# AUTOLIV INC (ALV) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from AUTOLIV INC's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1034670/000095017023002977/alv-20221231.htm Accession: 0000950170-23-002977 Filing date: 2023-02-16 Report date: 2022-12-31 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/ Previous year: /company/ALV/mda/fy2021/ (FY 2021) Next year: /company/ALV/mda/fy2023/ (FY 2023) 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, 2022 compared to the year ended December 31, 2021. Discussions of the Company's results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 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, 2021, which was filed with the United States Securities and Exchange Commission on February 22, 2022. 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, 2022, a number of factors influenced the Company’s results of operations, including: • Industry supply chain disruptions and the global semiconductor shortage limited the light vehicle production (LVP) recovery and caused high customer call-off volatility • Raw material price increases and corresponding inflation compensation negotiations with customers • COVID-19 pandemic • Continued growth above LVP driven by price, higher content per vehicle, and execution of strong order book • Order intake adding to an already strong customer base • Strategic and structural initiatives • Continued focus on operational excellence and quality [[GREPCENT_TABLE]] [["","2022","","","2021"],["YEARS ENDED DEC. 31 (DOLLARS IN MILLIONS, EXCEPT EPS)","Reported1)","","","change","","","Reported1)","","","change"],["Global light vehicle production (in thousands)","","79,289","","","","6.9","","%","","74,136","","","","3.6","","%"],["Consolidated net sales","$","8,842","","","","7.4","","%","$","8,230","","","","11","","%"],["Operating income","","659","","","","(2.3",")","%","","675","","","","77","","%"],["Operating margin, %","","7.5","","","","(0.7",")","pp","","8.2","","","","3.1","","pp"],["Net income attributable to controlling interest","","423","","","","(2.8",")","%","","435","","","","133","","%"],["Earnings per share2)","","4.85","","","","(2.2",")","%","","4.96","","","","132","","%"],["Net cash provided by operating activities","","713","","","","(5.4",")","%","","754","","","","(11",")","%"],["Return on capital employed, %","","17.5","","","","(0.7",")","pp","","18.3","","","","7.9","","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. Supply Chain LVP in 2022 was limited by the global semiconductor shortage and other industry supply chain disruptions. 2022 saw global LVP growth year-over-year by around 6.9% (according to S&P Global January 2023). Supply chain disruptions led to low customer demand visibility and material changes to customer call-offs with short notice which negatively impacted our production efficiency and profitability in 2022. Rising raw material costs amounted to around 4.5pp in operating margin headwind in 2022, which to a large extent was offset by commercial customer recoveries. The Company expects the current industry-wide supply chain disruptions to be a limiting factor for the global LVP in the first half year of 2023, while the Company expects that demand and supply will be in better balance in the second half of 2023. COVID-19 Direct COVID-19 related costs, such as personal protective equipment, quarantine costs and similar items, were around $15 million in 2022. Governmental support in connection with furloughing, short-term work weeks, and other similar activities were around $8 million in 2022. Inflation The Company expects the raw material price changes in 2023 will to a large extent be reflected in price changes in the Company's products, albeit with delays of several months. The Company also expects significant cost pressure from broad based inflation relating to labor, logistics, utilities and other items. The Company continues to execute on productivity and cost reduction activities to offset this inflation, and the Company has also initiated challenging discussions with its customers on non-raw material cost inflation. The Company believes price adjustments will gradually offset the non-raw material cost inflation as the market digests these new realities, with limited positive effects in the first quarter and gradual improvement as the year progresses. The war in Ukraine The direct impact of the war in Ukraine on our business has been relatively limited. In 2021, sales in Russia were less than 1.0% of the Company's total sales, declining to less than 0.1% in 2022. Autoliv has one facility with fewer than 20 employees in Russia, down from close to 200 employees before the start of the war. Our operations in Russia are currently suspended. Autoliv net assets in Russia consists of USD cash items, which amount to around $8 million. Autoliv has no operations in Ukraine. 