ASSA ABLOY
Annual Report 2019

Plain-text annual report

Annual Report 2019 Every day, we help billions of people to experience a more open world with innovative solutions that enable safe, secure and convenient access to physical and digital places Contents Report on operations ASSA ABLOY in brief Group key figures Highlights 2019 Statement by the President and CEO Market overview and trends Investment story Business model Targets and strategy Market growth Product leadership Cost efficiency People ASSA ABLOY’s divisions Divisions overview Opening Solutions EMEA Opening Solutions Americas Opening Solutions Asia Pacific Global Technologies Entrance Systems Customer solutions around the world ASSA ABLOY in the future Report of the Board of Directors Report of the Board of Directors Significant risks and risk management Corporate governance Board of Directors Executive Team Internal control – financial reporting Remuneration guidelines for senior executives Financial statements Sales and income Consolidated income statement and Statement of comprehensive income Comments by division Results by division Financial position Consolidated balance sheet Cash flow Consolidated statement of cash flows Changes in consolidated equity Parent company financial statements Notes Comments on five years in summary Five years in summary Definitions of key ratios Proposed distribution of earnings Auditor’s report 1 2 3 4 7 8 9 10 11 16 21 25 28 30 31 32 33 35 36 38 40 42 46 50 52 55 56 58 59 60 61 62 63 64 65 66 67 69 94 95 96 97 98 Shareholder information The ASSA ABLOY share Information for shareholders 102 105 The annual accounts and consolidated accounts of the company are included on pages 39–93 and 97 in this document. ASSA ABLOY in your daily life We are part of people’s everyday life all over the world! You will find ASSA ABLOY’s products and solutions in your home, at work or school, when you shop or travel. Some products are very visible to you like keys, locks and doors, while other products are embedded in solutions like e-passports and identity solutions. In this report we present some of our products and offerings under the vignette ”ASSA ABLOY in your daily life.” ASSA ABLOY in brief Who are we? The ASSA ABLOY Group is the global leader in access solu- tions. Our offering covers products and services related to openings; such as locks, doors, gates and entrance auto- mation solutions. We are also experts in trusted identities; with keys, cards, tags, mobile and bio metric identity verifi- cation systems as parts of our offering. What do we do? Every day, we help billions of people to experience a more open world with innovative solutions that enable safe, secure and convenient access to physical and digital places. For who? We provide efficient door openings, trusted identities, entrance automation and service for institutional and com- mercial customers, as well as for the residential market. We have the largest installed base of locks and access solutions in the world, with a large share of sales in the stable aftermarket. Where are we? We have leading positions in most of Europe, North and South America, Asia and Oceania. Our divisions The regional divisions manufacture and sell mechanical and electromechanical locks, digital door locks, cylinders and security doors, adapted to the local market’s standards and security requirements. The global divisions manufacture and sell electronic access control, identification products and entrance automation. Our brands We have considerable value in our well-known brands. Our brands play an important role in creating trust, loyalty and differentiation. We use a multi-brand strategy to leverage on our global and local strengths and to address different market segments, customer segments and routes to market. Openings Entrance automation Solutions Service Master key systems Access control Authentications Data and analytics Identities Sales by division 2019 Sales by region 2019 Legend Legend Legend Legend Legend EMEA, 22% (24) Americas, 25% (23) Asia Pacific, 10% (11) Global Technologies, 16% (14) Entrance Systems, 27% (28) North America, 42% South America, 3% Asia, 13% Europe, 38% North America, 44% (42) South America, 3% (3) Europe, 36% (38) Oceania, 3% Africa, 1% Asia, 12% (13) Oceania, 4% (3) Africa, 1% (1) ASSA ABLOY ANNUAL REPORT 2019 1 AfrikaOceanienAsienEuropaSydamerikaNordamerika GROUP KEY FIGURES The year in figures 94,029 Sales, SEK M 9.22 Earnings per share, SEK1 1 Excluding restructuring items. • Sales increased by 12% to SEK 94,029 M (84,048) driven by continued strong growth for electro- mechanical products. • Twelve acquisitions were completed, con tribut- ing to net acquired growth of 3 % for the year. • Continued good earnings and strong cash flow were achieved. Operating margin excluding items affecting comparability was 15.9 % (15.4). • Investments in product development continued at a fast pace. Sales generated by products launched during the last three years was 27 % (27). Key figures Sales, SEK M of which: Organic growth, % of which: Acquired growth, net total, % of which: Exchange rate effects, % Operating income (EBIT), SEK M 1 Operating margin, % 1 Income before tax (EBT), SEK M 1 Operating cash flow, SEK M 2 Return on capital employed, % 1 Dividend, SEK/share 2018 2019 Change 84,048 94,029 12% 5 2 3 3 3 6 12,909 14,920 16% 15.4 12,110 11,357 16.2 3.50 15.9 13,883 14,442 17.0 3.853 15% 27% 10% 1 Excluding impairment of goodwill and other intangible assets of SEK 5,595 M in 2018. Restruc- turing costs of SEK 1,218 M in 2018 and SEK 312 M in 2019. 2 Excluding restructuring payments. 3 As proposed by the Board of Directors. Sales and operating income (EBIT)1 Earnings per share2 Sales, SEK M 100,000 EBIT, SEK M 15,000 SEK 10 Sales Operating income (EBIT) 10 11 12 13 14 15 16 17 18 19 80,000 60,000 40,000 20,000 12,500 10,000 7,500 5,000 8 6 4 2 0 10 11 12 13 14 15 16 17 18 19 1 Excluding items affecting comparability. 2 Earnings per share has been restated due to the 3:1 share split in 2015. Goals and outcomes The financial and sus- tainability targets have been set at challenging but achievable levels. The financial targets have been set to balance growth with a return level that will bring substantial value creation. During the last ten years, ASSA ABLOY has grown more than 9% annually and achieved an adjusted operating margin of more than 16%. The sustainability targets were deter- mined in 2015. New sustainability targets will be defined in 2020. Over a business cycle Target 2020 vs. 2015 10 % Annual growth through a combination of organic and acquired growth 16–17% Operating margin –55 % Injury rate –20 % Greenhouse gas intensity, energy –7% –16% SEK M 100,000 80,000 60,000 40,000 20,000 0 10 11 12 13 14 15 16 17 18 19 % 20 18 16 14 12 10 10 11 12 13 14 15 16 17 18 19 Injury rate 8 Tons/SEK M 10 6 4 2 0 15 16 17 18 19 8 6 4 2 0 15 16 17 18 19 Total sales grew 12% with organic and acquired growth making up 6%. The organic growth decelerated during the year due to a slowdown in the global economy. We announced the acquisition of agta record, which will be the largest acqui- sition since 2011 and add about 4% in acquired revenue. During the last ten years, our average annual growth has been more than 9%. The adjusted operating margin was 15.9% in 2019. Significant investments in R&D that affected the margin negatively by 40 basis points were offset by lower raw material costs and effects of our efficiency initia- tives. During the last ten years, our annual operating margin has been more than 16%. The injury rate was down 16% in 2019 and is down by 55% since 2015, in line with the target. We have worked structurally with the working environment throughout the entire organi- zation and in particular targeted business areas that have had higher incident rates. During the last five years, our injury rate has improved by 14% annually. Our greenhouse gas intensity related to the Group’s energy consumption decreased by 7% in 2019 and is down 22% since 2015, above the target. This has been achieved through focused energy efficiency and produc- tivity improvement initiatives. During the last four years, our total greenhouse gas intensity is down 47%. 2 ASSA ABLOY ANNUAL REPORT 2019 Achievements HIGHLIGHTS 2019 • First important orders for a distress system solution to increase hotel personnel’s safety in the US. • Clemson University ordered our mobile key solution from HID with ASSA ABLOY electronic locks to enable students to use their mobile phone on campus to open doors in Apple wallet, providing a more user-friendly experience. • Together with other key industry players we established FiRa Consortium to drive the seam less user experiences using Ultra-Wideband Technology. Products 202 number of new patents were filed 27% of sales from new products launched in the last three years 395 increase in the number of R&D employees Operational improvements SEK 710 M in efficiency savings from MFP programs 10% sales increase per employee 5 factories were closed Sustainability Improved energy efficiency –10% Awards Total greenhouse gas reduction1 –21% 1 Intensity Water consumption decreased –8% Audited suppliers 1,175 • Secure Campus in the US for Attack Resistant Openings • DIY Week UK ‘Best Security Product’ for Sync Smart Alarm • Gold winner in German Brand Award • Govies Government Security Award ASSA ABLOY ANNUAL REPORT 2019 3  STATEMENT BY THE PRESIDENT AND CEO Investments in product development and people to drive future growth Dear shareholders, I am pleased to report another successful year for ASSA ABLOY in which we generated good growth with record profits and cash flow. During the year, we strengthened our Group culture and launched our new core values and beliefs. We accelerated our investments in R&D, which is a key enabler for our sustainable and profitable growth. In the manufacturing footprint program we achieved our highest ever annual efficiency gains. The initiatives taken strengthen ASSA ABLOY’s leadership within access solu- tions and position us as an agile and strong company with significant profitable growth opportunities. Financial overview In 2019, our total sales grew by 12% to SEK 94,029 M, with organic growth of 3%, net acquired growth of 3% and a pos- itive currency effect of 6%. The organic growth was driven by strong growth in Americas and Global Technologies, and good growth in EMEA and Entrance Systems. Although uncertainty in many markets increased during the year due to weaker new construction and lower GDP growth rates, the demand was generally healthy. Demand continued to be strong in the US, in particular for our resi- dential smart locks and in the institutional and commercial segments. In Europe, Africa and South America demand was mixed. Sales development in APAC was slightly negative due to notable declining market conditions in Korea and declining sales in China. During the year we implemented our new strategy in China involving factory consolidations and a more selective sales approach, which affected sales nega- tively in the short term. At the same time, the strategy has stabilized our Chinese business, with slightly improved margins, supported by several efficiency activities. We are now seeing the first results from the actions initiated in China, but we still have a long journey ahead of us. The accelerated investments in product development continue to generate growth, and 27% of our sales was generated by products launched during the last three years. Electromechanical products grew by 18%. They now make up 31% of sales compared with 23% five years ago and continue to be our fastest-growing product segment. We completed 12 acquisitions during the year adding SEK 3 bn in annual revenue. The acquisition of agta record, a Swiss pedestrian door company and our biggest acquisition since 2011, will add close to 4% to the Group’s revenue when concluded. Our operating result increased by 16% to SEK 14,920 M, the operating margin improved to 15.9%, and our return on capital employed (ROCE) increased to 17.0%. The improve- ments are a result of continued investments in our compet- itive product portfolio, actions initiated already in 2018 to offset the higher raw material costs and our other opera- tional efficiency measures. In total, the efficiency savings were above SEK 700 M from our manufacturing footprint program. At the end of the year we provided SEK 312 M in additional restructuring costs in accordance with our original plan for the manufacturing footprint program. Operating cash flow was at a record level of SEK 14,442 M, supported by improvements in working capital. The cash conversion improved to 104%. Together we grow ASSA ABLOY’s decentralized organizational structure has been a key to our success. It has enabled us to offer relevant products and solutions locally, while at the same time being agile and adapting quickly to changing market conditions. However, as more of our products and solutions become connected, we can realize more synergies between our dif- ferent regions, business areas and divisions. The global roll out of our August software platform for our smart residential locks is a good example of how we can achieve more “Market growth through customer relevance, product leadership, cost- efficiency and evolution through people form the cornerstones of our strategy.” 