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  • Autoliv - Annual Report 2005
    in Shareholders Equity Introduction Our Products Our Vision Summary President s Letter Creating Shareholder Value Research Development Human Resources Corporate Social Responsibility Quality Formal Annual Report Management s Discussion and Analysis Management s Reports Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Shareholders Equity Notes to Consolidated Financial Statements Auditors Reports Corporate Governance Board and Management Around the World The Autoliv Share Analysts

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  • Autoliv - Annual Report 2005
    meeting but also on the work of the Board and its committees compensation paid to and presentation of directors and certain senior managers Please also refer to the Form 10 K and Form 10 Q reports and Autoliv s other filings with the Securities and Exchange Commission SEC and the New York Stock Exchange NYSE These filings including the CEO CFO Section 302 Certifications Section 16 Insider Filings and the 2005 CEO Certification to the NYSE are available at www autoliv com under Financial Info Filings and at www sec gov Autoliv s Corporate Governance Guidelines Charters Codes of Ethics and other documents governing the Company can also be downloaded from the Company s corporate website Autoliv s financial reports press releases proxy statements and other general information on the Company are published both in English and Swedish All documents can be obtained free of charge from the Company at the addresses on page 60 Reader s Guide As a U S company incorporated in Delaware Autoliv follows Generally Accepted Accounting Principles in the United States U S GAAP and all amounts are in U S dollars unless otherwise indicated This annual report also contains some non U S GAAP measures Manage ment believes that these non U S GAAP measures may assist investors in analyzing trends in the Company s business Investors should consider these non U S GAAP measures in addition to rather than as a substitute for financial reporting measures prepared in accordance with U S GAAP Data on markets and competitors are Autoliv s estimates that are based on orders awarded to us or our competitors The estimates are also based on plans announced by vehicle manufacturers or regulatory agencies We the Company and Autoliv refer to Autoliv Inc as defined in Note 1 Principles of Consolidation on page 37 For forward looking information refer to the Safe Harbor Statement on page 27 Financial CALENDAR 1st quarter April 27 2006 2nd quarter July 26 2006 3rd quarter October 26 2006 4th quarter February 2007 Annual Report March 2007 Page 2 Content 4 Our Products 6 Our Vision 7 Summary 8 President s Letter 10 Creating Shareholder Value 14 Research Development 16 Human Resources 18 Corporate Social Responsibility 20 Quality Formal Annual Report 21 Management s Discussion and Analysis 32 Management s Reports 33 Consolidated Statements of Income 34 Consolidated Balance Sheets 35 Consolidated Statements of Cash Flows 36 Consolidated Statements of Shareholders Equity 37 Notes to Consolidated Financial Statements 51 Auditors Reports 52 Corporate Governance Board and Management 56 Around the World 58 The Autoliv Share 60 Analysts Definitions and Contacts 61 Multi year Summary Page 2 Page 3 Financial Information and Filings This annual report together with the proxy statement is distributed to all Autoliv Inc shareholders of record as of March 7 2006 the record date for the 2006 Annual General Meeting The proxy statement provides information on not only the agenda for the meeting but also on the work of the Board and

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  • Autoliv - Annual Report 2005
    for life threatening chest injuries by 75 in frontal crashes Autoliv introduced load limiters in 1995 6 Passenger airbag Estimated to reduce fatalities in frontal crashes by approximately 20 for belted occupants It deploys in 50 milliseconds half the time of the blink of an eye The passenger airbag in Volvo s new convertible is smart Consequently the power of the airbag can be tuned to the severity of the crash using a dual stage inflator i e an airbag inflator with two separate charges 7 New Airbag The new Volvo C 70 comes with the world s first door mounted curtain airbag In side impact collisions standard curtain airbags are estimated to reduce the risk of fatalities by 50 by protecting the head However curtain airbags have so far only been installed in vehicles that have roofs from which the curtains can be deployed Many convertible vehicles have instead been equipped with combo bags for side impact protection These bags combine chest side airbags with an extension that inflates upwards to protect the head The head extension does not cover as large of an area as a curtain airbag In T bone side impacts this difference is less important However in oblique side impact crashes when the occupant is hurled towards the windshield pillar a larger bag may provide better protection The new airbag has an extra stiff structure Using a three layer weaving technology it has double rows of cells that partly overlap one another As a result the new airbag can stay upright and help protect the head effectively even if the side windows are open Furthermore the bags deflate slowly to provide added protection in the event of a rollover accident The dual cell structure is manufactured using Autoliv s patented one piece weaving technology Other important products Autoliv also produces electronic airbag control units ACUs knee airbags anti sliding bags steering wheels typically integrated with the driver airbag and child seats as well as integrated booster cushions for children night vision systems and other active safety systems Page 4 The new airbag can stay upright and help protect the head effectively even if the side windows are open Autoliv s Integrated Safety Systems Autoliv has accounted for virtually all major technological breakthroughs in the occupant restraint industry over the last 20 years and remains in the forefront of development The new Volvo convertible C 70 which was launched in 2005 is an example of a new vehicle that features many state of the art safety products from Autoliv Page 4 Page 5 1 Driver airbag Estimated to reduce driver fatalities in frontal crashes by approximately 25 for belted drivers and serious head injuries by over 60 The driver airbag in the new Volvo C 70 is smart Consequently the power of the airbag can be tuned to the severity of the crash using a dual stage airbag inflator i e an airbag inflator with two separate charges 2 E Call The airbag control unit ACU