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 LVP only grew by 6.9% in 2022 - much below the 8.9% expected by S&P Global in the beginning of the year. For Europe, the LVP growth of 18% that was expected in the beginning of the year became a decline of 1%. This was mainly a result of distressed global automotive supply chains and limited semiconductor availability impacted by the COVID-19 pandemic. During 2022, the Company experienced a limited improvement in global LVP in the second half of the year, compared to a relatively weaker first half of the year, indicating a somewhat improved availability of semiconductors and stability of global automotive supply chains in the second half of the year. [[GREPCENT_TABLE]] [["Light Vehicle Production1)"],["","","2022","","","2021","","","Change 2022 vs 2021"],["","","(000\u00b4) units","","","% global","","","(000\u00b4) units","","","% global","","","(000\u00b4) units","","","%"],["Americas","","","15,879","","","","20","%","","","14,518","","","","20","%","","","1,361","","","","9","%"],["","North America","","13,078","","","","16","%","","","11,933","","","","16","%","","","1,145","","","","10","%"],["","South America","","2,801","","","","4","%","","","2,585","","","","3","%","","","216","","","","8","%"],["Europe","","","15,561","","","","20","%","","","15,765","","","","21","%","","","(204",")","","","(1",")%"],["Asia","","","45,638","","","","58","%","","","41,840","","","","56","%","","","3,798","","","","9","%"],["","China","","25,229","","","","32","%","","","23,290","","","","31","%","","","1,939","","","","8","%"],["","Japan","","7,290","","","","9","%","","","7,307","","","","10","%","","","(17",")","","","(0",")%"],["","South Korea","","3,695","","","","5","%","","","3,407","","","","5","%","","","288","","","","8","%"],["","India","","5,078","","","","6","%","","","4,139","","","","6","%","","","939","","","","23","%"],["","Other Asia","","4,345","","","","5","%","","","3,698","","","","5","%","","","647","","","","17","%"],["Other","","","2,210","","","","2","%","","","2,013","","","","3","%","","","197","","","","10","%"],["Global Total","","79,289","","","","","","","74,136","","","","","","","5,153","","","","7","%"],["1) Source: S&P Global"]] [[/GREPCENT_TABLE]] Chinese LVP, the world’s largest automotive market, increased by 2.0 million units or by 8% from 2021 to 2022. In Europe, an important market for automotive safety systems, LVP decreased by 1% or by approximately 0.2 million light vehicles during the same period. In North America, LVP increased by 1.1 million units, or by 10% compared to 2021. During 2022, Europe’s share of global LVP has declined to 20% from 21% while Americas' share was unchanged at 20% and China’s share increased to 32%. Japan’s share declined to 9% from 10% while India's share remained at 6%. Despite macro-economic uncertainties in parts of the world, we expect light vehicle markets to grow both in the short and long term, 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 rates of airbags and more advanced seatbelts, impacting CPV positively. Commercial customer recoveries compensating for increased raw material costs also added to CPV in 2022, partly offset by negative effects from continued productivity related pricing pressure from vehicle manufacturers. The trend of increasing CPV was negatively impacted in 2022 by the unfavorable regional LVP mix development, as more than 75% of global LVP growth came from lower safety content regions such as China, India, Other Asia, and South America. This negative regional mix effect was more than offset by the overall increase in global CPV of more than 6% and the execution of the Company's strong order book, which supported an organic growth (see section Non-U.S. GAAP Performance Measures) of 6.6 percentage points above growth in global LVP. The average global safety CPV (airbags, pedestrian safety, seatbelts, and steering wheels) amounted to around $255 in 2022. The more stringent crash rating requirements and consumer demand for more safety should enable the global automotive safety market to grow around 2-3 percentage points per year faster than the global LVP during the next two years. This excludes the impact from cost inflation related price increases. The past years’ high order intake share has resulted in the Company's sales development outperforming the underlying LVP significantly in the past three years. In 2022, the Company's organic sales development outpaced global LVP by around 6.6 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 Electric Vehicles (not including PHEVs) amounted to more than $1 billion in 2022, decreasing our dependency on ICE vehicles. 32 WELL BALANCED GLOBAL FOOTPRINT The Company's regional sales mix continues to be balanced with 27% of sales in Europe, 33% in the Americas and 40% in Asia in 2022, compared to 28%, 31% and 41%, respectively, in 2021. In Asia, the Company's sales in the important Chinese market remained at 21% of total sales in 2022. The Company's sales in India increased to 4% of total sales in 2022 from 3% in 2021. The balanced regional sales mix has been achieved through timely investments and strengthening of technical and support capabilities in growth markets. ORDER INTAKE ADDING TO AN ALREADY STRONG CUSTOMER BASE The Company's order intake in 2022, with high win rates for new EV platforms with both new and traditional OEMs, added to the Company's already strong base, which includes supplying products to more than 1,300 vehicle models and around 100 car brands. The order intake in 2022 supports the Company's estimate that the Company's sales market share is moving towards around 45% in the next few years. The Company estimates that its sales market share was unchanged at around 43% in 2022. The lead time from order intake to start of production is typically 1-3 years. 