4 ASSA ABLOY ANNUAL REPORT 2019  STATEMENT BY THE PRESIDENT AND CEO In November 2019, ASSA ABLOY celebrated its 25th anniversary. In a special event, several dif- ferent sites participated in a live webcast which all employees were invited to watch. Together we celebrated! synergies through increased internal collaboration, while maintaining our decentralized organizational structure. A strong common culture is the cornerstone for success ful internal collaboration. In 2019 we launched our common core values: Empowerment, Innovation and Integrity and strengthened our common culture with our ‘Together We’ program, encouraging further collaboration and realizing more synergies across the Group. While we benefit from our decentralized organization, we can also benefit and grow as an organization by learning from each other and collaborating more. employees. Our people are our most important asset and our future depends on that we can continue to attract, retain and develop the right people and evolve with them. We work on many initiatives to strengthen what we do in this area. For example, we invest in external talent via graduate programs and we focus on providing our employees with development opportunities, with the aim to help them to grow into bigger roles within the organization. By enabling our people to develop continuously and by providing them with a varied, challenging and long-term career, we lay an important foundation for ASSA ABLOY’s future success. Our strategic objectives We have fine-tuned our four strategic objectives: Growth through customer relevance; Product leadership through innovation; Cost-efficiency in everything we do; and Evolution through people. We further extended and strengthened our product port- folio and invested in our market presence in order to increase customer value. We invested in our different channels to market and grew our service and customer support organization in a significant way. Innovation is an enabler for our sustainable and profitable growth where digitization provides many opportunities. We increased our R&D expenses by SEK 673 M and R&D repre- sented 3.8% of our sales in 2019. We accelerated R&D invest- ments in general and for Global Technologies in particular. In this division we invest in new verticals such as elderly care, critical infrastructure and student accommodation and further expand our specific access solutions. Enhanced cus- tomer value at a lower cost and a reduced environmental footprint are basic principles for all our development pro- jects. Please take a look at a few examples of new products that we have launched recently on pages 36–37 in this report. Our manufacturing footprint program, where we consol- idate production facilities, sales offices and warehouses, is an important contributor to improvements in efficiency. In addition to the larger ongoing programs, smaller day-to-day lean improvements are equally important. In fact, these effi- ciency activities generated savings, that we reinvest in R&D and our presence in the market, which in turn will contribute to our growth. Realizing cost efficiency is a journey that never ends and we continue to see potential to further reduce operational costs. These efficiency activities also contribute to our improved sustainability performance. All these activities cannot happen and be successfully implemented without our talented and committed Sustainability is an enabler for value creation ASSA ABLOY is committed to reducing its environmental footprint and to help to mitigate climate change, to meet the needs of future generations. In the last four years we have reduced our water intensity by 43% and our total greenhouse gas intensity is down 47%. About 12% of our total energy consumption is generated by renewable resources, a figure we will continue to focus on increasing in the coming years. We are committed to working towards an injury-free work- place and our health & safety performance has improved with an injury rate reduction of 55% since 2015. Our cus- tomers require our products to be produced in a sustainable way, while also helping to enable them to reduce their own environmental footprint. Although we can always do more, as a Group, we are well positioned to address this demand. Importantly, our strategic objectives are well aligned with improving our sustainable solutions and we will stay focused on addressing these important challenges and opportunities. Finally, I would like to thank our employees for their dedi- cated work in 2019. It has delivered results and value in many dimensions, including improving our operating margin. In November, we celebrated the foundation of ASSA ABLOY 25 years ago. It is a very successful period that we can look back to as an inspiration for the future. I would also like to thank our shareholders and other stakeholders for your trust and interest in ASSA ABLOY. We will do our best to deserve it in the coming years. Thank you! Stockholm, 6 February 2020 Nico Delvaux President and CEO ASSA ABLOY ANNUAL REPORT 2019 5 ASSA ABLOY in your daily life Our products are present in your daily life to help you feel safe, secure and experience a more open world. Every year, people around the world experience safer and more seamless environments by using Mobile Access from ASSA ABLOY. Enabling locks to be operable through personal mobile devices or wearables such as smart watches, Mobile Access ensures that people always encounter both enhanced security and convenience whether visiting hotels, student accommodations, cruise ships or an array of other locations. 6 ASSA ABLOY ANNUAL REPORT 2019 A good industry MARKET OvERvIEW AND TRENDS The demand for convenient access solutions has long- term favorable drivers. ASSA ABLOY is well positioned to benefit from the industry and the megatrends that support our long-term growth in a sustainable and compliant way. Market overview The industry for access solutions has a lengthy history, with standards being developed over a long time. It has evolved from wooden mechanical locks into sophisticated access solutions, now also entailing different types of identification such as fingerprints and face recognition. The value of the global industry for access solutions and trusted identities is above USD 100 billion annually, with good underlying drivers. Through continuous evolution, local standards have emerged, driven by local needs and lock companies. As a result, the market for access solutions is very fragmented, even more so in emerging markets. At ASSA ABLOY, we secure buildings from the perimeter to their shell and core. We are the largest provider of access solutions, but due to the fragmentation of the market our global market share is still low, meaning that we still have significant potential to grow. Trends There are several trends that drive increased demand for access solutions, including meeting the individual’s most basic need for safety and security. These trends are expected to con- tribute to a continued growing demand for security solutions at a faster pace than the average growth of the global economy. Megatrends Industry trends Urbanization People are moving from rural areas into urbanized areas. This transfer creates demand for new buildings and thereby also new access solutions. The trend is par- ticularly evident in emerging markets, where an increased need for housing, workplaces and stores drives demand for access solutions. Demand for security To be safe and secure is a basic human need. In a world with a high per- ception of uncertainty, the demand and need for con- venient and efficient access solutions is increasing – both in the residential and non-residential segments. The growth is further sup- ported by the demand for additional time-efficient solutions, as time is a pre- cious asset. Studies in the US and Sweden of crime percep- tions confirm that the perception of uncertainty remains at unchanged levels. Property crimes have decreased in both countries in the past ten years while the number of assaults and other violent crimes has recently increased in Sweden. Source: The Swedish National Council for Crime Prevention, Gallup, Bureau of Justice Statistics Today about 55% of the world´s population lives in urban areas. The United Nations project that the number of people living in urban areas could increase by 2.5 billion by 2050, including 400 million in India and 250 million in China. Source: UN DESA 2018 Sustainability The focus and demand for sustainable, energy- and resource-efficient access solutions in buildings is increasing. This requires more transparency in relation to the environ- mental impact from the product, sustainable pro- duction and good working conditions. Also, there is an increasing amount of regu- lation of standards in an increasing number of coun- tries for more energy-effi- cient buildings and access solutions. New technologies Emerging technologies and technical innovations enable the development of new convenient solutions for customers and provide new business opportunities. The proportion of electro- mechanical products that we sell has increased from 23% to 31% over the last five years. The change of the product mix to more electromechanical products will continue and provides many business opportunities, while sup- porting recurring revenues and software monetization. A global study among architects, contractors and building owners indi- cates that the demand for green projects will con- tinue to increase – 47% of the respondents believe that more than 60% of their projects will be green by 2021. Source: Dodge Data and Analytics The demand for new tech- nology continues to be strong and our organic growth for electrome- chanical products has continued to be high, with an average organic growth of 9% during the last three years. Regulation A changing regulative envi- ronment, with local regula- tions, as well as applications and codes, results in an increasing demand for updated and compliant access solutions. Different standards in different coun- tries require adaptation of products, which creates hurdles and complexity while preventing commod- itization of these products. Regulations for the European market are decided by EU directives which have a significant impact on our industry. In 2019 the EU Directive n° 2011/65/EU was imple- mented with restrictions on using ten different hazardous substances in electronic equipment. ASSA ABLOY was one of the first in our industry to be compliant with the directive. Source: ASSA ABLOY Source: EUR-Lex ASSA ABLOY ANNUAL REPORT 2019 7 INvESTMENT STORY ASSA ABLOY as an investment Sales +169 % in 10 years EPS +200 % in 10 years ASSA ABLOY is the global leader in access solutions with operations in more than 70 countries. By continuously optimizing our production and developing new inno- vative products that cater for customer needs and demand, we have created significant customer and share- holder value since our foundation in 1994. Our ambition is to continue to create great customer value and improve shareholder value. 1  Good industry to be in – We are subject to some underlying strong trends supporting growth and demand for our products. These include increased demand for security and sustainable buildings, urbanization, a shift to new technologies, changing codes and continuous changes in local market regulation (see page 7). Our customer offering is represented by critical affordable products which, in combination with the fundamental growth trends and high exposure to the aftermarket, imply that the demand is less cyclical than in many other industries. 2  Consistent profitable growth – We have a strong track record of profitable growth. Our revenue has grown by more than 9% annually during the last ten years and the adjusted EBIT-margin has been stable at above16%. We continue to focus on growing through customer relevance and being cost efficient in everything we do, which enables us to deliver consistent profitable growth. Profitable growth is also enabled by the shift to electromechanical products and investments in our people. 3  Leading market position – We have the largest installed base of locks and different access solutions in the world, which we actively upgrade. Two thirds of our revenue is generated from the aftermarket, which provides us with a stable customer and revenue base. 4  Investing in innovation – We invest close to 4% of our revenue in R&D. Given the size of our business, this gives us a competitive advantage, both short and long term. Our innovation capacity is based on our common platforms, the global reach but local competence of our innovation organization, our ~2,800 R&D employees and more than 9,000 patents. During the last three years some 27% of our revenue has been derived from products launched in the previous three years. 5  Strong acquisition record – Since 1994 we have acquired almost 300 companies globally. In many cases, the businesses are leading access providers in their respective market with well-established customer bases and brands. After realizing synergies, we aim to grow the busi- nesses and increase their profitability and margins. This strategy has proven successful and since 2009, we have acquired businesses with about SEK 34 billion in sales that after integration have generated significant value. 6  Strong brand portfolio – There is considerable value in our well-known brands that play an important role in creating trust, loyalty and differentiation. We use a multi- brand strategy to combine global and local strengths. ASSA ABLOY is the Group brand and is increasingly becoming the leading brand for commercial door solutions. We also have strong master brands to continue to be a leader in each of the core areas of our business and a portfolio of other brands in markets and segments where needed. In total, we have 130 endorsed brands that complement our offering. Our brands are often leading brands in their market, such as Yale, which is one of the world’s most well-known residential lock brands. 7  Operational efficiency – Our production is structured around local assembly lines close to the customer, adapted according to the local standards, with some strategic components concentrated at Group plants, such as cylinders, rim locks and electromechanical products. This enables us to quickly supply our products efficiently to our customers. We also continue to optimize our supply chain, product setup and footprint and work with lean processes and automation. 8  Active sustainability initiatives – About one third of our revenue is generated by products which have an environmental product declaration (EPD), based on a life cycle assessment. When we develop new products, our ambition is to minimize their environmental impact and embodied carbon footprint, while maximizing sustainability attributes, such as energy efficiency, during the products’ in-use phase of their lifecycle. This gives us a competitive advantage, especially in larger projects. We are also continu- ously reducing our environmental footprint in production, and monitoring and improving the safety of our people. Sales and operating income Dividend and earnings per share New product ratio SEK M 15,000 12,000 9,000 6,000 3,000 0 Sales Operating income1 1 Excluding items affecting comparability 2016, 2018 and 2019. SEK 10 8 6 4 2 0 15 16 17 18 19 SEK M 100,000 80,000 60,000 40,000 20,000 0 8 Dividend per share Utdelning per aktie Earnings per share after Vinst per aktie efter utspädning1 dilution1 15 16 17 18 19 1 Excluding items affecting comparability 2016, 2018 and 2019. % 35 30 25 20 15 10 5 0 15 16 17 18 19 ASSA ABLOY ANNUAL REPORT 2019 Value creation business model BUSINESS MODEL Our vision is to be the global leader in providing innovative access solutions that help people feel safe, secure and experience a more open world. By responsibly using human capital, natural resources and capital, we continuously create sustainable value not only for our shareholders, but also for other stakeholders. Resources Our most important activities What we create Value for stakeholders Developing, producing and delivering access solutions and trusted identities to commercial and residential customers. Activities include: • Innovation and product development • Sourcing, manufacturing, and streamlining of processes • Integration of acquisitions • Services, advisory and support • Marketing and sales • Financial capital • 49,000 employees in over 70 countries • Strong common processes in a decentralized customer- focused organization • Sustainability as an integrated part in all business processes within the Group • Efficient production and assembly facilities all over the world • Strategic and cost- effective suppliers • Strong patents, brands and well-diversified product portfolio that meets local regulations and standards • Customers all over the world with a large installed product base External factors • Growing security needs • Urbanization • Digitization • Automation • Sustainability Customers • Security, safety and convenience • Technology and product leadership • Sustainable products with environmental product declaration Suppliers and partners • Technological development • Stable partner • Earnings and employment Shareholders and investors • Dividends and capital appreciation Employees • Safe workplace • Professional develop- ment and income • Ethically, stable and long-term business Society • Growth • Employment • Sustainability • Increased safety and security 31% of sales are from electromechanical products 27% of sales are from entrance automation 25% of sales are from mechanical locks 17% of sales are from security doors and hardware 27% of sales are from products launched in the past three years ASSA ABLOY ANNUAL REPORT 2019 9 TARGETS AND STRATEGY Strategic overview The Group’s strategic direction is to lead the trend towards the world’s most innovative and well-designed access solutions. Our purpose is to help people feel safe, secure and experience a more open world. Our core values, beliefs and strategic objectives help guide our way. Purpose Financial targets Strategic objectives To every day help people feel safe, secure and experience a more open world Vision To be the global leader in providing innovative access solutions that help people feel safe and secure so that they can experience a more open world Mission • Building sustainable shareholder value • Providing added value to our customers, partners and end-users • Being a world leading organization where people succeed • Conducting business in an ethical, compliant and sustainable way Growth 5% organic 5% acquired = 10% total EBIT Growth through customer relevance Product leadership through innovation Cost-efficiency in everything we do 16–17% Evolution through people Core values & beliefs Empowerment We have trust in people Innovation We have the courage to change Integrity We stand up for what’s right 10 ASSA ABLOY ANNUAL REPORT 2019 Strategic objective #1 Growth through customer relevance MARKET GROWTH ASSA ABLOY is a global company with local presence. We have achieved this position through successful acquisitions, our leading brands, strongly- positioned sales channels and a large installed base of products which we actively and constantly upgrade. We believe that continued growth starts with under- standing our customers and being relevant to their needs. Our ambition is to maintain our leadership, meeting the demands for safety, security, convenience and sustainability. “ How can ASSA ABLOY accelerate growth? Underlying market conditions continue to offer many opportunities in general. Sources that have delivered growth for us in the last few years, such as expanding around our core business, upgrading from mechanical to electro- mechanical, expansion into secure identities, will continue to be highly attractive, sources of growth in the future. Despite the uncertain nature of emerging markets, these also offer good potential. With many growth opportunities available, the most important aspect of accelerated growth is prioritizing and focusing on the right opportunities and not spread ourselves too thin across everything at the same time. What are the greatest opportunities? The greatest opportunities are in the electromechanical, connected and smart products and more specifically the commercial and institutional verticals where high requirements for quality, performance and security are combined with local market standards. Here, our understanding of customer needs in combination with good product knowledge is highly needed in the sales process, which is an important reason why we have achieved such a leading position in the installed base. A large installed base also allows further growth in the aftermarket for sales of software services, such as mobile keys and field service contracts. Björn Lidefelt Chief Commercial Officer No. 1 Global leader in access solutions. x 3 17% of sales are in emerging markets, a threefold increase in last ten years. 58% The percentage of electro- mechanical products and entrance automation has increased from 35 % to 58 % of sales in ten years. ASSA ABLOY ANNUAL REPORT 2019 ASSA ABLOY ANNUAL REPORT 2019 11 11 MARKET GROWTH How we work to grow through customer relevance Mechanical locks, lock systems and fittings, 26% Entrance automation, 28% Electromechanical and electronic locks, 30% Market insights and segmentation Insights into our markets, competitors and customers are important to identify and prioritize opportunities. We therefore continuously monitor the operating environment and how it is changing. By predicting scenarios of how, where and when markets will change and the impact this will have on our business, we can swiftly anticipate changes. Using these insights, we segment our markets into industry ver- ticals and develop our offering and skills to serve specific ver- ticals in the best way. Clear customer segmentation is essential to be able to identify customer-specific needs and build a relevant value proposition to that segment. Security doors and hardware, 16% Institutional and commercial markets represent some 75% of our total sales with the rest generated by residential customers. Two thirds of our business is generated in the aftermarket with the remaining 33% from new construction. The aftermarket is of a recurring nature and includes renova- tions, replacements and upgrades as well as ongoing ser- vices. Our ambition is to generate more recurring revenues and increase field service penetration through new software-related offerings and enhanced service packages. Growth in the aftermarket is also supported by the increased demand for electromechanical products, which are more frequently replaced and upgraded than mechanical solu- tions. The aftermarket is less cyclical than new construction, which means that our sales and customer composition implies a lower cyclicality of sales and profit. Our ambition is to increase our market position through increased customer relevance. This is achieved by delivering differentiated products and solutions that address specific customer needs, including local requirements, regulations and standards, as well as the need for integration into new or existing security systems. We aim to be an expert in total access solutions in each customer segment and to increase the focus on new and existing verticals such as logistics, ASSA ABLOY grows customer relevance through: • Market insights and segmentation • Customer experience • Branding • Commercial excellence • Emerging markets elderly care and hospitality. At the same time we continue to develop more innovative mechanical products and drive the conversion to electromechanical solutions. To reach the different segments, our market organization works closely with architects, security consultants, large end customers and distributors. Given the fragmented nature of our market, these relationships are established locally. Customer experience Customer experience is at the center of everything we do. The experience we deliver to our customers must always meet their expectations. New intelligent tools and technol- ogies allow us to measure and understand customer in a way that has not been possible before. Our performance has never been more transparent than it is now, with the growth of e-commerce and social media. To consistently deliver in accordance or above the customer’s expectation, we start by understanding what their requirements are. Customers have different expectations on product features, lead time for delivery, and after-market services. Many things influence customer experience such as price, quality, delivery, design and brand image. We use Net Pro- moter Score (NPS) to measure our customer experience. Our goal is to achieve the top NPS score in our industry. Sales by product group, 2019 Mechanical locks, lock systems and fittings, 25% Entrance automation, 27% Electromechanical and electronic locks, 31% Security doors and hardware, 17% The Group sees fast-growing demand for electromechanical products, as well as electronic and digital solutions. Since 2009 these have sharply increased from 24 % to 31 % of Group sales. Mechanical products continue to increase, but electro mechanical products are growing considerably faster. Breakdown of ASSA ABLOY’s sales 75% Commercial Institutional and commercial market – share of sales 25% Residential Private customers and residential market – share of sales 33% New construction New buildings – share of sales 67% Aftermarket Renovations, remodeling and additions, replace- ments and upgrades of existing access solutions, as well as ongoing service – share of sales 12 ASSA ABLOY ANNUAL REPORT 2019 Sales by region, 2019 North America, 44% South America, 3% Europe, 36% Asia, 12% Oceania, 4% Africa, 1% MARKET GROWTH funnel and customer dialogue are supported by information captured in customer relationship management systems, enabling us to prioritize our sales efforts and approach the customer with the right information to hand. Sales excellence Recognizing that not all sales is done the same way, we differ- entiate our sales approaches, such as specification-driven sales and retail sales, to design the right processes, tools and benchmark cases for a specific way of selling. Depending on the business nature and market conditions, we set out appropriate routes to market strategies. We have the potential to grow within our existing indirect channels by leveraging the skills and reach of our channel partners, which we do for most of our business. In selected verticals where the business requires close end-user contact, we go direct to the customer. For example, to hotels we sell hotel-customer check-in experience and in Entrance Systems we sell full door solutions. This allows us to under- stand and serve the customer needs in the best way. The field service and aftermarket business offers us opportunities for increased profitability and customer loyalty. With the intro- duction of software and connectivity in our products, new opportunities for recurring revenue are arising. By analyzing the reach of our sales force we can identify gaps and allocate resources to cover all parts of the market. We also aim to be involved in the decision making process early in a customer’s purchase process phase. This is done through vertical specialization and specifications. We use Openings Studio, our own Building Information Modeling software. This allows hardware and architects to produce complete opening models with door, frame and hardware specifications integrated with the building design software. Pricing Our ambition is to capture the full value of our products and services through price. Pricing is a continuous core business activity that follows defined processes. To fulfill this we have dedicated pricing managers to drive price optimization. Price performance and price activities are tracked through common Key Performance Indicators to create transparency and visualize results. We apply value-based pricing, which means that products should be priced based on the value to the customer. Price is differentiated, by how and who we sell to, in a structured, efficient and compliant way, using solid discount and rebates governed by approval thresholds and escalations. We pro- actively manage fluctuations in our cost base and are ready North America, 42% South America, 3% Branding The ASSA ABLOY Group has considerable value in its well- known brands. They play an important role in creating trust, loyalty and differentiation. We use a multi-brand strategy to make the most of our global and local strengths and to address different markets, customer segments and routes to market. Europe, 38% Asia, 13% Oceania, 3% Africa, 1% ASSA ABLOY is the Group brand and employer brand and is increasingly becoming the leading master brand for our com- mercial business, as we are consolidating our brand portfolio to create brand consistency and awareness. To continue to be the leader in each of the core areas of our business, we build multiple strong master brands: ASSA ABLOY for commercial openings and entrance automation, Yale for the residential market and HID for secure identity and access management. Our master brands are strong, promoted brands. We also have a portfolio of other brands, endorsed by any of the master brands, which complement the master brands in markets and segments where needed. About 70% of our total sales are under the ASSA ABLOY master brand while 20% are under the HID or Yale brands. In addition, the Group has brands that are not associated with ASSA ABLOY. These brands, representing some 10% of our total sales, have leading expertise in specialty products and services, and are important complements to our market presence and positioning. These brands are usually sold through distributors and installers. We create consistent brand experiences, which are critical to building trust and to increase the protection of our brand and business; we have clear brand guidelines and work with industrial design to create a compelling and consistent design of our products. The products are designed in a smart way to achieve an optimal balance between different fea- tures, value to the customers and cost. We have been recog- nized for this and won several design awards during the year; for example, the German Brand Award, the Design Value Award, and Red Dot Brand Award. Examples of awards in 2019 Commercial excellence A structured sales process enables us to go beyond the natural development of our skilled sales force. Our sales ASSA ABLOY’s brands Group brand and employer brand Master brands ASSA ABLOY ANNUAL REPORT 2019 Endorsed brands + more brands 13 AfrikaOceanienAsienEuropaSydamerikaNordamerikaMARKET GROWTH to increase price to protect our profitability and to drive an inflationary dynamic in the market. E-business E-business embraces all digital touch points throughout a customer journey from digital marketing at the beginning to the after-sales support at the end. With e-business, we are able to serve our customers in a better and more efficient way by making it easier to buy from us. It allows us to present the customer with all necessary information throughout the customer journey and enables us to measure how this information influences purchase decisions. We have a target to significantly grow our online sales and we will do this both through our own e-shop and through third-party e-commerce sites. Sustainability Customers demand more sustainable products, including environmental and material transparency, which is fueled by the strong growth in certified ‘green buildings’. This trend is expected to continue. Our sales team and specification con- sultants can help our customers to reduce their environ- mental footprint by adopting the Group’s expanding line of products with green attributes. For example, as part of the specification process, we can specify projects with environ- mental product declaration (EPD) products, which assists our customers to get green building certificates. By staying relevant and developing more products that improve the sustainability as well as being produced sustainably, we can further strengthen