see section Non-U.S. GAAP Performance Measures) at December 31, 2021 and 2020 of $1,052 million and $1,214 million, respectively. In June 2020, the Company utilized its new SEK 6,000 million facility with Swedish Export Credit Corporation which was signed in May 2020. The SEK 6,000 million facility was utilized in two different loans. One SEK 3,000 million loan maturing in 2022 carrying a floating interest rate of 3M STIBOR +1.35% and one SEK 3,000 million loan maturing in 2025 carrying a floating interest rate of 3M STIBOR +1.85%. In June 2018, the Company priced and issued 5-year notes for a total of €500 million in the Eurobond market. The notes carry a coupon of 0.75% and matures in 2023. In July 2016, the Company refinanced its existing revolving credit facility (RCF) of $1,100 million. The facility, syndicated among 14 banks, originally maturing in July 2021 with two extension options, each for an additional year. The extension options have been used by the Company and the maturity date for the facility has been extended to July 2023. The Company pays a commitment fee on the undrawn amount of 0.1%, representing 35% of the applicable margin, which is 0.375% (given the Company’s rating of “BBB” from S&P Global Ratings at May 28, 2020). Borrowings under the facility are unsecured and bear interest based on the relevant LIBOR or IBOR rate. At December 31, 2021, the RCF of $1,100 million was unutilized. This facility is not subject to any financial covenants nor is any other substantial financing of Autoliv. In 2014, the Company issued and sold long-term debt securities in a U.S. Private Placement pursuant to a Note Purchase and Guaranty Agreement dated April 23, 2014, by and among Autoliv ASP Inc., the Company and the purchasers listed therein. As of December 31, 2021, $767 million remains outstanding from the 2014 issuance. The Company has a €3,000 million Euro Medium Term Note Program in place for being able to issue notes to be traded on the Global Exchange Market of Euronext Dublin. On December 31, 2021, no notes had been issued under this program. At December 31, 2021, Autoliv’s long-term credit rating from S&P Global Ratings was BBB with stable outlook. The Company aims to maintain a strong investment grade credit rating. For additional information about the Company's debt and credit arrangements, see Note 13 to the Consolidated Financial Statements included herein. 41 FACTORING During 2021 and 2020, the Company sold receivables and discounted notes related to selected customers. These factoring arrangements increase cash while reducing accounts receivable and customer risks. At December 31, 2021, the Company had received $159 million for sold receivables without recourse and discounted notes with a discount cost of $2 million during the year, compared to $161 million at December 31, 2020 with a discount cost of $3 million recorded in Other non-operating items, net. NUMBER OF SHARES At December 31, 2021, 87.5 million shares were outstanding (net of 15.3 million treasury shares), a 0.1% increase from 87.4 million one year earlier. The number of shares outstanding is expected to increase by 0.4 million when all Restricted Stock Units (RSU) and Performance Shares (PSs) vest and if all stock options (SOs) to key employees are exercised, see Note 16 to the Consolidated Financial Statements included herein. In total, Autoliv has repurchased 44.5 million shares under its stock repurchase program between May 2000 and December 2021 for cash of $2,498 million, including commissions. The average cost per share for all repurchased shares to date is $56.13. No stock repurchases were made in 2021. Purchases can be made from time to time as market and business conditions warrant in open market, negotiated or block transactions. On December 31, 2021, the stock repurchase program authorized by the Board of Directors in 2014 expired with approximately 3 million shares remaining. In November 2021, the Board of Directors approved a new stock repurchase program that authorizes the Company to repurchase up to $1.5 billion or up to 17 million shares (whichever comes first) between January 2022 and the end of 2024. Contractual Obligations and Commitments Contractual obligations include debt, sponsored defined benefit plans, lease and purchase obligations that are enforceable and legally binding on the Company. For material contractual debt obligations as of December 31, 2021, see Note 13 to the Consolidated Financial Statements included herein. Operating lease obligations represent the payment obligations (undiscounted cash flows) under leases classified as operating leases. Capital lease obligations are not material. See Note 3 to the Consolidated Financial Statements included herein. There are no unconditional purchase obligations other than short-term obligations related to inventory, services, tooling, and property, plant and equipment purchased in the ordinary course of business. Purchase agreements with suppliers entered into in the ordinary course of business do not generally include fixed quantities. Quantities and delivery dates are established in “call off plans” accessible electronically for all customers and suppliers involved. Communicated “call off plans” for production material from suppliers are normally reflected in equivalent