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 2022 continued on a high level. The estimated life-time sales for all orders booked in 2022 is around $10.7 billion, almost unchanged compared to around $10.8 billion in 2021, despite currency headwinds and lower LVP outlook in 2022. The 2022 order intake included high win rates with relatively new automakers and for new EV platforms. 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. Our sales growth has outperformed the change in global LVP by around 5-7 percentage points every year in the past five years. In 2022, the outperformance was 6.6 percentage points. During 2022, growth was positively affected through recent launches of several new models, including GMC Sierra/Chevrolet Silverado, Toyota Tundra, and Toyota Yaris as well as steering wheels sales to a number of Mercedes models. STRATEGIC INITIATIVES AND STRUCTURAL IMPROVEMENTS 2022 light vehicle market was hampered by an industry wide shortage of semi-conductors, a distressed global automotive supply chain and a raw material inflation which resulted in significant increases in cost for purchased material. In response, Autoliv management continued to implement strict cost control measures, including footprint and capacity alignments in Europe, Japan, South Korea as well as moving overhead functions to Best Cost Countries. 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 was fully implemented by 2022. The provision, net of reversals, for restructuring activities in 2022 amounted to $13 million compared to $8 million in 2021. As of December 31, 2022, the Company had $31 million reserved in its balance sheet related to restructuring compared to $88 million last year. For more information, see Note 11, Restructuring, 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. In 2022, the pricing environment changed to some extent due to high raw material price and cost increases, which led to renegotiations with customers regarding commercial terms. These discussions resulted in a net positive price development, gradually implemented throughout the year. A key strategy for Autoliv to be and to remain cost competitive 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 three years due to the COVID-19 pandemic related decline in LVP in 2020 and the high volatility in customer call-offs in 2021 and 2022 driven by the industry wide supply chain instability, especially for semiconductors. The Company foresees opportunities for further productivity on gains from LVP recovery and increased call-off stability when supply of semiconductors 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 continues on a relatively high level. 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 less than 2% of recalls in the industry in the past ten years. This indicates that the Company is delivering on its quality strategy. For more information see product warranty and recalls in Note 12, Product Related Liabilities, to the Consolidated Financial Statements in this Annual Report. CHANGES IN COMPETITIVE LANDSCAPE During the past eight 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. 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. 34 CAPITAL STRUCTURE The Company’s net debt stood at $1,184 million on December 31, 2022. This was an increase of $132 million compared to December 31, 2021. Total interest-bearing debt at December 31, 2022 amounted to $1,766 million, a decrease of $242 million compared to December 31, 2021. Cash flow from operations was $713 million in 2022 and $754 million in 2021. Capital expenditures, net amounted to $485 million in 2022 and $454 million in 2021. During 2022 and 2021 the Company paid dividends of $224 million and $165 million, respectively. 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, 2022, the current leverage ratio is 1.4x. 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 2022, the Company repurchased and retired 1.44 million shares, under the stock repurchase program authorized by the Board of Directors in November 2021. This stock repurchase program 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. In addition, in 2022, the Company retired 10 million shares of common stock that has been held in treasury. These shares were acquired between 2008 and 2014 under the prior stock repurchase program. After the retirement, the Company continues to hold around 5 million shares of common stock in treasury. Outlook for 2023 The Company's outlook indications for 2023 are mainly based on our customer call-offs, a full year 2023 global LVP growth of around 3%, that we achieve our targeted cost compensation effects and that customer call-off volatility is reduced. [[GREPCENT_TABLE]] [["Financial measure","","Full year indication"],["Organic sales growth","","Around 15%"],["Foreign exchange impact on net sales","","Around 1% negative"],["Adjusted operating margin1)","","Around 8.5-9%"],["Tax rate 2)","","Around 32%"],["Operating cash flow3)","","Around $900 million"],["Capital expenditures, net % of sales","","Around 6%"]] [[/GREPCENT_TABLE]] 1) Excluding costs for capacity alignments, anti-trust related matters and other discrete items. 