our competitiveness. Emerging markets The market for access solutions has grown rapidly in emerging markets over the last ten years. During the same period we have more than tripled our sales, both through acquisitions and organic growth. Our share of sales in the emerging markets is now 17% of total sales. Demand for mechanical locks is somewhat stronger in emerging markets than in mature markets; however, growth of electromechanical access solutions is driven by urbani- zation and a stronger economy. This is evident both in the commercial segment and the residential market, where the potential of connectivity drives demand for connected locks and smart home security. Our emerging market strategy focuses on key markets in Asia, South America and Africa. For these focus markets we will invest in the local organization as well as consider acqui- sitions. We will also invest more in our master brands ASSA ABLOY, Yale and HID, complemented by investments in strong brands such as PANPAN in China and Papaiz in Brazil. In some emerging markets, we have a strong position in the premium segments but need to expand our offering into the mid-end segment in order to accelerate growth. This will be done either through acquisitions or internal development of new product lines. To ensure cost competiveness, we will continue to increase our efficiency in the local supply chains. As an example, we are building more local production in South East Asia. With a large population, Asia has the greatest growth potential. The vast Chinese market, where the Group is one of the largest suppliers of access solutions, remains important. Sales channels The majority of our sales go through distributors. Most markets are fragmented where we sell our products to several distributors. We work proactively with these distributors in product marketing and product development, with the aim to grow our share of their business. The end-customers are influenced by specification, and also by direct relationships with some key accounts. Creating a push effect through management of sales channels and channel partners ASSA ABLOY OEM Distributor/ wholesaler Integrator/ installer (incl. locksmiths) End customer Pull effect driven by specifications, brand loyalty and recurring revenues 14 ASSA ABLOY ANNUAL REPORT 2019 ASSA ABLOY in your daily life Our products are present in your daily life to help you feel safe, secure and experience a more open world. In every region of the world, we have successfully engineered and deployed e-passports and ID solutions that are being used by millions of people every day. HID provides solutions to governments for the secure creation and issuance of physical and mobile identities. The software systems and physical documents are designed to meet the needs of local agencies, partners and our government customers. ASSA ABLOY ANNUAL REPORT 2019 ASSA ABLOY ANNUAL REPORT 2019 1515 Strategic objective #2 Product leadership through innovation Product leadership is is one of the most important drivers for organic growth. We achieve this through innovation, which is at the core of everything we do. Our innovation capacity is reflected in our high innovation rate, and our ability to develop mechanical, electro- mechanical and digital products that meet or exceed our customers’ expectations. “ How can ASSA ABLOY maintain its product leadership? This starts by understanding the customers’ needs and providing added value to our customers, partners and end-users. We will continue to focus on security and safety, and to always be right the first time. Product leadership can also be achieved through continuous improvement in how we work, as well as harnessing the potential of new technologies. What innovation trends do you see? The emergence of new technologies will be important to our industry in the years to come. Connected products, wireless solutions and sustainable products that harvest their own energy are just a few examples of new technol- ogies that allow us to create new business models or enhance existing ones. How does digitalization affect our innovation work? Digitalization offers the possibility to add customer value to traditional products and also opens the door to completely new products and services. It provides a huge opportunity, both for our customers and for us. For example, the performance of existing products can be enhanced to foresee maintenance needs, thus solving issues before they arise. The use of modern digital tools in product development has started already, and will continue to make ASSA ABLOY more efficient, particularly in more complex projects. Johan Warnström Chief Technology Officer No. 1 The most innovative supplier of access solutions. 31% The percentage of electro- mechanical products has increased from 24% to 31% of sales in ten years. 27% Products launched in the past three years account for 27% of total sales. 16 ASSA ABLOY ANNUAL REPORT 2019 How we work with innovation to ensure product leadership PRODUCT LEADERSHIP Percentage of sales of products launched in past three years % 35 30 25 20 15 10 5 0 15 16 17 18 19 Investments in research and development SEK M 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 15 16 17 18 19 The constant flow of new, enhanced, innovative and sus- tainable products is an essential driver for our target of 5% organic growth and our margin development. Through our product leadership, we gain long-term competitive advan- tages. The innovation processes build on customer and end-user insights, while cost savings are achieved through improved designs, new materials, software and components, as well as continuous improvement of the development and production process. Products less than three years old accounted for 27% of total sales in 2019, exceeding our target of at least 25% of total sales and building on a high level of our innovation rate and capacity over the last decade. Innovation processes Our overall objective with our innovation process is to exceed customers’ expectations. This will improve customer benefits and also our competitive position. To maintain our position as innovation leaders, we need to excel at what we develop and how we develop it. Our innovation system is our ‘engine’ to excel both in customer relevance and execution. Identifying and defining the cus- tomer benefits at an early stage in the product development process ensures that enhanced customer benefits are integrated at minimum cost. Product management, along with customer and market insights, helps us identify and select the right things to do – to create what our customers really want. A lean and agile approach increases efficiency in the development process. Through cross-functional teams, that include functions such as sales, marketing and R&D, we can align and ensure that the organization aims at common goals. The right mix of pre-product, new product and con- tinuous product innovation assists us in achieving long-term growth and profitability. In pre-product innovation, we explore and learn from new technologies with a long-term perspective. Sustainable solutions, wireless connectivity, software and identification are some core technologies that lay the foundation for our pre-product innovation work. New product innovation brings new products to market and can be defined as the transformation of an opportunity into a product available for sale. Our product innovation process is based on a structured gateway process where all potential products have to pass five decision points on their way from idea to released product. Continuous product innovation is the management of products already in the market. There may be new opportu- nities with these products for new feature upgrades or quality improvements that will maximize profitability over the course of their lifecycle. Product management Product management means managing a product or a solution throughout its lifecycle to maximize customer and business value. It ensures that each product group has a vision-based plan founded on market insight, technology ASSA ABLOY’s product leadership is achieved through: • Developing and exploiting the advantages of a Group-wide, structured innovation process. • Applying lean principles and deep customer insight to product management and development. • Developing and using common modular platforms and common technologies. • Investing SEK 3.6 bn in R&D, including in our competence centers, in 2019. development, customer value and the strengths of each product. This includes the long-term planning of which new products to introduce, monitoring and optimizing the performance of products in the market and the termination of products that are no longer needed. Effective product management requires thorough and first-hand knowledge of products, technology, customers, end users, competition and where the market is heading. Based on this knowledge, generation plans and product roadmaps are formed, ensuring future products and growth. Product management has a central role and functions as the dynamic force in the innovation system. Product management results in the transformation of insights from the market and visions from executive leadership into real concepts and guides a product from cradle to grave. Product managers are based in product units and are responsible for a product group, its generation plan and roadmap. Product managers have important counterparts, the product marketing managers, who operate from regional sales units and are responsible for taking the products to the market and commercializing them. In addition to divisional R&D competence centers, our Shared Technologies organization is the Group’s devel- opment center for global technology platforms. Its modular approach to both hardware and software is the basis for the important strategic solutions, providing an opportunity to reuse components and advanced technologies on a global scale. Shared Technologies is also a center for our advanced research and investments in pre-product innovation. Intellectual property management We continuously invest in developing our extensive port- folio of intellectual property (IP) to protect our investment in state-of-the-art and industry-leading products. The aim is to continue to expand the size and breadth of the IP port- folio and develop unique customer value from our innova- tions. By capitalizing, sharing and controlling the IP portfolio we can achieve full value from our product innovation. We have systematic processes and expertise to ensure that we register and protect our IP. The IP portfolio is aligned with commercial priorities and desired product positions ASSA ABLOY ANNUAL REPORT 2019 17 PRODUCT LEADERSHIP Product platforms and we defend our rights against competitors and potential infringers. The patent and design strategy also includes mon- itoring other patents and patent applications in the industry. We also use our valuable IP to enable co-development processes and build foundations for trusted partnerships. IP management is integrated into our entire innovation system, from capturing pre-product innovation value as new inventions or trade secrets, to supporting new product innovation with strong patents and trademarks, and, finally, ensuring our continuous product innovation through commercial contracts and active defense of our valuable IP. Our portfolio includes some 9,000 patents, trademarks and designs. Product quality, safety and security We are committed to deliver products and services that meet or exceed our customers’ demands on quality, security and safety. This is essential to maintain our position as a trusted supplier in access solutions, and to protect our cus- tomers and brands. Based on a holistic approach and fact based decision-making, where issues are examined from dif- ferent perspectives, we utilize a ‘first time right’ principle. For all our products we ensure that they meet the highest demands for quality and design as well as safety and security. We also conduct product failure analysis to secure a high level of quality throughout the lifecycle of a product. Design to value Design to value enables us to focus our innovation work on what our customers are willing to pay for. By designing to value we balance features against cost. It is important that design to value is an integral part of the early stages of new and continuous product innovation. Design to value is a cross-functional approach where fact- based trade-off decisions are made based on insight from customers, competitors and suppliers. The process also includes design for service, design for manufacturing and design at the lowest overall cost, which aims to increase growth and profitability. The following activities are key to the design to value process: • We design products to make them easier to service. This drives sales in the aftermarket and leads to closer and better relationships with the customer. • We apply design for manufacturing to make our products easier to produce and distribute in the most cost-efficient way. • We apply industrial design to ensure that we have an attractive and user-centric design that is consistently applied across all product ranges. Customer insight is key to ensuring that design decisions are evaluated in relation to the perceived customer value of a product’s qualitites. CLIQ is a secure locking system with advanced micro electronics in programmable keys and cylinders. The system offers a large number of combinations of mechanical and electronic products, which satisfy various requirements for secure, flexible access control. Most types of locks can be fitted with CLIQ technology, which together with various software programs provides the global market with customized, flexible access control solutions. Seos is an identification technology solution that allows the customer to use various devices, from smart cards to cell phones, for secure access to applications. Seos’ applications range from building access control, computer login and cashless payments to IoT (Internet of Things) applications, time and attendance reporting, and secure printing. Aperio is a technology developed as a complement to existing electronic access control systems. It is a con- venient solution for end- users to improve the security and control of their premises. Central to Aperio is a wireless communications protocol, which functions at short distances and can connect an online access control system to an Aperio-com patible mechanical lock. Accentra™ Accentra is a cloud-based access control system that focuses on solutions for multi- family buildings and small and medium-sized enterprises. A scalable infrastructure through a cloud provider, provides a high level of service and full control over information in a centrally based security system. Accentra supports multiple global products at door level (Aperio, Yale, ASSA and HID readers) and is developed for, and deployed in, a true cloud environment for a global reach, while complying with local demands. Hi-O (Highly intelligent Opening) is a concept that simplifies installation, service and maintenance of connected doors thanks to advanced technology and the plug-and-play principle. Hi-O is a standardized technology for control and security of door environments. The technology enables communication between all the components included in a door opening solution. 