commitments from Autoliv customers. The Company sponsors defined benefit plans that cover a significant portion of the Company's U.S. employees and certain non-U.S. employees. The pension plans in the U.S. are funded in conformity with the minimum funding requirements of the Pension Protection Act of 2006. Funding for the Company's pension plans in other countries is based upon plan provisions, actuarial recommendations and/or statutory requirements. Due to volatility associated with future changes in interest rates and plan asset returns, the Company cannot predict with reasonable reliability the timing and amounts of future funding requirements. The Company may elect to make contributions in excess of the minimum funding requirements for the U.S. plans in response to investment performance and changes in interest rates, or when the Company believes that it is financially advantageous to do so and based on other capital requirements. See Note 18 to the Consolidated Financial Statements included herein. Risks and Risk Management The Company is exposed to several categories of risks. They can broadly be categorized as operational risks, strategic risks and financial risks. Some of the major risks in each category are described below. There are also other risks that could have a material effect on the Company’s results and financial position, and the description below is not complete but should be read in conjunction with the discussion of risks described in Item 1A above, which contains a description of the Company's material risks. As described below, the Company has taken several mitigating actions, applied numerous strategies, adopted policies, and introduced control and reporting systems to reduce and mitigate these risks. In addition, the Company from time to time identifies and evaluates emerging or changing risks to the Company in order to ensure that identified risks and related risk management are updated in this fast-moving environment. 42 Operational Risks LIGHT VEHICLE PRODUCTION Around 30% of Autoliv’s costs are fixed; therefore, short-term earnings are dependent on sales volumes and highly dependent on capacity utilization in the Company’s plants. Global LVP is an indicator of the Company’s sales development. Ultimately, however, sales are determined by the production levels for the individual vehicle models for which Autoliv is a supplier (see Dependence on Customers). The Company’s sales are split over several hundred contracts covering more than 1,100 vehicle models. This moderates the effect of changes in vehicle demand of individual countries and regions as well as production issues. The risk of fluctuating sales has also been mitigated by Autoliv’s rapid expansion in Asia and other growth markets, which has reduced the Company’s former high dependence on sales in Europe to a diversified mix with Europe, the Americas and Asia each accounting for roughly 30% to 40% of the Company's 2021 total sales. It is the Company’s strategy to reduce the risk of fluctuating LVP by using a high number of temporary personnel instead of permanent personnel in direct production. During 2021 and 2020, the level of temporary personnel in relation to total personnel in direct production was 9% and 13%, respectively. To reduce the potential impact of unusual fluctuations in the production of vehicle models supplied by the Company such as during the financial crisis in 2008-2009 and the COVID-19 pandemic in 2020-2021 – it is also necessary for the Company to be prepared to quickly adapt the level of permanent employees as well as fixed cost production capacity. PRICING PRESSURE Pricing pressure from customers is an inherent part of the automotive components business. The extent of price reductions varies from year to year and takes the form of one time give backs, reductions in direct sales prices and/or discounted reimbursements for engineering work. In response, Autoliv is continuously engaged in efforts to reduce costs and to provide customers added value by developing new products. Generally, the speed by which these cost-reduction programs generate results will, to a large extent, determine the future profitability of the Company. The various cost-reduction programs are, to a considerable extent, interrelated. This interrelationship makes it difficult to isolate the impact of costs on any single program, therefore, the Company monitors key measures such as costs in relation to sales and productivity. COMPONENT COSTS AND RAW MATERIAL PRICES The cost of direct materials was approximately 50% of sales in 2021, of which approximately half is the raw material cost portion. The main raw materials being used as input material for Autoliv operations are steel, textiles, plastic and non-ferrous metals. The Company saw a significant inflation in 2021 with respect to rising raw material costs due to very high market prices. Semiconductor shortages hampered the global auto production and caused disturbances in the second half of 2021. There are also supply chain difficulties related to freight capacity and import tariffs imposed by the United States and other countries. The low schedule reliability in freight and the import tariffs are impacting the raw material market and creating pricing and availability uncertainties. The Company