2) Excluding unusual tax items. 3) Excluding unusual items. The forward-looking non-U.S. GAAP financial measures above are provided on a non-U.S. GAAP basis. Autoliv has not provided a U.S. GAAP reconciliation of these measures because items that impact these measures, such as costs related to capacity alignments and antitrust matters, cannot be reasonably predicted or determined. As a result, such reconciliation is not available without unreasonable efforts and Autoliv is unable to determine the probable significance of the unavailable information. Significant Legal Matters See Item 3. Legal Proceedings and Note 17 Contingent Liabilities to the Consolidated Financial Statements in this Annual Report. 35 results of operations Consolidated net sales in 2022 increased by 7.4% compared to 2021. Excluding negative currency translation effects of 6.1%, the organic sales increased (Non-U.S. GAAP measure, see reconciliation table below) by 14.0%. Sales by Product [[GREPCENT_TABLE]] [["","","","","","","","","","","","Components of Change in Net Sales"],["","","2022","","","2021","","","Reported change","","","Currency effects1)","","","Organic"],["Airbags, Steering Wheels and Other2)","","$","5,807","","","$","5,380","","","","7.9","%","","","(5.9",")%","","","14.0","%"],["Seatbelt products2)","","","3,035","","","","2,850","","","","6.5","%","","","(6.4",")%","","","13.0","%"],["Total","","$","8,842","","","$","8,230","","","","7.4","%","","","(6.1",")%","","","14.0","%"]] [[/GREPCENT_TABLE]] 1) Effects from currency translations. 2) Including Corporate and Other sales. The largest contributor to the organic growth within Airbags, Steering Wheels and Other were inflatable curtains and steering wheels, followed by passenger airbags and side airbags. The main contributors to the organic growth were Europe and Americas, followed by Asia excluding China, and China. Sales by Region [[GREPCENT_TABLE]] [["","","","","","","","","","","","Components of Change in Net Sales"],["","","2022","","","2021","","","Reported change","","","Currency effects1)","","","Organic"],["Asia","","$","3,521","","","$","3,407","","","","3.3","%","","","(7.9",")%","","","11","%"],["Whereof: China","","","1,883","","","","1,766","","","","6.6","%","","","(4.4",")%","","","11","%"],["Japan","","","686","","","","733","","","","(6.4",")%","","","(16",")%","","","9.2","%"],["Rest of Asia","","","952","","","","908","","","","4.8","%","","","(8.6",")%","","","13","%"],["Americas","","","2,967","","","","2,535","","","","17","%","","","0.5","%","","","17","%"],["Europe","","","2,355","","","","2,289","","","","2.9","%","","","(11",")%","","","13","%"],["Global","","$","8,842","","","$","8,230","","","","7.4","%","","","(6.1",")%","","","14","%"]] [[/GREPCENT_TABLE]] 1) Effects from currency translations. Autoliv’s global sales increased organically (Non-U.S. GAAP measure, see reconciliation table above) by 14.0% compared to 2021, which was 6.6 percentage points better than global LVP (according to S&P Global, January 2023). Sales increased organically in all regions. The 6.6pp outperformance was driven by price increases and new product launches, partly offset by negative geographical mix effects. Autoliv outperformed LVP by around 15pp in Europe, by around 9pp in Japan, by around 7pp in Americas and by around 3pp in China, while we underperformed LVP by around 3pp in rest of Asia. [[GREPCENT_TABLE]] [["2022 Organic growth1)","","Americas","","Europe","","China","","Japan","","Rest of Asia","","Global"],["Autoliv","","17%","","13%","","11%","","9.2%","","13%","","14%"],["Main growth drivers","","GM, Ford, Stellantis","","VW, Stellantis, Toyota","","Toyota, Geely, BYD","","Subaru, Mitsubishi, Nissan","","Tata, Suzuki, Hyundai","","Stellantis, Toyota, Ford"],["Main decline drivers","","Nissan","","Nissan, Mitsubishi, Volvo","","Great Wall, Hyundai, Mazda","","n/a","","Nissan, Mitsubishi","","Great Wall, Nissan"],["1) Non-U.S. GAAP Measure"]] [[/GREPCENT_TABLE]] 36 Condensed Statement of Income [[GREPCENT_TABLE]] [["","Years ended December 31"],["(Dollars in millions, except per share data)","2022","","","2021","","","Change"],["Net Sales","$","8,842","","","$","8,230","","","","7.4","%"],["Gross profit","","1,396","","","","1,511","","","","(7.6",")%"],["% of sales","","15.8","%","","","18.4","%","","","(2.6)pp"],["S,G&A","","(437",")","","","(432",")","","","1.2","%"],["% of sales","","(4.9",")%","","","(5.2",")%","","","0.3","pp"],["R,D&E net","","(390",")","","","(391",")","","","(0.1",")%"],["% of sales","","(4.4",")%","","","(4.7",")%","","","0.3","pp"],["Other income (expense), net","","93","","","","(3",")","","n/a"],["Operating income","","659","","","","675","","","","(2.3",")%"],["% of sales","","7.5","%","","","8.2","%","","","(0.7)pp"],["Adjusted operating income3)","","598","","","","683","","","","(12",")%"],["% of sales","","6.8","%","","","8.3","%","","","(1.5)pp"],["Financial and non-operating items, net","","(56",")","","","(61",")","","","(7.9",")%"],["Income before taxes","","603","","","","614","","","","(1.8",")%"],["Tax rate","","29.5","%","","","28.9","%","","","0.7","pp"],["Net