18 ASSA ABLOY ANNUAL REPORT 2019 PRODUCT LEADERSHIP Digital factory As the product portfolio contains an increasing share of digital solutions, software and data, revenues will shift toward more recurring services. Subscription-based agree- ments for upgrades, data and analysis, as well as software licenses, are increasing. The trend toward complex, multi- functional systems creates new business opportunities, pro- motes close customer relationships, and generates stronger recurring revenue streams. To support and provide service to customers who use our digital solutions, we have a digital service organization whose primary objective is to deliver a world-class customer experience that is always available, with no downtime and no service windows. The digital factory is a cross-functional approach that creates a seamless link between product development, IT operations, service operations and the customer. It underpins the introduction, delivery and continuous support of our digital products. Central to the digital factory is the joint cooperation between product development and IT operations. When a digital product is ready for the market, our team and agile ways of working ensure that we deliver a world-class customer experience. We do this by ensuring that: • Digital products and services are made available for the customer through our secure private cloud. • Uptime and response times are in line with customer expectations. • Continuous software updates are deployed and the customer is supported during the configuration and integration phases. R&D During the year, we expensed SEK 3,565 M in R&D and we had 2,794 R&D employees, including product development, in all divisions. We also secure innovation capacity through acquisitions by complementing existing operations to increase our offering in openings, identities and entrance automation. Sustainable innovation Sustainability is a journey of continuous improvement. Our sustainability program has the ambition to decrease our, and our customers’ impact on the environment by reducing the resources we use in our operations, such as materials, energy and water, as well as reducing the impact of the product when it is used and ultimately disposed of. We are also com- mited to working towards an injury-free workplace. Sustainability is a key driver and an integral part of product innovation and is therefore integrated into the product development process from the concept stage to end of life. Through sustainable innovation we aim to develop products that are efficient and have less impact on the environment. We do this by creating products that, for example, harvest energy, are easier to recycle, reduce the energy consumption of buildings or have ‘green attributes’ that have positive effects on the environment and our competitive offering. Our sustainability compass directs us towards a lifecycle approach and raises the profile of sustainability-related design criteria during the development of new products. The compass is used to outline the sustainability vision for indi- vidual products and is divided into three main areas: reduce, reuse and recycle. Sustainability Compass Sustainability compass Recycle The Sustainability Compass is a tool to increase our efficiency and decrease the environmental footprint. The Compass includes eight dimensions: • Reduce – five areas • Reuse • Recycle – two areas The green leaf indicates sus- tainable footprint to minimize the footprint throughout the life cycle. Innovation process Reuse Reuse t n i r p t o o f n o b r a C E n e r g y i n u se R e c y cl a b il i t y C o s t w m aterial R a R e c y cled content Packagin g Reduc e Our innovation process starts with the identification of opportunities. Once an opportunity has been identified, a pre- study is undertaken. In the next phase, we carry out a feasibility study to specify the requirements for the development of the product. During the product and process design phase, the plans resulting from the studies are executed and the product is developed. The next phase is the validation of the product, production and customer acceptance. Finally, the product launch is the culmination of the product having passed through all these phases. Business opportunity Requirement Specification Product & process design Industrialization & market preparation Launch ASSA ABLOY ANNUAL REPORT 2019 19 ASSA ABLOY in your daily life Our products are present in your daily life to help you feel safe, secure and experience a more open world. Managing visitors and guests from the time they are invited to the time they leave is critical to workplace security and safety. Our HID SAFE™ visitor Manager is deployed around the world and provides a highly intu- itive enterprise class solution for visitor preregistration, registration, security checks, access authorization, check-in/ checkout, badge printing, centralized reporting and audit trail functions. 20 ASSA ABLOY ANNUAL REPORT 2019 Strategic objective #3 Cost-efficiency in everything we do COST EFFICIENCY COST EFFICIENCY ASSA ABLOY continues to improve cost effi- ciency and quality through the implementation of operational excellence and sustainable operations. We do this through an increasingly holistic approach to operations – including cross-divisional cooperation and continuous streamlining of manufacturing, professional sourcing and processes. All activities must translate to improved efficiency for the Group that can be used for value-creating activities. “ You joined ASSA ABLOY in early 2019. What have you focused on in your first year? I’ve focused on getting to know our widespread operations organization and highly competent teams across the globe. In the spirit of our ‘Together we’ strategy, we have also commenced a set of Group-wide and joint operations initiatives related to sourcing, the supply chain and manufacturing. What are the main opportunities to increase efficiency further? We can further intensify our sourcing efforts and, in particular, work closer in partnerships with our largest suppliers and share them between several divisions. The footprint of the end-to-end supply chain can also be further optimized. We will include a logistics network, offices, shared services and continue our factory optimization efforts in the footprint program. How will increasing environmental requirements affect the operations? My fundamental belief is that truly lean operations – end-to-end lean – contribute positively to the environment. These cause less waste at the same time as we minimize quality problems and over-processing, and reduce energy. Smart and innovative product designs use less material, which also contributes positively. David Simonsson Chief Operating Officer 50% Share of total purchases in low-cost countries. –24% The number of direct material suppliers has been reduced by 24 % over the past five years. SEK 710 M Efficiency savings from MFP pro- grams in 2019. ASSA ABLOY ANNUAL REPORT 2019 21 COST EFFICIENCY Cost-efficiency in everything we do Share of total purchases in low-cost countries % 60 50 40 30 20 10 0 15 16 17 18 19 Raw materials, components and finished goods from low-cost countries accounted for 50 % of the Group’s total purchases in 2019. Efficient manufacturing footprint and outsourcing To consolidate and improve our production structure and overall manufacturing efficiency, we are reducing the number of factories we have through multi-year structural programs. In addition, we are reducing the amount of other sites we have, such as offices and warehouses, to increase efficiency in the organizational structure and to enhance performance. The number of manufacturing sites is by far outnumbered by other locations and sites, including warehouses. Thus, there are also significant efficiency gains to achieve in streamlining other sites. Production of our more strategic components, such as cylinders, rim locks and some electromechanical products, is concentrated in the Group’s own production plants, while other more standard components are increasingly sourced from production partners. The goal is to concentrate product assemblies to sophisticated plants close to cus- tomers, primarily in mature markets. Since the first Manu- facturing Footprint Program (MFP) in 2006, 93 production plants have been closed and about 70 offices. A majority of the production units in mature markets are final assembly lines or customization centers. We are also investing in automation and in robotics, where suitable, to improve manufacturing efficiency. With the ambition to, over time, focus and develop long- term MFP plans, in 2018 we launched a MFP covering a period of three years. The MFP entails the closure of 14 pro- duction plants and about 30 offices, with a total cost of the program of SEK 1,530 M, of which SEK 312 M was accounted for in 2019. In 2019, the restructuring programs proceeded well and led to efficiency improvements of SEK 710 M and a reduction of 1,367 employees. The number of employees in low-cost countries was about 20,500 in 2019, representing 42 % of the total workforce. Professional sourcing Professional sourcing ensures competitiveness through improved quality, better delivery times and cost reductions. This includes the application of traditional sourcing practices such as multi-tendering, benchmarking, and group-wide With cost-efficiency in everything we do, our aim is to continuously improve quality and further strengthen our competitiveness through: • Efficient manufacturing footprint and outsourcing • Professional sourcing and streamlining of processes • Operational excellence • Reducing the environmental footprint contracts, to validate competitiveness, as well as process and product optimizations. We apply ‘should-cost’ analysis and e-auctions to ensure the best total cost, quality and per- formance of our supplier base. To ensure correct execution across the Group, we have initiated the implementation of a new sourcing policy in 2019, aimed at hardwiring profes- sional sourcing principles in our organization. We focus on the largest suppliers, representing a signif- icant share of total spend, and identify partners among these that can contribute to cost efficiency by being both compet- itive and innovative. Consequently, the total number of suppliers is expected to decrease when volumes can be allocated to fewer strategic suppliers. Over the past five years, the number of direct material suppliers has been reduced by 24% to around 7,900 worldwide, with a majority in low-cost countries. In 2019, the number of direct material suppliers decreased by 5% on Group level. The criteria set on partner suppliers ensure that the selected suppliers contribute to improved cost efficiency. Our strategic suppliers then become involved in product development and work closely with us. The cooperation allows the strategic partners to deliver products and services, while enjoying larger volumes as we grow. We use consistent performance monitoring and evaluation tools to identify both the best and worst performers; the latter may not remain as suppliers or may only remain so if they meet certain criteria. Ameristar in Tulsa, US. 22 ASSA ABLOY ANNUAL REPORT 2019 COST EFFICIENCY Suppliers are categorized and segmented based on the strategic needs identified according to different quality cate- gories. The divisions have specialized purchasing managers for each component category. Operational excellence Operational excellence is where problem-solving, teamwork and leadership results in the ongoing improvement in the organization. The process involves focusing on the cus- tomers’ needs, keeping the employees empowered, and continually improving the current activities. The starting point is good leadership that drives the right behaviour, supported by structures such as steering, follow up and lean principles. To improve operational excellence, we use lean principles to increase productivity in all processes, across all divisions, including automation, robotizing and digitization. In parallel we are also running a seamless flow program to improve and automate our administrative flows. The lean elements include material flow, quality assurance and control, equipment and maintenance strategy – including auto- mation, and manpower systems – to maximize an optimized workflow. These underpin and support lean principles in a successful operational organization. Quality is an integral part of lean principles, impacting every stage of the value chain from innovation to purchasing, across production and administration to sales and service. This includes both technical tools as well as the involvement of management and employees. An increased focus on sus- tainability, improved purchase processes to ensure high quality at best cost and enhancing product quality with smarter designs are all underpinning quality performance. Material choice with the aim to, for example, eliminate waste, does not only reduce product cost but it also improves quality, while reducing manual processing in support functions also improves operational quality. Logistics and supply chain Logistics provides a competitive advantage: improved global logistics result in lower costs, increased flexibility, improved delivery performance and quality for customers and a better work environment as well as a lowered environmental foot- print. Our global logistics are a result of, and depend on, the existing manufacturing footprint as well as on warehouse locations. These locations are optimized, based on our sales and operations planning. Through increasing the cross- divisional collaboration and realizing the full potential in logistics and warehousing, we can improve our operational performance. For us, 2019 was a year of execution as we con- tinued to coordinate and focus on reducing the cost of our inbound logistic providers, while creating a more efficient structure for logistics centers with a high degree of standard- ization of materials and products. This also included further development of standardized digital processes to enable fast, efficient and secure transportation solutions. Seamless flow Seamless flow is an administrative improvement program that is central in achieving fully automated information flows and makes us more efficient. The overall ambition with the Seamless flow program is to digitalize the company and make us more efficient. It will help us achieve fully auto- mated information flows. The aim is to optimize and streamline processes, especially in sales support, production and the supply chain, enabling a seamless customer expe- rience throughout all interactions. Achieving production transparency implies improved material cost control, improved decision-making proce- dures, shorter development times, and increased collabo- ration between marketing and sales staff. To be successful in Seamless flow, a holistic view on master data management is required, in combination with a simplified and consolidated application landscape that is supported by a robust