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  • Autoliv - Annual Report 2005
    care rehabilitation and loss of income is also at least ten times higher than our sales see page 18 Autoliv Inc was created in 1997 from a merger between the Swedish company Autoliv AB and the American company Morton ASP Autoliv now has 80 subsidiaries and joint ventures in 30 vehicle producing countries with nearly 40 000 employees In addition we have technical centers in nine countries with 20 crash test tracks more than any other automotive safety supplier Autoliv s shares are listed on the New York Stock Exchange under the symbol ALV and its Swedish Depository Receipts SDR are listed on the Stockholm Stock Exchange under the symbol ALIV Summary 2005 Record sales despite a drop in car production in our largest market Continued strong market growth for side airbags Higher raw material costs but operating income maintained Utilization of Jobs Creation Act opportunity Net income earnings per share and return on equity affected by this one time tax savings opportunity Dividend increased and share buybacks accelerated US 2005 2004 2003 Sales in millions 6 205 6 144 5 301 Operating income in millions 513 513 427 Net income in millions 293 326 268 Earnings per share assuming dilution 3 26 3 46 2 81 Cash from operations in millions 479 680 529 Return on shareholders equity 11 7 13 2 12 2 Dividends paid in millions 105 70 51 stable margins Despite a 1 5 percentage point negative effect from higher raw material prices operating margin stood almost unchanged at 8 3 in 2005 compared to 8 4 in 2004 record sales Since 2001 consolidated sales including acquisitions and currency effects have grown by 55 compared to a 5 growth in the light vehicle production in the Triad i e Europe North America and Japan during the same period Record shareholder returns During 2005 Autoliv returned a total of 483 million to shareholders through stock buybacks and dividend payments This was 65 more than net income and corresponds to 18 of the Company s average market capitalization during 2005 Page 6 Our products save over 15 000 lives globally every year and prevent at least ten times as many injuries Vision mission and strategy our vision is to substantially reduce traffic accidents fatalities and injuries our mission is to create manufacture and sell state of the art automotive safety systems our strategy is to be vehicle manufacturers first choice supplier through Technological leadership Complete system capabilities Highest value safety system solutions Cost efficiency Quality excellence Global presence Highest level of service and commitment Dedicated and motivated employees OUR VALUES ARE life We have a passion for saving lives customers We are dedicated to creating satisfaction for our customers and value for the driving public employees We are committed to the development of people s skills knowledge and creative potential innovation We are driven for innovation and continuous improvement ethics We adhere to the highest level of ethical and social behavior culture We are founded on global thinking