takes several actions to mitigate raw material price increases, such as competitive sourcing and exploring alternative materials. LEGAL The Company is involved from time to time in regulatory, commercial and contractual legal proceedings that may be significant, and the Company’s business may suffer as a result of adverse outcomes of current or future legal proceedings. These claims may include, without limitation, commercial or contractual disputes, including disputes with the Company’s suppliers and customers, intellectual property matters, alleged violations of laws, rules or regulations, governmental investigations, personal injury claims, product liability claims, environmental issues, tax and customs matters, and employment matters. A substantial legal liability or adverse regulatory outcome and the substantial cost to defend the litigation or regulatory proceedings may have an adverse effect on the Company’s business, operating results, financial condition, cash flows and reputation. No assurances can be given that such proceedings and claims will not have a material adverse impact on the Company’s profitability and consolidated financial position, or that reserves or insurance will mitigate such impact. See Note 17 to the Consolidated Financial Statements included herein and Item 3 – Legal Proceedings. 43 PRODUCT WARRANTY AND RECALLS If our products are alleged to fail to perform as expected or are defective, the Company may be exposed to various claims for damages and compensation. Such claims may result in costs and other losses to the Company even where the relevant product is eventually found to have functioned properly. If a product (actually or allegedly) fails to perform as expected or is defective, we may face warranty and recall claims. If such actual or alleged failure or defect results, or is alleged to result, in bodily injury and/or property damage, we may also face product liability and other claims. The Company may experience material warranty, recall, product or other liability claims or losses in the future, and the Company may incur significant cost 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. Government safety regulators also have policies and practices with respect to recalls. 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. In addition, with global platforms and procedures, vehicle manufacturers are increasingly evaluating our quality performance on a global basis. Any one or more quality, warranty or other recall issue(s), including the ones affecting few units and/or having a small financial impact, may cause a vehicle manufacturer to implement measures which may have a severe impact on the Company’s operations, such as a temporary or prolonged suspension of new orders or the Company’s ability to bid for new business. In addition, over time, there is a risk that the number of vehicles affected by a failure or defect will increase significantly (as would the Company’s costs), since our products often use global designs and are increasingly based on or utilize the same or similar parts, components or solutions. Although quality has always been a central focus in the automotive industry, especially for safety products, our customers and regulators have become increasingly attentive to quality with even less tolerance for any deviations, which has resulted in an increase in the number of automotive recalls. This trend is likely to continue as automobile manufacturers introduce even stricter quality requirements and regulating agencies and other authorities increase the level of scrutiny given to vehicle safety issues. A warranty recall or a product liability claim brought against the Company in excess of the Company’s insurance may have a material adverse effect on its business and/or financial results. Vehicle manufacturers are also increasingly requiring their external 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 defective products under new vehicle warranties when the product supplied did not perform as represented. Additionally, a customer may not allow us to bid for expiring or new business until certain remedial steps have been taken. Accordingly, the future costs of warranty claims by the Company’s customers may be material. The Company’s warranty reserves are based upon management’s best estimates of amounts necessary to settle future and existing claims. Management regularly evaluates the appropriateness of these reserves and adjusts them when we believe it is appropriate to do so. However, the final amounts determined to be due could differ materially from the Company’s recorded estimates. We believe our established reserves are adequate to cover potential warranty settlements typically seen in our business. The Company’s strategy is to follow a stringent procedure when developing new products and technologies and to apply a proactive “zero-defect” quality policy (see section Quality Management). In addition, the Company maintains a program of insurance, which may include commercial insurance, self-insurance, or a combination of both approaches, for potential recall and product liability claims in amounts and on terms that it believes are reasonable and prudent based on our prior claims experience. However, such insurance may not be sufficient to cover every possible