income","","425","","","","437","","","","(2.7",")%"],["Earnings per share, diluted1, 2)","","4.85","","","","4.96","","","","(2.2",")%"],["Adjusted earnings per share, diluted1, 2), 3)","","4.40","","","","5.02","","","","(12",")%"]] [[/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 2022, Gross profit decreased by $115 million and the gross margin decreased by 2.6 pp compared to 2021. The gross profit decrease was primarily driven by adverse effects from higher costs for raw material and premium freight and adverse currency translation effects, partly offset by price increases. Operating Income Operating income decreased in 2022 by $16 million, mainly as a consequence of lower gross profit, partly offset by improved Other income (expense). Selling, General and Administrative (S,G&A) expenses increased in 2022 by $5 million, or by 1.2%, mainly relating to investments in personnel and IT and improvement projects, partly offset by positive currency translation effects. Research, Development & Engineering (R,D&E) expenses, net decreased in 2022 by $1 million, or by 0.1%. In relation to sales, R,D&E costs declined from 4.7% to 4.4%. Other income (expense), net decreased by $96 million in 2022 compared to the previous year, mainly due to around $80 million gain from the sale of a property in Japan and around $20 million from a patent litigation settlement partly offset by around $10 million in capacity alignment provision for the closure of a plant in South Korea. Financial and Non-operating Items, net Financial and non-operating items, net, costs increased by $5 million in 2022 compared to previous year, mainly due to lower interest net and improved other non-operating items, net. Income Taxes The tax rate for 2022 was 29.5%, compared to 28.9% in 2021, mainly due to unfavorable country mix. In addition, discrete tax items, net, decreased the tax rate this year by 2.5pp. Discrete tax items, net increased the tax rate last year by 0.6pp. Net Income and Earnings Per Share Net income in 2022 decreased by $12 million compared to 2021. Earnings per share, diluted decreased by $0.11 compared to a year earlier, where the main driver was $0.19 from lower operating income, partly mitigated by $0.04 from financial items. The weighted average number of shares outstanding assuming dilution in 2022 was 87.2 million compared to 87.7 million in 2021. 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","","2022","","","2021"],["Receivables, net","","$","1,907","","","$","1,699"],["Inventories, net","","","969","","","","777"],["Accounts payable","","","(1,693",")","","","(1,144",")"],["Trade working capital","","$","1,183","","","$","1,332"]] [[/GREPCENT_TABLE]] Net debt As part of efficiently managing the Company’s overall cost of funds, the Company routinely enter into “debt-related derivatives” (DRD) as part of its debt management. Creditors and credit rating agencies use net debt adjusted for DRD in their analyses of the Company’s debt and therefore the Company provides this non-U.S. GAAP measure. See reconciliation table below. DRD are fair value adjustments to the carrying value of the underlying debt. Also included in the DRD is the unamortized fair value adjustment related to discontinued fair value hedges, which will be amortized over the remaining life of the debt. By adjusting for DRD, the total financial liability of net debt is disclosed without grossing debt up with currency or interest fair values. Reconciliation of U.S. GAAP measure to “Net debt” (dollars in millions) [[GREPCENT_TABLE]] [["DECEMBER 31","","2022","","","2021"],["Short-term debt","","$","711","","","$","346"],["Long-term debt","","","1,054","","","","1,662"],["Total debt","","","1,766","","","","2,008"],["Cash and cash equivalents","","","(594",")","","","(969",")"],["Debt issuance cost/Debt-related derivatives, net","","","12","","","","13"],["Net debt","","$","1,184","","","$","1,052"]] [[/GREPCENT_TABLE]] 38 Adjusted operating income, adjusted operating margin and adjusted EPS Adjusted operating margin and adjusted EPS are non-U.S. GAAP measures the Company uses to evaluate its business, because the Company believes it assists investors and analysts in comparing the Company's performance across reporting periods on a consistent basis by excluding items that are non-operational or non-recurring in nature (such as costs related to capacity alignments, costs related to antitrust matters and for EPS unusual tax items) and that the Company does not believe are indicative of its core operating performance and underlying business trends. Adjusted operating margin and adjusted EPS, as shown in the table below, should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with U.S. GAAP, including operating margin and EPS. [[GREPCENT_TABLE]] [["Items affecting comparability"],["","","2022","","","2021"],["(DOLLARS IN MILLIONS, EXCEPT EPS)","","Reported","","","Adjust- ments1)","","","Non- U.S. GAAP","","","Reported","","","Adjust- ments1)","","","Non- U.S. GAAP"],["Operating income","","$","659","","","$","(61",")","","$","598","","","$","675","","","$","8","","","$","683"],["Operating margin, %","","","7.5","","","","(0.7",")","","","6.8","","","","8.2","","","","0.1","","","","8.3"],["Income before income