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  • Autoliv - Annual Report 2005
    care rehabilitation and loss of income is also at least ten times higher than our sales see page 18 Autoliv Inc was created in 1997 from a merger between the Swedish company Autoliv AB and the American company Morton ASP Autoliv now has 80 subsidiaries and joint ventures in 30 vehicle producing countries with nearly 40 000 employees In addition we have technical centers in nine countries with 20 crash test tracks more than any other automotive safety supplier Autoliv s shares are listed on the New York Stock Exchange under the symbol ALV and its Swedish Depository Receipts SDR are listed on the Stockholm Stock Exchange under the symbol ALIV Summary 2005 Record sales despite a drop in car production in our largest market Continued strong market growth for side airbags Higher raw material costs but operating income maintained Utilization of Jobs Creation Act opportunity Net income earnings per share and return on equity affected by this one time tax savings opportunity Dividend increased and share buybacks accelerated US 2005 2004 2003 Sales in millions 6 205 6 144 5 301 Operating income in millions 513 513 427 Net income in millions 293 326 268 Earnings per share assuming dilution 3 26 3 46 2 81 Cash from operations in millions 479 680 529 Return on shareholders equity 11 7 13 2 12 2 Dividends paid in millions 105 70 51 stable margins Despite a 1 5 percentage point negative effect from higher raw material prices operating margin stood almost unchanged at 8 3 in 2005 compared to 8 4 in 2004 record sales Since 2001 consolidated sales including acquisitions and currency effects have grown by 55 compared to a 5 growth in the light vehicle production in the Triad i e Europe North America and Japan during the same period Record shareholder returns During 2005 Autoliv returned a total of 483 million to shareholders through stock buybacks and dividend payments This was 65 more than net income and corresponds to 18 of the Company s average market capitalization during 2005 Page 6 Our products save over 15 000 lives globally every year and prevent at least ten times as many injuries Vision mission and strategy our vision is to substantially reduce traffic accidents fatalities and injuries our mission is to create manufacture and sell state of the art automotive safety systems our strategy is to be vehicle manufacturers first choice supplier through Technological leadership Complete system capabilities Highest value safety system solutions Cost efficiency Quality excellence Global presence Highest level of service and commitment Dedicated and motivated employees OUR VALUES ARE life We have a passion for saving lives customers We are dedicated to creating satisfaction for our customers and value for the driving public employees We are committed to the development of people s skills knowledge and creative potential innovation We are driven for innovation and continuous improvement ethics We adhere to the highest level of ethical and social behavior culture We are founded on global thinking

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  • Autoliv - Annual Report 2005
    to reduce our sales by 5 Consequently sales are expected to decline by 8 Despite this decline operating margin is expected to improve from the 7 6 level recorded in the first quarter 2005 and operating income is expected to exceed the 129 million recorded in the same quarter 2005 During the full year 2006 light vehicle production in the Triad is expected to increase by 1 despite a 2 decline in Western Europe with a negative vehicle model mix The decline in our sales in the first quarter is expected to diminish already in the second quarter and during the fall sales are expected to start to pick up gradually with a positive momentum into 2007 As a result we expect organic sales for 2006 to be relatively flat Interest expense net should be favorably impacted by the Jobs Act transaction in 2005 and by Autoliv s Eurobond coming to maturity in May 2006 These transactions could potentially reduce interest expense in 2006 by approximately 15 million given current exchange rate and interest rate differences in Sweden and the U S However this favorable effect may be offset by higher market interest rates and a higher average net debt due to the share repurchases Consequently we expect a healthy growth in earnings per share despite a challenging vehicle production Lars Westerberg higher leverage To take advantage of Autoliv s strong balance sheet and low borrowing cost we increased our leveraged position during 2005 Headcount allocation Total headcount has increased by 37 since 2001 to nearly 39 000 compared to sales that have increased by 55 during the same period Headcount in high cost countries has been reduced to 60 of total headcount from 75 in 2001 Sales mix The rapidly growing markets in the Rest of the World RoW i e mainly Asia excluding Japan accounted for 11 of revenues compared to 5 in 2001 Autoliv s dependence on the Big 3 in North America GM Ford and Chrysler has declined from 24 to 15 of sales during the same period Page 8 We have returned a total of 483 million which is 65 more than our 2005 net income Driving on Dear Shareholder 2005 was a challenging year for the automotive industry Steel prices skyrocketed and vehicle production declined in Western Europe our most important market Several vehicle manufacturers were faced with heavy losses and some suppliers as well as Rover even had to file for bankruptcy In this environment Autoliv fared comparably well because our consolidated sales rose by 1 and operating income was maintained despite an increase of about 90 million in raw material prices To cope with this tough environment we continued to restructure our operations and invested 16 million more in 2005 than in 2004 in plant consolidations and other restructuring activities Excluding this additional cost operating margin improved to 8 5 Thus continuing the underlying trends from prior years Since 2001 sales have jumped by 55 and organic sales i e sales excluding