claim that can arise in the Company’s businesses, now or in the future, or may not always will be available should the Company, now or in the future, wish to extend, renew, increase or otherwise adjust such insurance. In recent years, the cost of recall and product liability insurance as well as the Company’s level of self-insurance and deductibles has increased. Management’s decision regarding what insurance to procure is also impacted by the cost for such insurance. As a result, the Company may face material losses in excess of the insurance coverage procured. A substantial recall or liability in excess of coverage levels could therefore have a material adverse effect on the Company. ENVIRONMENTAL Most of the Company’s manufacturing processes consist of the assembly of components. As a result, the environmental impact from the Company’s plants is generally modest. While the Company’s businesses from time to time are subject to environmental investigations, there are no material environmental-related cases pending against the Company. Therefore, Autoliv does not incur (or expect to incur) any material costs or capital expenditures associated with maintaining facilities compliant with U.S. or non-U.S. environmental requirements. To reduce environmental risk, the Company has implemented an environmental management system in all plants globally and has adopted an environmental policy (see corporate website www.autoliv.com). Autoliv is subject to a number of environmental and occupational health and safety laws and regulations. Such requirements are complex and are generally becoming more stringent over time. There can be no assurance that these requirements will not change in the future, or that the Company will at all times be in compliance with all such requirements and regulations, despite its intention to be. The Company may also find itself subject, possibly due to changes in legislation or other regulation, to environmental liabilities based on the activities of its predecessor entities or of businesses acquired. Such liability could be based on activities which are not related to the Company’s current activities. TRADE Autoliv is subject to various international trade regulations and regimes and changes in these regimes could lead to increased compliance costs and costs of raw materials and other components. In addition, political conditions leading to trade conflicts and the imposition of tariffs or other trade barriers between countries in which the Company does business could increase its costs of doing business. 44 Strategic Risks REGULATIONS In addition to vehicle production, the Company’s market is driven by the safety content per vehicle, which is affected by new regulations and new vehicle rating programs, in addition to consumer demand for new safety technologies. The most important regulations are the seatbelt installation laws that exist in all vehicle-producing countries. Many countries also have strict enforcement laws on the wearing of seatbelts. Another significant vehicle safety regulation is the U.S. federal law that, since 1997, requires frontal airbags for both the driver and the front-seat passenger in all new vehicles sold in the U.S. In 2007, the U.S. adopted new regulations for head impact and enhanced thorax protection in side impact crashes, which now have been fully phased-in. China introduced a vehicle rating program in 2006 and during the past 15 years this China NCAP, together with the new additional rating program CIASI from 2019, drive Chinese vehicle safety performance and safety content with regards to crashworthiness and occupant protection. Latin America introduced a basic rating program in 2010 followed by ASEAN NCAP in Southeast Asia in 2011, and Global NCAP that is rating vehicles sold in significant emerging markets like India. Several countries, e.g., Malaysia and Thailand, are increasingly adopting the UN Regulations regarding vehicle safety under the UN 1958 agreement, and Malaysia started a world first motorcycle safety rating program in 2021. The United States upgraded its vehicle rating program in 2010 and Europe upgraded the Euro NCAP rating system during 2018. Euro NCAP is midway of a new upgrade, which will be fully implemented by 2025. Japan and South Korea are continuously upgrading their respective vehicle rating programs, JNCAP and KNCAP respectively. India requires frontal airbags for the driver from July 2019, and passenger airbags from 2021 for all new passenger vehicles (M1). Vehicles with automated driving systems (ADS) are expected to provide additional opportunities through integration of protective safety systems with ADAS technologies, as well as new vehicle interior layouts and seating configurations. There are also other plans for improved automotive safety, both in these countries and others that could affect the Company’s market. However, there can be no assurance that changes in regulations will not adversely affect the demand for the Company’s products or, at least, result in a slower increase in the demand for them. DEPENDENCE ON CUSTOMERS As a result of this highly consolidated market, the Company is dependent on a relatively small number of customers with strong purchasing power. In 2021, the five largest vehicle manufacturers accounted for around 50% of