taxes","","","603","","","","(61",")","","","542","","","","614","","","","8","","","","622"],["Net income attributable to controlling interest","","","423","","","","(39",")","","","384","","","","435","","","","5","","","","440"],["Capital employed","","","3,810","","","","(39",")","","","3,771","","","","3,700","","","","5","","","","3,705"],["Return on capital employed, % 2)","","","17.5","","","","(1.5",")","","","16.0","","","","18.3","","","","0.2","","","","18.5"],["Return on total equity, % 3)","","","16.3","","","","(1.3",")","","","15.0","","","","17.1","","","","0.2","","","","17.3"],["Earnings per share, diluted 4, 5)","","$","4.85","","","$","(0.45",")","","$","4.40","","","$","4.96","","","$","0.06","","","$","5.02"]] [[/GREPCENT_TABLE]] 1) Represents costs for capacity alignments and antitrust related matters. See table below for a disaggregation of these costs. 2) Operating income and income from equity method investments, relative to average capital employed. 3) Net Income relative to average total equity for the year. 4) Assuming dilution and net of treasury shares. 5) Participating share awards with right to receive dividend equivalents are (under the two-class method) excluded from the EPS calculation. [[GREPCENT_TABLE]] [["Items included in Non-U.S. GAAP adjustments"],["","","2022","","","2021"],["","","Adjustment Millions","","","Adjustment Per share","","","Adjustment Millions","","","Adjustment Per share"],["Capacity alignment","","$","(61",")","","$","(0.70",")","","$","8","","","$","0.10"],["Total adjustments to Operating income","","","(61",")","","","(0.70",")","","","8","","","","0.10"],["Tax on Non-U.S. GAAP adjustments1)","","","22","","","","0.25","","","","(3",")","","","(0.04",")"],["Total adjustments to Net Income","","$","(39",")","","$","(0.45",")","","$","5","","","$","0.06"],["Weighted average number of shares outstanding - diluted2)","","","","","","87.2","","","","","","","87.7"],["Adjustment Return on capital employed","","$","(61",")","","","","","$","8"],["Adjustment Return on capital employed, %","","","(1.5",")","","","","","","0.2"],["Adjustment Return on total equity","","$","(39",")","","","","","$","5"],["Adjustment Return on total equity, %","","","(1.3",")","","","","","","0.2"]] [[/GREPCENT_TABLE]] 1) The tax is calculated based on the tax laws in the respective jurisdiction(s) of the adjustment(s). 2) Annualized average number of outstanding shares. 39 Liquidity, Capital Resources, and Financial Position [[GREPCENT_TABLE]] [["","","Years ended December 31"],["(DOLLARS IN MILLIONS)","","2022","","","2021"],["Net cash provided by operating activities","","$","713","","","$","754"],["Net cash used in investing activities","","","(485",")","","","(454",")"],["Net cash used in financing activities","","","(531",")","","","(469",")"],["Effect of exchange rate changes on cash and cash equivalents","","","(73",")","","","(39",")"],["Decrease in cash and cash equivalents","","","(375",")","","","(209",")"],["Cash and cash equivalents at beginning of year","","","969","","","","1,178"],["Cash and cash equivalents at end of year","","$","594","","","$","969"]] [[/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 $713 million in 2022 compared to $754 million in 2021. The decrease of $41 million was mainly due to lower net income excluding the gain on property divestiture, lower depreciation and amortization and adverse effects from changes in deferred income taxes partly offset by positive working capital effects. At December 31, 2022, trade working capital (see section Non-U.S. GAAP Performance Measures above) amounted to $1,183 million corresponding to 13% of net sales compared to $1,332 million and 16% at December 31, 2021. Receivables outstanding in relation to sales (see Glossary and Definitions for definition) were 20% at December 31, 2022, compared to 20% at December 31, 2021. Factoring agreements did not have any material impact on receivables outstanding for 2022 or 2021. Inventory in relation to sales (see Glossary and Definitions for definition) was 10% at December 31, 2022, compared to 9% at December 31, 2021. Payables outstanding in relation to sales (see Glossary and Definitions for definition) were 18% at December 31, 2022 compared to 14% at December 31, 2021. NET CASH USED IN INVESTING ACTIVITIES In 2022 and 2021, net cash used in investing activities amounted to $485 million and $454 million, respectively. The Company's investing activities primarily consist of investments in property, plant and equipment. Net cash generated by operating activities continued to sufficiently cover capital expenditures for property, plant and equipment. The net increase of $31 million compared to previous year was mainly due to increased investments of $126 million, mainly related to footprint and capacity expansions, partly offset by $95 million in proceeds from the sale of property in Japan. In relation to net sales, capital expenditures, net was unchanged at 5.5%. Depreciation and amortization totaled $363 million in 2022 compared to $394 million in 2021. During the years 2022 and 2021, 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. NET CASH USED IN FINANCING ACTIVITIES Net cash used in financing activities amounted to $(531) million and $(469) million for the years 2022 and 2021, respectively. In 2022, the Company paid dividends of $224 million. In 2021, the Company paid dividends of $165 million after reinstating the dividends in the second quarter of 2021. 