appli- cation integration architecture. A supportive tool is the Enterprise Resource Planning (ERP) system, which enable us to improve the quality of administrative flows and processes. It is freeing up resources that can be dedicated to direct cus- tomer relationships instead of support functions and other back-end administrative functions. We are currently consoli- dating the different ERPs in the Group. Review of the lean metrics at the Sargent factory in New Haven, US. ASSA ABLOY ANNUAL REPORT 2019 23 COST EFFICIENCY Value Analysis and Value Engineering Value Analysis (VA) is a structured process for optimizing cost and customer value in existing products. The same applies to Value Engineering (VE), which is part of the product development process, focusing on new products. Value Analysis/Value Engineering (VA/VE) entails an in- depth analysis of the product’s design, components and pro- duction methods, which systematically reduces costs and enhances customer value with improved quality. The gov- erning principles for selecting products for Value Analysis are material content, conversion complexity and volume. These will ensure maximum payback. Reducing our environmental footprint Improving resource efficiency by reducing the consumption of materials, energy, water, waste and greenhouse gases (GHGs) in our production processes, are some of the focus areas within our cost efficiency initiatives. Reducing waste – all forms of waste – helps to minimize our environmental footprint and reduce cost while enabling us to better service our customers. Improving sustainability and environmental performance is organically integrated into all operations’ focus areas and processes. Consolidating the manufacturing footprint helps to maximize resource efficiency across the Group. Supplier sustainability audits are a core part of supply management and sourcing. The VA/VE process makes a significant contribution to the sustainability impact of our products, reducing the embodied carbon footprint and energy consumption during manufacturing. Lean and sustainability go hand in hand. Lean, like sustainability, aims to reduce all forms of non-value adding waste. Lean tools are also very applicable to sustainability initiatives. Improving health and safety performance is a key part of our operations and sustainability objectives, working towards an injury-free workplace. We reinforce a culture of health and safety on all levels of the organization, proactively identifying risks and implementing safety improvements to minimize the like- lihood of an injury occurring. The health and safety culture has resulted in a substantial reduction in lost time injury rate of 55% between 2015 and 2019 and thereby supported improvements in operational performance. Digital wall at ASSA ABLOY’s factory in Rychnov, Czech Republic. 24 ASSA ABLOY ANNUAL REPORT 2019 Strategic objective #4 Evolution through people PEOPLE PEOPLE ASSA ABLOY has about 49,000 employees in more than 70 countries around the world. Developing our people, and growing their careers within ASSA ABLOY, is how we secure the Group’s future success and growth. Our ambition is to create a culture that adds value to the business and encourages internal mobility, diversity and knowledge sharing, while supporting our ambition to be an employer of choice. To align our people across the world to focus on the right things and working together, we have during 2018–2019 launched and activated our shared values, – empowerment, innovation and integrity, which will guide us in our daily work. “ What has been your focus in 2019? ‘Evolution through people’ was added to our strategic objectives and we have focused on what that means for us and our people. We have put together a plan that will transform what we do to add even more value to our business. An important starting point is our common identity – Together we – which has come to life through our common core values in a series of workshops across the Group. How do you work with empowering all employees? This goes hand in hand with being a supportive manager who is able to set a clear vision. With the power to act comes not only responsibility, but accounta- bility. Our leaders have to ensure that our people have what they need to take on challenging work. Empowerment is also important when it comes to career development. We value initiative, that the employee put themselves in the driving seat, show motivation, passion and that they are ready for the next step. How are you working with attracting the best talent? Our diverse organization and multiple brands are unique, and candidates looking for a place to grow and develop have great opportunities to do so with us. ASSA ABLOY is a big job market itself, and we are proud of that. Many organizations claim they are special, but they haven’t worked for ASSA ABLOY! There is ‘special’ and then there is us, and our uniqueness is what make us come together and drive our business forward. That’s Together we for you. Maria Romberg Ewerth Executive Vice President and Chief Human Resources Officer 27 87% different nationalities in senior management positions. of the employees participated in the most recent employee survey. 3.0 injuries per million hours worked. Since 2015 the injury rate decreased by 55 %. ASSA ABLOY ANNUAL REPORT 2019 ASSA ABLOY ANNUAL REPORT 2019 25 25 PEOPLE Evolution through people Common culture ASSA ABLOY is a diverse Group with a shared purpose and vision that unites us across geographies, and our divisions, brands and companies. This is underpinned by our three shared values: empowerment, innovation and integrity. These values are central to us as an organization, with the ambition to be always growing, never boring and leading right. A strong identity and inclusive culture helps us to work together and ensure that we are all heading in the same direction. In 2019, the Group identity ‘Together we’ was launched. The ambition is to, in our decentralized structure, work more closely together cross-divisionally to create synergies and work as one Group heading in the same direction. With a holistic approach, we can better address our customers and make ASSA ABLOY stronger. Employee experience Our aim is to always improve the employee experience and enable a personalized development journey. It should be tailored to everyone’s individual needs and choices, from recruitment and onboarding to development and growth. We strive to support agile working methods by providing collaboration tools and equipment to enable people to work flexibly. Simplicity and agility are valued and we believe in an inclusive working environment, clear feedback and having a workplace that encourages engagement, experimentation and efficiency in everything that we do. Talent management To be a competitive employer, we aim to give people the opportunity to grow in their career and develop their talent within the organization. We encourage an environment where it is easy to move between roles, functions, busi- nesses, divisions and countries. A continuous dialogue between managers and employees, focusing on devel- opment and growth is also encouraged. We strive to offer interesting roles in which employees can make a meaningful contribution to the business, relevant to the employees’ experience, capabilities and interests. Talent management also involves attracting the right people to our organization. With the aim to develop our own talent, we also run several graduate and trainee programs, with the EMEA program being the most developed and longest running. Leadership Our culture needs supportive, trusting and engaging man- agers. This requires managers who are driven and motivated leaders and who can inspire others to share our business vision and goals. Good leaders can lead without formal authority and have the ability to encourage working together within teams and across the Group. We have leadership programs for our managers both at Group and divisional level. The development agenda is built on a leadership framework that guides our shared approach. Its foundation consists of two development programs for senior managers: ASSA ABLOY MMT and ASSA ABLOY IMD. About 620 of the Group’s senior managers from 35 countries have participated in the IMD program since 2005. It includes a customized program, developed in collaboration with the Swiss management school, the International Institute for Management Development (IMD) in Lausanne, with 30 participants per intake. Ethical and social responsibility As an ethical and socially responsible employer, ASSA ABLOY promotes diversity and inclusion. We bring people together to harness diverse perspectives and resources. We are good corporate citizens, act ethically and with integrity, and always comply with laws and regula- tions. Any form of discrimination or harassment in the work- place such as in terms of race, ethnicity, sexual orientation, gender, religion, age, disability, political opinion, and nation- ality, is not tolerated. We work with non-governmental organizations and trade unions, as well as initiating and supporting employee-volunteer activities. Underlying our ethical and social responsibility practices is a culture of visibility and transparency. Health and safety Health and safety is part of our DNA. ASSA ABLOY is com- mitted to provide a safe work environment, which we have worked systematically with for a long time. The Group-wide safety agenda promotes safe behavior, reduces workplace hazards and risk taking, and supports the development of a workplace free of injuries across all operations. Safety training and audits are routine. In 2019, we have continued our progress on key perfor- mance indicators of injury rate and lost days per injury. We have also implemented a safety dialogue workshop globally, focusing on safe behavior in the workplace and our approach to risk taking, which about 30,000 employees participated in during 2019. Digital workplace The digital workplace is our personal productivity tool. It enables employees to organize their work and to have all the workflows and information they need at their fingertips. Its purpose is to make it easy for our people to collaborate with each other as well as with their business partners regardless of where they are in the world. We strive to provide our employees with the best available tools, based on common standards, functionality, perfor- mance and cost, with the aim to seamlessly support their choice of communication channel, such as voice, video, chat or plain exchange of information. The digital workplace must also safeguard the integrity of the data, data storage and the user, and that it follows appli- cable rules and laws on how to collaborate and store data. 26 ASSA ABLOY ANNUAL REPORT 2019 PEOPLE ASSA ABLOY in your daily life Our products are present in your daily life to help you feel safe, secure and experience a more open world. Millions of our sliding, swing and revolving doors have been installed around the world and are daily used billions of times. With our revolving and sliding doors we offer many ways to improve and secure accessibility, safety and convenience in any building. Automatic doors welcome visitors, guide traffic and preserve indoor climate zones with minimized energy loss. Sliding doors are welcoming you with a convenient entrance in many places, including retail stores, hotels, restaurants, train stations, hospitals and offices. ASSA ABLOY ANNUAL REPORT 2019 27 ASSA ABLOY’S DIvISIONS Divisions overview Regional divisions The regional divisions manufacture and sell mechanical and electromechanical locks, digital door locks, cylinders and security doors adapted to the local market’s standards and security requirements. Opening Solutions EMEA Opening Solutions Americas Opening Solutions Asia Pacific P 30 P 31 P 32 Share of sales Share of operating income Share of sales Share of operating income Share of sales Share of operating income 22% 22% 25% 30% 10% 6% emea Americas Asia Financials in brief 2019 Financials in brief 2019 Financials in brief 2019 • Sales: SEK 21,144 M (20,201) with 2% organic • Sales: SEK 23,172 M (19,817) with 7% organic • Sales: SEK 10,689 M (9,949) with growth. growth. –1% organic growth. • Operating income (EBIT): SEK 3,396 M (3,256).1 • Operating margin: 16.1% (16.1).1 • Operating income (EBIT): SEK 4,673 M (3,941).1 • Operating margin: 20.2% (19.9).1 • Operating income (EBIT): SEK 879 M (492).1 • Operating margin: 8.2% (4.9).1 Sales SEK M 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Operating income1 SEK M Sales Operating income1 4,000 3,500 3,000 2,500 2,000 1,500 1,000 15 16 1 17 18 19 Sales SEK M 24,000 22,000 20,000 18,000 16,000 14,000 12,000 Operating income1 SEK M Sales Operating income1 5,000 4,500 4,000 3,500 3,000 2,500 2,000 15 16 1 17 18 19 Sales SEK M 12,000 10,000 8,000 6,000 4,000 2,000 0 Operating income1 SEK M Sales Operating income1 1,500 1,250 1,000 750 500 250 0 15 16 1 17 18 19 Sales Operating income1 Sales Operating income1 Sales Operating income1 1 Excluding items affecting comparability. 1 Excluding items affecting comparability. 1 Excluding items affecting comparability. Sales by product group Sales by product group Sales by product group Säkerhetsdörrar och beslag, 15% Mekaniska lås, låssystem och tillbehör, 54% Elektromekaniska och elektroniska, 31% Mechanical locks, lock systems and fittings, 48% Electromechanical and electronic, 34% Security doors and hardware, 18% Säkerhetsdörrar och beslag, 44% Mekaniska lås, låssystem och tillbehör, 41% Elektromekaniska och elektroniska, 15% Mechanical locks, lock systems and fittings, 38% Electromechanical and electronic, 23% Security doors and hardware, 39% Säkerhetsdörrar och beslag, 29% Mekaniska lås, låssystem och tillbehör, 51% Elektromekaniska och elektroniska, 20% Mechanical locks, lock systems and fittings, 47% Electromechanical and electronic, 24% Security doors and hardware, 29% 28 ASSA ABLOY ANNUAL REPORT 2019 Säkerhetsdörrar och beslagElekromekaniska och elektroniskaMekaniska lås, låssystem och tillbehörSäkerhetsdörrar och beslagElekromekaniska och elektroniskaMekaniska lås, låssystem och tillbehörServiceHotellåsMekaniska lås, låssystem och tillbehörASSA ABLOY’S DIvISIONS Global divisions The global divisions manufacture and sell access solutions, identification products and entrance automation on the global market. Global Technologies P 33 Entrance Systems P 35 Share of sales Share of operating income Share of sales Share of operating income 16% 19% 27% 23% global entre Financials in brief 2019 Financials in brief 2019 • Sales: SEK 15,423 M (11,951) with • Sales: SEK 25,553 M (23,762) with 2% organic 5% organic growth. growth. • Operating income (EBIT): SEK 2,890 M (2,387).1 • Operating margin: 18.7% (20.0).1 • Operating income (EBIT): SEK 3,652 M (3,358).1 • Operating margin: 14.3% (14.1).1 For more key figures see page 61. Sales SEK M 18,000 15,000 12,000 9,000 6,000 3,000 0 Operating income1 SEK M Sales Operating income1 3,000 2,500 2,000 1,500 1,000 500 0 15 16 1 17 18 19 Sales SEK M 26,000 22,000 18,000 14,000 10,000 6,000 2,000 Operating income1 SEK M Sales Operating income1 4,000 3,500 3,000 2,500 2,000 1,500 1,000 15 16 1 17 18 19 Sales Operating income1 Sales Operating income1 1 Excluding items affecting comparability. 