global LVP and the ten largest manufacturers for around 73%. In 2021, the Company’s five largest customers accounted for around 51% of revenues and the ten largest customers for around 80% of total sales. The Company's largest customer contract accounted for around 2% of sales in 2021. [[GREPCENT_TABLE]] [["Customer","","% of Autoliv sales","","","% of Global LVP1)"],["Renault/Nissan/Mitsubishi","","","13","%","","","9","%"],["Stellantis","","","11","%","","","8","%"],["VW","","","10","%","","","11","%"],["Toyota","","","9","%","","","13","%"],["Honda","","","8","%","","","6","%"],["Hyundai","","","8","%","","","9","%"],["Ford","","","7","%","","","4","%"],["General Motors","","","6","%","","","5","%"],["BMW","","","4","%","","","3","%"],["Mercedes-Benz","","","4","%","","","3","%"]] [[/GREPCENT_TABLE]] 1) Source: IHS Markit Although business with every major customer is split into at least several contracts (usually one contract per vehicle platform) and although the customer base has become more balanced and diversified as a result of the Company's significant expansion in China and other rapidly-growing markets, the loss of all business from a major customer (whether by a cancellation of existing contracts or not awarding Autoliv new business), the consolidation of one or more major customers or a bankruptcy of a major customer could have a material adverse effect on the Company. In addition, a quality issue, shortcomings in the Company's service to a customer or uncompetitive prices or products could result in the customer not awarding the Company new business, which will gradually have a negative impact on the Company's sales when current contracts start to expire. See also Note 20 Segment Information to the Consolidated Financial Statements included herein. CUSTOMER PAYMENT RISK Another risk related to the Company's customers is the risk that one or more of its customers will be unable to pay their invoices that become due. The Company seeks to limit this customer payment risk by invoicing its major customers through their local subsidiaries in each country, even for global contracts. By invoicing this way, the Company attempts to avoid having the receivables with a multinational customer group exposed to the risk that a bankruptcy or similar event in one country would put all receivables with such customer group at risk. In each country, the Company also monitors invoices becoming overdue. Even so, if a major customer is unable to fulfill its payment obligations, it is likely that the Company would be forced to record a substantial loss on such receivables. 45 DEPENDENCE ON SUPPLIERS The Company relies on internal and/or external suppliers in order to meet its delivery commitments to the customers. In some cases, suppliers are dictated by the customers based on very specific qualification requirements. Autoliv supply chain organization is reviewing sourcing risks and actively working on mitigating related supply chain risks. The Company’s ambition is to maintain an optimal number of suppliers in all significant component technologies. NEW COMPETITION Increased competition may result in price reductions, reduced margins and the Company's inability to gain or hold market share. OEMs rigorously evaluate suppliers on the basis of product quality, price, reliability and delivery as well as engineering capabilities, technical expertise, product innovation, financial viability, application of lean principles, operational flexibility, customer service and overall management. To maintain the Company's competitiveness and position as a market leader, it is important to focus on all of these aspects of supplier evaluation and selection. Although the market for occupant restraint systems has undergone a significant consolidation during the past ten years, the passive safety market remains very competitive. It cannot be excluded that additional competitors, both global and local, will seek to enter the market or grow beyond their current Keiretsu group or traditional customer base. Particularly in China, South Korea and Japan there are numerous small domestic competitors often supplying just one OEM group PATENTS AND PROPRIETARY TECHNOLOGY The Company’s strategy is to protect its innovations with patents, and to vigorously protect and defend its patents, trademarks and know-how against infringement and unauthorized use. At the end of 2021, the Company held more than 6,400 patents and patents applications. These patents expire on various dates during the period from 2022 to 2041. The expiration of any single patent is not expected to have a material adverse effect on the Company’s financial results. Although the Company believes that its products and technology do not infringe upon the proprietary rights of others, there can be no assurance that third parties will not assert infringement claims against the Company in the future. Also, there can be no assurance that any patent now owned by the Company will afford protection against competitors that develop similar technology. As the Company continues to expand its products and expand into new businesses, it will increase its exposure to intellectual property claims. Financial Risks The Company is exposed to financial risks through its operations. To reduce the financial risks and to