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, Summary of Significant Accounting Policies, and Note 5, Income Taxes, 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, 2022, the Company’s net pension liability (i.e. the actual funded status) for its U.S. and non-U.S. plans was $154 million compared to $197 million at December 31, 2021. The decrease in the total net pension liability in 2022 of $43 million was mainly due to the increase in discount rates, partly offset by lower performance than expected of the plan assets. The plans had a net unamortized actuarial loss before tax of $44 million recorded in Accumulated Other Comprehensive (Loss) Income in the Consolidated Balance Sheets at December 31, 2022, compared to $68 million at December 31, 2021. The decrease in the actuarial loss was mainly due to settlement and curtailment gains in the non-U.S. plans during 2022. The amortization of the loss is expected to be $1 million in 2023. Pension expense associated with the defined benefit plans was $11 million in 2022 and $24 million in 2021, and is expected to be $19 million in 2023. The $13 million decrease in 2022 pension expense was mainly due to the benefit freeze of the U.S. plan and settlement and curtailment gains in the non-U.S. plans. The Company contributed $22 million to its defined benefit plans in 2022 and $25 million in 2021. The Company expects to contribute $9 million to these plans in 2023 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, Retirement Plans, to the Consolidated Financial Statements included herein. SHAREHOLDER RETURNS In 2022, the Company paid cash dividends of $224 million. The Company paid $165 million in dividends in 2021, after reinstating the dividend in the second quarter of 2021. The Company repurchased shares to an amount of $115 million in 2022. EQUITY During 2022, total equity decreased by $22 million to $2,626 million as of December 31, 2022. The change was mainly due to dividends paid of $224 million, share repurchases of $115 million and negative foreign exchange effects of $136 million, partly offset by $425 million from net income. TREASURY ACTIVITES DEBT AND CREDIT ARRANGEMENTS The Company's total debt as of December 31, 2022 and 2021 was $1,766 million and $2,008 million, respectively. The Company had a net debt position (see section Non-U.S. GAAP Performance Measures) at December 31, 2022 and 2021 of $1,184 million and $1,052 million, respectively. In May 2022, the Company refinanced its existing revolving credit facility (RCF) of $1,100 million. The facility, syndicated among 11 banks, matures in May 2027 and has two extension options, each for an additional year. The Company pays a commitment fee on the undrawn amount of 0.15%, representing 35% of the applicable margin, which is 0.425% (given the Company’s rating of “BBB” from S&P Global Ratings). Borrowings under the facility are unsecured. As of December 31, 2022, the facility was not utilized. In June 2020, the Company utilized its SEK 3,000 million facility with Swedish Export Credit Corporation which was signed in May 2020. The SEK 3,000 million loan mature 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 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, 2022, $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, 2022, no notes had been issued under this program. At December 31, 2022, 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, Debt and Credit Agreements, to the Consolidated Financial Statements included herein. 41 FACTORING During 2022 and 2021, 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, 2022, the Company had received $174 million for sold receivables without recourse and discounted notes with a discount cost of $2 million during the year, compared to $159 million at December 31, 2021 with a discount cost of $2 million recorded in Other non-operating items, net. NUMBER OF SHARES At December 31, 2022, 86.2 million shares were outstanding (net of 5.0 million treasury shares), a 1.5% decrease from 87.5 million one year earlier. The number of shares outstanding is expected to increase by 0.3 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, Stock Incentive Plans, to the Consolidated Financial Statements included herein. In 2022, the Company retired 10 million shares of common stock that had been repurchased under a prior stock repurchase program and since held in treasury. These shares were acquired between 2008 and 2014. During 2022, Autoliv repurchased and retired 1.44 million shares, equal to $115 million, under the current stock repurchase program authorized by the Board to repurchase up to $1.5 billion, or 17 million common 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, 2022, see Note 13, Debt and Credit Agreements, 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, Leases, 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, Retirement Plans, 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 1,300 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 27%, 33% and 40%, respectively, of the Company's 2022 total