1 Excluding items affecting comparability. Sales by product group Sales by product group Passerkontroll, 71% Hotellås, 22% Access solutions, 73% Hotel locks, 20% Service, 7% Service, 7% Produkter, 73% Service, 27% Products, 71% Service, 29% ASSA ABLOY ANNUAL REPORT 2019 29 ServiceHotellåsPasserkontrollServiceProdukterASSA ABLOY’S DIvISIONS Opening Solutions EMEA Good performance in a challenging market environment Highlights • Electromechanical products had a continued good growth. • Cash flow improved strongly with an increase of 25%. Overview EMEA is organized in 12 market regions with divisional head- quarters located in Woking in the UK. The market regions are responsible for manufacturing and selling mechanical and electromechanical locks, hardware and security doors adapted to the local markets’ standards and requirements. The products for the commercial market are sold under the master brand ASSA ABLOY or brands endorsed by ASSA ABLOY, while Yale is the master brand for the residential market, also with endorsed brands. EMEA has about 11,400 employees. The largest market region is Scandinavia, followed by the UK and DACH (Germany, Austria and Switzerland). Financial development The demand in the region was good with an organic sales growth of 2%, with mixed market conditions between the market regions. The growth was strongest in Middle East/ Africa and Eastern Europe, while the UK and France were weaker due to challenging market conditions. The growth in Scandinavia leveled from a high growth level in previous years due to a slower new construction market in Sweden and Norway. Sales of electromechanical products with digital and mobile solutions continued to grow strongly. The net acquired growth was flat at 0% due to the transfer of business from EMEA to Global Solutions. Operating income grew in line with sales and increased by 4% with an operating margin of 16.1% (16.1). Efficiency activities supported the operating margin in a significant way. Cash flow improved strongly and was up 25% (–5), in line with the increased oper- ating income. To maintain our competitive advantage in technology we continued to invest in R&D and the share of new products introduced over the past three years was 26% of total sales. Acquisitions All acquisitions completed during the past three years developed well with strong growth, and their integration has been the primary focus in 2019. Two businesses were trans- ferred from EMEA to Global Solutions: Abloy’s critical infra- structure solutions and Traka, a leading provider of key man- agement systems. The businesses have developed well and the purpose of the transfers is to accelerate the growth on a global scale. Offering: Mechanical and electromechanical locks, digital door locks, security doors and fire doors, as well as hardware. Markets: EMEA is the leader in its product areas in Europe, the Middle East and Africa. The commercial segment accounts for around 60% of sales and the residential segment for 40%. EMEA comprises a large number of Group companies with a good knowledge of their local and in many respects diverse markets. Products are sold primarily through a number of dis- tribution channels, but also directly to end-users. Comment on market trends Neil Vann Executive Vice President and Head of EMEA division What trends have you seen in the market in 2019? We have witnessed a strong uptake of digital products in most markets in the commercial and residential sectors. There has been a growing interest in new services enabled by digital products, including in home delivery and services. Digital transformation has been an important part of 2019 and will continue. This is not just the introduction of new digital products but also the way we do business through new channels and routes to markets. Over the last year, we have seen double digit growth in EMEA e-commerce sales. Which product groups/seg- ments grew mostly and why? Our electromechanical products, both components and access control, have seen pos- itive growth. Investments in resources and platform technol- ogies will provide sustained long-term growth. There has been great success in the Nordics with our Pulse energy harvesting range and we are continuing to develop and expand the product range. Also our CLIQ®, high-security, key-based access control range continues to provide strong double digit growth. We continue to invest in smart residential products and are introducing more innovative smart home security products that allow our customers to connect and control their homes from anywhere at any time. Our new Yale Access system has provided increased functionality and integration with smart home devices. In 2019 we have also renewed our focus on core mechanical products and there has been good growth in our pan- European door closers, cylinder and lock case ranges. What were your main challenges during the year? We have seen swings in demand due to the volatility in emerging markets as well as political insta- bility in others. How does the increased focus on sustainability affect your business? Sustainability is a key driver throughout our value chain and we have a continued focus on innovative products that min- imize the impact on the envi- ronment. We are seeing a rise in investments in green buildings and have recognized that our customers are rapidly turning to and expecting more sustainable, innovative and resilient solu- tions. Sustainability has become an integral part of the product innovation process, using our Sustainability Compass devel- opment tool, which supports the development of new sus- tainable products and customer solutions. 30 ASSA ABLOY ANNUAL REPORT 2019 Opening Solutions Americas ASSA ABLOY’S DIvISIONS Strong growth and margin improvement Highlights • Strong organic growth con- tinued in the US and the total sales for the division increased by 17%. • Cash flow improved strongly by 35% due to increased earnings and working capital improvements. • Yale launched a new Pro Series product line for professional installers with a key-free smart lock. Overview Americas is organized in 15 business areas and market regions with divisional headquarters located in New Haven in the US. In the US it is organized by product category, while the other regions are organized in a country structure. The business areas and market regions are responsible for manu- facturing and selling mechanical and electrometrical locks, hardware, secure lockers, access control devices, security doors and perimeter systems1 adapted to the local markets’ standards and requirements. ASSA ABLOY and Yale are the master brands, with a strong portfolio of endorsed brands. The Americas division has about 9,400 employees. The largest market is the US. Financial development Sales growth was strong and increased by 17%, with organic growth of 7% and acquired growth of 2%. The US market grew strongly despite a more challenging situation with tariffs and a tight labour market. Latin America had a slow development with a weak Mexico and Chile, while Brazil and Colombia were stable. Electromechanical products grew by 38% and mechanical solutions grew by 14% driven by both the com- 1 transferred to Entrance Systems in 2020. mercial and institutional segments, while Perimeter Security was weak. The operating income increased by 19% and the operating margin improved to 20.2% (19.9). Implemented efficiency activities offset the higher raw material costs and contributed to improved operating leverage and earnings. Cash flow was up by 35% and cash conversion was very strong at 113%, driven by working capital improvements. The ratio of new products introduced over the past three years was 27% of total sales. Acquisitions Two acquisitions, Stiles Custom Metal and LifeSafety Power, were completed in the US in 2019. Stiles complements the hollow metal door business and adds a stronger footprint on the US West Coast with a factory in California. Stiles makes it possible to provide the entire package of security and safety products in this region of the US. LifeSafety Power adds a critical component for access solutions and electrometrical products where power connectivity is vital to their operation. Offering: Mechanical and electromechanical locks, digital door locks, cylinders, door fittings, security doors, door frames, access control devices, secure locker and until the end of 2019 high-security fencing and gates. Markets: U.S. Canada, Mexico, Central America and South America. In the US and Canada, ASSA ABLOY has an extensive manufacturing and sales footprint. Institutional and com- mercial customers are the largest end-customer segments and account for 80% of sales, while the private residential segment accounts for 20% of sales. Sales in South America and Mexico are primarily focused on the residential segment, although several verticals in the commercial area have shown significant growth in the past years. Comment on market trends Lucas Boselli Executive Vice President and Head of Americas division What trends have you seen in the market in 2019? Industrial design continues to be at the forefront of our industry. We continue to see more cus- tomization, and decisions driven by aesthetics of the products. Demand for higher security products remains a growth driver throughout North and South America. The migration from mechanical to electrome- chanical continues to be strong, in both commercial and resi- dential markets. While we are in the early days of market pene- tration, we see a lot of upside as the adoption of these technol- ogies accelerates. We continue to invest in the digitalization of our business to position us strongly in this transition. What were your main challenges during the year? The market volatility in the US related to tariffs, an overall slowdown in Latin America, especially in Mexico and unfavourable weather in the US during the first part of the year, which affected our Perimeter Security business. Lastly, a tight labor market in the US and increased healthcare costs impacted our personnel costs. Which product groups/seg- ments grew the most and why? Our core commercial in the US had a very good performance in the region along with the smart residential segment in the US. Both new construction and aftermarket in the US grew nicely, as the new construction was driven by a large con- struction backlog and growth in the west coast and southern part of the United States. After- market growth was driven by upgrades from mechanical to electromechanical across several vertical markets. How does the increased focus on sustainability affect your business? It increases the demand for more advanced and environ- mentally certified products and solutions. We continue to focus on innovation in energy efficient products that contribute to healthier and safer buildings, as well as products that improve the wellbeing of people at work. This has contributed to our growth and, in particular, we will continue to make such invest- ments in providing healthier and more sustainable environments in glass applications and parti- tions in the US and Latin America. ASSA ABLOY ANNUAL REPORT 2019 31 ASSA ABLOY’S DIvISIONS Opening Solutions Asia Pacific Implementation of new strategy in China Highlights • Strong growth for electro- mechanical products with particular strong growth for smart residential products. • The new business plan for China was implemented during the year and the first small results from the actions initiated started to materialize. • The world’s first hydraulic floor hinge with the highest rating of dust and water resistance was launched by Samwha Precision. Overview Asia and Pacific is organized in 12 business areas and market regions with divisional headquarters located in Hong Kong. The organization in China is organized by market segment and the other regions in Asia and Pacific are organized in a region or country structure. The business areas and market regions are responsible for manufacturing and selling mechanical and electrometrical locks, hardware and security doors adapted to the local markets’ standards and require- ments. ASSA ABLOY is used as the master brand for products in commercial markets and Yale is the master brand for the residential market, also with endorsed brands. Asia and Pacific has about 10,600 employees across the region. The largest market by sales is China, followed by Australia and South Korea. Financial development The sales development was stable with organic growth of –1% and acquired growth of 5%. The markets in Pacific had good development despite slower demand in the residential segment. Sales in South Korea decreased due to weak market conditions, while sales in South Asia and India were stable. During the year, the new business plan in China was being implemented according to plan, but sales declined due to the closure of factories and a more selective sales approach. The division´s operating income adjusted for write downs in China 2018 was stable and operating margin decreased to 8.2% (9.0). Cash flow decreased by –23% and the cash conversion rate was at 71%. Growth continued to be strong for electromechanical products and security doors developed well, while sales development for mechanical solutions was stable. The ratio of new products introduced over the past three years was 38% of total sales. Acquisitions Two acquisitions, Spence Doors in Australia and Pacific Door Systems in New Zealand, were completed in 2019. Spence Doors is a leader in Australia for commercial doors with a strong presence in the institutional segment. In line with the change in the market and our strategy of providing the total solution to the market, these acquisitions complement our existing door opening solutions offering to our customers. Offering: Mechanical and electromechanical locks, digital door locks and smart home access solutions, high-security doors, fire doors and hardware. Markets: The Asian countries are predominately emerging markets without established security standards. New con- struction accounts for around three-quarters of sales. In the Chinese market the same types of lock, handle and hardware are often used in both homes and workplaces. The pro- duction units in China also produce for ASSA ABLOY’s other divisions. Australia and New Zealand are mature markets with established lock standards, where renovations and upgrades account for the majority of sales. Comment on market trends Anders Maltesen Executive Vice President and Head of Asia Pacific division What trends have you seen in the market in 2019? Firstly, digital adaptation is accel- erating. The use of digital pay- ments, social media and pene- tration of smart products and solutions in general is increasing. This is also leading to an increased demand for digital access solutions for us. Secondly, the replacement residential market is growing. We have noted that consumers look to the replacement market to upgrade their existing solutions by transitioning from mechanical to smart digital solu- tions. Thirdly, higher standards for security and sustainability are being introduced. Many of the countries in my region are not as regulated as Europe or North America. However, more standards are being introduced, leading to higher requirements both for security and safety as well as for energy efficiency and sustainability. Which product groups/seg- ments grew mostly and why? Smart solutions for the replacement market grew well during the year and this is a segment that we expect to be a growth driver in the future. To get closer to our customers, we opened Yale smart shops in dif- ferent Asia Pacific markets. Yale smart shops allow end-users to experience the benefits of resi- dential smart security solutions. In China, the establishment of a Key Account organization made progress, resulting in many new signed strategic contracts and projects to be delivered over the next 12 months. Our PANPAN resi- dential security & fire doors and Guoqiang window hardware business also grew strongly during the year. What were your main challenges during the year? The global economic and political uncertainties have been challenging. The introduction of trade tariffs, political instabilities and lower construction activ- ities in different markets affect our business, especially in the more mature markets. As technologies change swiftly, it is vital for us to maintain speed in product development, integrate new technologies, and recruit the right talent to meet the rapidly changing demand and customer experiences. How does the increased focus on sustainability affect your business? It is increasing customers’ expectations and demand for energy-saving security solutions such as doors and windows that can help save energy. With the green building trend, security products with Environmental Product Declarations are becoming more important in supporting a building to get accreditation. It also means that we need to work with our own operations, and we continue investing in our facilities across Asia Pacific to be more sus- tainable in relation to water con- sumption, energy and carbon footprint. 