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  • Autoliv - Annual Report 2005
    not to exceed 10 We expect to meet this target also for the next few years although it may fluctuate between quarters We should also be able to continue to conform to our policy that the leverage ratio should be significantly below three and our interest coverage ratio significantly above 2 75 for definitions see page 60 These ratios were 1 1 and 14 1 respectively at the end of 2005 Furthermore we believe depreciation including amortization will be adequate for covering anticipated capital expenditures during the next few years The need for additional manufacturing capacity could however be affected by for instance the above mentioned new side impact test regulation in the United States Capital employed During the past five years it has been possible to grow sales by 55 and double operating income At the same time we increased capital employed by a mere 10 This improvement in capital utilization reflects a number of initiatives such as plant consolidations outsourcing and moving to low cost countries where less capital intensive manufacturing processes can be used It is also a reflection of the fact that growth in sales and profits have been achieved without any major goodwill increasing acquisitions As a result goodwill and other intangibles now correspond to less than 25 of sales compared to more than 50 at the start of the company in 1997 Since our market tends to increase it should be possible to continue this trend and grow business organically rather than by major acquisitions As a result we should be able to continue to grow earnings faster than capital employed 5 ANNUAL MARKET GROWTH 8 ANNUAl sales growth Cost breakdown Of Autoliv s revenues 49 is used for buying components from external suppliers The second most important cost to control is labor which represents 26 of sales including 10 for direct labor in manufacturing and 16 in indirect labor in overhead and research and development Other costs which also represents 16 of sales include depreciation freight insurance and a variety of other small cost items Page 10 Maximizing Long term Cash Flow Our value creating process focuses on long term cash flow with an aim of providing funds for competitive returns to shareholders in addition to maintaining earnings momentum and an adequate financial position We therefore focus on growing earnings per share while efficiently managing the capital required to take full advantage of Autoliv s growth potential Topline growth One of Autoliv s targets is to outperform the global occupant restraint market This target has been met every year for the last several years except for 2005 due to a 3 decline during the year in West European vehicle production Our market has risen by an average rate of 5 since 1997 see graph when the new Autoliv company was created At the same time Autoliv s sales have grown at an annual average rate of 8 6 and by approximately 5 excluding acquisitions and currency translation effects The market is driven both

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  • Autoliv - Annual Report 2005
    000 people are killed every year in night time accidents and an additional 560 000 people are injured record investment in R d e During 2005 we increased our gross expenditures for R D E by 1 to 475 million or to 7 7 of sales from 7 5 in 2004 and 7 2 in 2001 Of the 2005 amount 85 million was related to customer funded engineering projects and crash tests Net of this income we increased our R D E expenditures by 5 to 386 million or to 6 2 of sales compared to 6 0 in 2004 and 5 0 in 2001 Number 1 in Safety Patents According to the latest published data Autoliv accounted for more subsequent patents filings in automotive safety than any other company Autoliv holds 3 500 patents an increase of 300 from 2004 and an increase of 50 over the past few years The expiration of any single patent is not expected to have any material adverse effect on Autoliv s financial position We also hold trademarks but patents are more important in our industry since products are not sold directly to the car buyers New airbag Although airbags save thousands of lives every year they are potentially dangerous for children and other occupants who are sitting too close to a deploying frontal airbag To reduce this risk for children the vehicle manufacturers install airbag suppression systems However these systems have several drawbacks e g high costs low accuracy and complicated installation in the seat Autoliv is therefore developing an airbag that could automatically release pressure should the occupant be too close to the bag If the occupant is at a safe distance to the bag two straps will be stretched and as a consequence cinch their vent tubes to allow gas pressure to build up in the bag This Cinch Tube Airbag is currently being tested to confirm that it is as efficient and safe as existing airbags The work is being done in cooperation with a vehicle manufacturer AUTOLIV S INTEGRATED SAFETY Page 14 A Key to our Leadership Position Autoliv s technology leadership has been key in establishing the Company as the industry s global sales leader with superior profitability The pursuit for new cost efficient safety technologies continues in addition to implementing further improvements and cost reductions in existing products integrated safety After having become the global leader in seatbelts airbags and other passive safety systems Autoliv has started to develop active safety systems These are systems that help the driver avoid accidents or intervene automatically while a crash is still avoidable They include see illustration below safety enhancing Convenience systems such as Night Vision Adaptive Cruise Controls that maintains the speed and distance with the vehicle ahead and Queue Assist Systems that automatically stops and starts the vehicle in queues Warning systems such as Collision Warning Lane Departure Warning and Pedestrian Warning that warns the driver of a pedestrian at risk Emergency systems that automatically control the

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