take advantage of economies of scale, the Company has a central treasury department supporting operations and management. The treasury department handles external financial transactions and functions as the Company’s in-house bank for its subsidiaries. The Board of Directors monitors compliance with the financial risk policy on an on-going basis. For information about specific financial risks, see Item 7A – Quantitative and Qualitative Disclosures about Market Risk. Significant Accounting Policies and Critical Accounting Estimates NEW ACCOUNTING STANDARDS The Company has considered all applicable recently issued accounting standards. The Company has summarized in Note 2 to the Consolidated Financial Statements each of the recently issued accounting standards and stated the impact or whether management is continuing to assess the impact. APPLICATION OF CRITICAL ACCOUNTING POLICIES The Company’s significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included herein. Senior management has discussed the development and selection of critical accounting estimates and disclosures with the Audit Committee of the Board of Directors. The application of accounting policies necessarily requires judgments and the use of estimates by a Company’s management. Actual results could differ from these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on the Company's historical experience, terms of existing contracts, and management’s evaluation of trends in the industry, information provided by the Company's customers and information available from other outside sources, as appropriate. The Company considers an accounting estimate to be critical if: • It requires management to make assumptions about matters that were uncertain at the time of the estimate, and • Changes in the estimate or different estimates that could have been selected would have had a material impact on the Company's financial condition or results of operations. The accounting estimates that require management’s most significant judgments include the estimation of variable considerations, estimations associated with purchase price allocations regarding business combinations, assessment of recoverability of goodwill and intangible assets, estimation of pension benefit obligations based on actuarial assumptions, estimation of accruals for warranty and recalls , restructuring charges, uncertain tax positions, valuation allowances and legal proceedings. The Company has summarized its critical accounting policies requiring judgment below. These might change over time based on the current facts and circumstances. 46 REVENUE RECOGNITION In accordance with ASC 606, Revenue from Contracts with Customers, revenue is measured based on consideration specified in a contract with a customer, adjusted for any variable consideration (i.e. price concessions) and estimated at contract inception. The estimated amount of variable consideration that will be received by the Company are based on historical experience and trends, management´s understanding of the status of negotiations with customers and anticipated future pricing strategies. 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, the Company 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 the payment concession can be clearly linked to the future business award. If the payments are capitalized, the amounts are amortized to revenue as the related goods are transferred. INVENTORY RESERVES Inventories are evaluated based on individual or, in some cases, groups of inventory items. Reserves are established to reduce the value of inventories to the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. There can be no assurance that the amount ultimately realized for inventories will not be materially different than that assumed in the calculation of the reserves. GOODWILL The Company performs an annual impairment test of goodwill in the fourth quarter of each year following the Company’s annual forecasting process. In October 2021 the Company concluded that there were no impairments of goodwill. For further information, see Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements. RECALL PROVISIONS AND WARRANTY OBLIGATIONS The Company records liabilities for product recalls when probable claims are identified and when it is possible to reasonably estimate costs. Recall costs are costs incurred when the customer decides to formally recall a product due to a known or suspected safety concern. Product recall costs are estimated based on the expected cost of replacing the product and the customer´s cost of carrying out the recall, which is affected by the number of vehicles subject to recall and the cost of labor and materials to remove and replace the defective product. The Company maintains a program of insurance, which may include commercial insurance, self-insurance, or a combination of both approaches, for potential recall and product liability claims in amounts and on terms that it believes are reasonable and prudent based on our prior claims experience. The Company’s insurance policies generally include coverage of the costs of a recall, although costs related to replacement parts are generally not covered. Actual costs incurred could differ from the amounts estimated, requiring adjustments to these reserves in future