sales. It is the Company’s strategy to reduce the risks associated with fluctuating LVP by using temporary personnel in direct production, when appropriate. During 2022 and 2021, the level of temporary personnel in relation to total personnel in direct production was 13% and 9%, 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 historical 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. In 2022, due to unprecedented raw material price increases the Company engaged in extensive negotiations with its customers regarding price compensation and an increased element of tying pricing to raw material prices. COMPONENT COSTS AND RAW MATERIAL PRICES The cost of direct materials was approximately 52% of sales in 2022. The main raw materials being used as input material for the Company's operations are steel, textiles, plastic and non-ferrous metals. The Company still sees effects coming from import tariffs and trade barriers across borders. These barriers are impacting the raw material market and creating pricing and availability uncertainties. Inflation was significant across raw materials and services in 2022. The Company took action including pricing discussions with customers and suppliers, 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, Contingent Liabilities, 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 16 years this China NCAP, together with the additional Chinese rating program, CIASI, from 2017, 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 is rating vehicles sold in significant emerging markets. 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, US NCAP, in 2010, which now is in the process of being updated by the U.S. National Highway Traffic Safety Administration. Europe upgraded the Euro NCAP rating system during 2018, and is now completing a new upgrade, intended to 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), moreover has announced that side airbags shall become mandatory in 2023. In addition, India has announced that its Bharat NCAP shall start in 2023. 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. This development is likely to become subject to legal requirements. There are also other plans for improved automotive safety through new or changed regulations, 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 2022, the five largest vehicle manufacturers accounted for around 48% of global LVP and the ten largest manufacturers accounted for around 70% of global LVP. In 2022, the Company’s five largest customers accounted for around 49% of consolidated sales and the ten largest customers accounted for around 80% of consolidated sales. The Company's largest customer contract accounted for around 2% of consolidated sales in 2022. [[GREPCENT_TABLE]] [["Customer","","% of Autoliv sales","","","% of Global LVP1)"],["Renault/Nissan/Mitsubishi","","","11","%","","","8","%"],["Stellantis","","","11","%","","","7","%"],["VW","","","10","%","","","11","%"],["Toyota","","","9","%","","","13","%"],["Honda","","","8","%","","","5","%"],["Ford","","","8","%","","","4","%"],["Hyundai","","","7","%","","","9","%"],["General Motors","","","7","%","","","6","%"],["Major EV maker","","","5","%","","","2","%"],["BMW","","","4","%","","","3","%"]] [[/GREPCENT_TABLE]] 1) Source: S&P Global 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. 45 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. 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. The Company's supply chain organization continually reviews sourcing risks and actively works 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 2022, the Company held more than 6,600 patents and patents applications. These patents expire on various dates during the period from 2023 to 2042. 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. 46 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, Summary of Significant Accounting Policies, 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, Summary of Significant Accounting Policies, 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, 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. 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. As of October 2022 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. 47 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. 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 54% 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 2022 pension expense were a discount rate of 2.77% 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, 2022 were a discount rate of 5.41%. 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 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, 2022, 23% of the U.S. plan assets were invested in equities, which is below 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 and decrease in return on plan assets 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","","2022 net periodic benefit cost increase (decrease)","","","2022 projected benefit obligation increase (decrease)"],["Discount rate","","1pp increase","","$","2","","","$","(18",")"],["Discount rate","","1pp decrease","","","(1",")","","","21"],["Return on plan assets","","1pp decrease","","","3","","","n/a"]] [[/GREPCENT_TABLE]] 48 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. 49