periods. It is possible that changes in our assumptions or future product recall issues could materially affect our financial position, results of operations or cash flows. Estimating warranty obligations requires the Company to forecast the resolution of existing claims and expected future claims on products sold. The Company bases the estimate on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. These estimates are re-evaluated on an ongoing basis. Actual warranty obligations could differ from the amounts estimated requiring adjustments to existing reserves in future periods. Due to the uncertainty and potential volatility of the factors contributing to developing these estimates, changes in our assumptions could materially affect our results of operations. RESTRUCTURING PROVISIONS The Company defines restructuring expense to include costs directly associated with capacity alignment programs, plus exit or disposal activities. Estimates of restructuring charges are based on information available at the time such charges are recorded. In general, management anticipates that restructuring activities will be completed within a time frame such that significant changes to the exit plan are not likely. Due to inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially estimated. 47 DEFINED BENEFIT PENSION PLANS The Company has defined benefit pension plans in thirteen countries. The most significant plans exist in the U.S. These U.S. plans represent approximately 59% of the Company’s total pension benefit obligation. See Note 18, Retirement Plans to the Consolidated Financial Statements included herein. The Company, in consultation with its actuarial advisors, determines certain key assumptions to be used in calculating the projected benefit obligation and annual pension expense. For the U.S. plans, the assumptions used for calculating the 2021 pension expense were a discount rate of 2.37%, expected rate of increase in compensation levels of 2.65%, and an expected long-term rate of return on plan assets of 5.05%. The assumptions used in calculating the U.S. benefit obligations disclosed as of December 31, 2021 were a discount rate of 2.77% and an expected age-based rate of increase in compensation levels of 2.65%. The discount rate for the U.S. plans has been set based on the rates of return of high-quality fixed-income investments currently available at the measurement date and are expected to be available during the period the benefits will be paid. The expected rate of increase in compensation levels and long-term return on plan assets are determined based on a number of factors and must take into account long-term expectations and reflect the financial environment in the respective local markets. At December 31, 2021, 42% of the U.S. plan assets were invested in equities, which is in-line with the target of 40%. The table below illustrates the sensitivity of the U.S. net periodic benefit cost and projected U.S. benefit obligation to a 1pp change in the discount rate, decrease in return on plan assets and increase in compensation levels for the U.S. plans (in millions). The use of actuarial assumptions is an area of management’s estimate. [[GREPCENT_TABLE]] [["Assumption (in millions)","","Change","","2021 net periodic benefit cost increase (decrease)","","","2021 projected benefit obligation increase (decrease)"],["Discount rate","","1pp increase","","$","1","","","$","(34",")"],["Discount rate","","1pp decrease","","","2","","","","41"],["Compensation levels","","1pp increase","","","0","","","","0"],["Return on plan assets","","1pp decrease","","","4","","","n/a"]] [[/GREPCENT_TABLE]] INCOME TAXES Significant judgment is required in determining the worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Many of these uncertainties arise as a consequence of intercompany transactions. Although the Company believes that its tax return positions are supportable, no assurance can be given that the final outcome of these matters will not be materially different than that which is reflected in the historical income tax provisions and accruals. Such differences could have a material effect on the income tax provisions or benefits in the periods in which such determinations are made. See also the discussion of reserves for uncertain tax positions, and the determinations of valuation allowances on the Company's deferred tax assets in Note 5, Income Taxes to the Consolidated Financial Statements. CONTINGENT LIABILITIES Various claims, lawsuits and proceedings are pending or threatened against the Company or its subsidiaries, covering a range of matters that arise in the ordinary course of its business activities with respect to commercial, product liability or other matters. The Company diligently defends itself in such matters and, in addition, carries insurance coverage to the extent reasonably available against insurable risks. The Company records liabilities for claims, lawsuits and proceedings when they are probable and it is possible to reasonably estimate the cost of such liabilities. Legal costs expected to be incurred in connection with a loss contingency are expensed as such costs are incurred. A loss contingency is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact the Company's consolidated financial statements. 48