32 ASSA ABLOY ANNUAL REPORT 2019 Global Technologies ASSA ABLOY’S DIvISIONS HID Global grew strongly in mobile solutions Highlights • Strong organic growth, driven by our new digital and mobile solutions. • Record year with five acquisi- tions adding SEK 1,300 M in sales. • First project win of student IDs at Clemson University. Overview HID is a global organization and is organized in six business areas with the business segment headquarters located in Austin in the US. The business areas are responsible for global sales and product development in their product area. HID is powering trusted identities of the world’s people, places and things. Its products are used to open doors, access digital networks, personalize badges, verify transac- tions, find information, track assets and connect with others – ensuring that identities are seamlessly accepted, anywhere, anytime. The products and solutions are sold under the master brand HID or by brands endorsed by HID. HID has about 3,900 employees worldwide. The largest business area is Physical Access Control. Financial development HID generated strong organic sales growth in 2019. The ambition to double the revenue for HID is well on track. Sales growth was strong for Secure Issuance and Physical Access Control while growth in Citizen ID and Identity & Access Man- agement was stable. Identification Technology and Extended Access Technologies reported negative sales development. The growth was strong in mature markets, while emerging markets were stable. The growth was strongest for our issuance solutions and was further driven by investments in digital and mobile solutions. Efficiency activities continued and the consolidation of our European shared services and the manufacturing of credentials in Europe to Ireland reached important milestones. Product innovation continued at a high level and we increased our investments in R&D. The share of new products introduced over the past three years was 20% of sales. Several new products and solutions were launched, including the first project win of student IDs at Clemson University in collaboration with Apple. Acquisitions Five acquisitions were completed. The largest acquisition was Placard, the largest secure card manufacturer in Australia. Another acquisition was LUX-IDent, an Eastern European manufacturer of RFID products. The ID Solutions business of De La Rue, with a factory in Malta, was acquired. In addition, two US companies were acquired, the access control company PTI Security Systems and HydrantID, a public key infrastructure service provider. Offering: HID Global is a worldwide leader in trusted identity solutions, dedicated to powering the trusted identities of the world’s people, places and things. Markets: Millions of people around the world use HID products and services to navigate their everyday lives, and over 2 billion things are connected through HID-technology. Customers comprise companies, healthcare, education, financial, government and state institutions. Customers are mainly in the institutional and commercial sectors worldwide. What were your main challenges during the year? The trade barriers and uncer- tainties in that area have been an issue. We have managed to offset most of the tariffs, but the disruptions it caused in the supply chain, and the conversa- tions required with customers have consumed a lot of time in the organization. How does the increased focus on sustainability affect your business? We see a continuous need for more green products. Since our product portfolio consists of either software or electronic products, our focus is mainly on energy savings, either in our own products, or by providing data and information that our cus- tomers can use to optimize their own operations. 33 Which product groups/seg- ments grew mostly and why? Our highest growth area was our Secure Issuance business, which grew on the back of several sig- nificant orders last year, that were delivered in 2019. Our Physical Access Control also continued with strong growth driven by both good market growth and continued invest- ments in new technology such as Mobile Access. In addition, the growth was good in our biometrics products, e-passports, location services, and digital certificates. What trends have you seen in the market in 2019? Overall the market was good in 2019. However, we saw delays and longer decision cycles for larger projects in the second half of the year. In terms of tech- nology adoption, the trends towards more secure creden- tials, mobile credentials, and biometric solutions continued as in previous years. We saw the launch of Apple’s Student ID with our Seos mobile tech- nology based on NFC. We were also a founding member of the new FiRa Consortium together with Samsung, Bosch and NXP, that will drive the use of Ultra- Wideband technology for access and location solutions. Comment on market trends Stefan Widing Executive Vice President and Head of Global Technologies business unit HID Global In January 2020, Björn Lidefelt was appointed as EVP and Head of HID Global following the decision by Stefan Widing to pursue other opportunities outside the Group. ASSA ABLOY ANNUAL REPORT 2019 ASSA ABLOY’S DIvISIONS Global Technologies Global Solutions investing in new verticals Highlights • The new organizational setup with focused verticals con- tributed to strong organic sales growth. • Keyper was acquired, which complements our Traka business. • Vostio Location Solutions was launched, a new distress alarm system for our hospi- tality customers. Overview Global Solutions is a global organization and is organized in six verticals. The verticals are responsible for manufacturing, sales and solution developments for the specific verticals, which are Hospitality, Marine, Senior Care, Education, Critical Infrastructure and Key Management Systems. Its products include electronic locks, safes, credentials and software service. Global Solutions sells its innovative solutions under the master brand of ASSA ABLOY and the brands Traka and Abloy. Global Solutions has about 1,700 employees worldwide. The largest business area is Hospitality, offering check-in and check-out solutions at hotels worldwide. Financial development Global Solutions generated strong organic sales growth in 2019. Sales growth was strong for Marine, Critical Infra- structure, Senior Care and Traka, while the growth was good for Hospitality. Growth was strong in mature markets while growth was good in the emerging markets. The trend with hotels upgrading to mobile key solutions continued to be strong and the recurring revenue from the solutions increased significantly. Further investments were initiated to grow the geographical footprint as well as to develop solutions for the different verticals. Some of the verticals are in an investment phase and in the process to develop their solutions. To maintain the product leadership and the tech- nological advantage, our investments in R&D increased sig- nificantly and will continue. New solutions were introduced and for our hotel customers, we launched a new distress alarm system to meet new requirements in several US states. The ratio of new products introduced over the past three years was at a high level with 33% of total sales. Acquisitions Two acquisitions were completed, KEYper Systems in the US and Secure Edge Technologies in Australia. KEYper comple- ments the product range within intelligent key and asset management solutions offered by traka. KEYper has a strong footprint in the US with suitable offerings for the auto- motive, fleet and property management industries. With the acquisition of Secure Edge Technologies, we strengthened our position in the Pacific region as one of the leading providers of key management systems. Offering: ASSA ABLOY Global Solutions is leading the devel- opment within secure access solutions for hotels, cruise ships, student accommodations, elderly care facilities, key man- agement and critical infrastructure. Markets: ASSA ABLOY Global Solutions’ systems and products are installed in millions of hotel rooms worldwide. Customers are mainly in the institutional and hospitality sectors worldwide. Comment on market trends Christophe Sut Executive Vice President and Head of Global Technologies business unit Global Solutions What trends have you seen in the market in 2019? The positive development con- tinued for our different access solutions that allow our cus- tomers to create value for their businesses. In particular, the demand for our Mobile Access solutions grew very strongly, which is a trend that we expect to continue. Which product groups/seg- ments grew mostly and why? The Hospitality and Marine ver- ticals developed positively, driven by a solution that allows us to improve the guest expe- rience. This was primarily driven by an increase in the number of rooms where the Mobile Access service is being provided. Our focus on providing solu- tions has also allowed us to support our customers with new software- based solutions. In 2019, we launched a new location service solution, which received significant traction in the second half of the year. Senior Care is in an investment phase, where we are capitalizing on the broad tech- nology portfolio in the ASSA ABLOY Group. Managing and providing care to an aging popu- lation is a long-term need. We are, step by step, increasing our market coverage to new coun- tries by enabling our new software to the existing lock platform. Critical Infrastructure is gaining momentum. In 2019 we won a significant project in Australia. At the same time, we had positive interest in some emerging markets, like India, where we see strong potential as the need for reliable infra- structure is growing. What were your main challenges during the year? Global Solutions’ responsibil- ities have grown significantly in 2019. During the year, we com- pleted our new acquisitions at the same time as Traka and Abloy were moved to our global organization from the regional divisions. To integrate these great businesses into our organi- zation while maintaining focus on the core business has been challenging. At the same time, we have accelerated our R&D investments in the existing products and new verticals in order to maintain and grow our leadership. These investments will enable us to grow our business for many years to come. How does the increased focus on sustainability affect your business? Sustainability is very high on the agenda of our customers, par- ticularly our global customers. The Group’s commitment and leadership in sustainability strengthens our competi- tiveness. To even better meet our customers’ sustainability needs and demand for trans- parency, we are currently in the process of obtaining Environ- mental Product Declarations for all our products in the Hospi- tality, Marine and Education business areas. 34 ASSA ABLOY ANNUAL REPORT 2019 Entrance Systems Investing in service organization ASSA ABLOY’S DIvISIONS Highlights • A new organization setup was launched in the end of the year with four business seg- ments: Pedestrian, Industrial, Residential and Perimeter Security. • Investments in the service business generated strong organic sales growth. • Cash flow improved signifi- cantly with an increase of 29% driven by improved working capital. Overview Entrance Systems is a global organization and from 2020 is organized in four business segments: Pedestrian, Industrial, Residential and Perimeter Security. The divisional head- quarters will be located in Switzerland. The business seg- ments are responsible for sales, manufacturing and product development in their specific product areas. Entrance Systems manufactures and sells entrance automation products, services and, from 2020, also perimeter security. The route to the market is both direct and indirect. We go to the market under the master brand ASSA ABLOY in the direct channel and have a number of brands for the indirect channel. Entrance Systems has about 11,300 employees worldwide. The largest business segment is Industrial fol- lowed by Pedestrian. Financial development Sales growth was stable with an organic sales growth of 2% and acquired growth of 1%. Equipment sales growth was strong for Pedestrian, driven by upgrades from retail cus- tomers, while equipment for Industrial was stable. Resi- dential sales growth declined due to weak new construction activity in the US residential market. Our investments in field service started to show results and the growth was strong. Operating income increased by 9% with an improved oper- ating margin of 14.3% (14.1). The operating leverage was strong, supported by efficiency activities. The cash flow increased by 32%, driven by the improved earnings and working capital improvements, and the cash conversion was 100%. Our share of new products introduced over the past three years was 25% of total sales. Acquisitions The most important event was signing an agreement to buy a majority stake in the Swiss pedestrian door company agta record. It is the largest acquisition for the ASSA ABLOY Group since 2011. The acquisition is cleared but subject to anti- trust conditions. In addition, we also acquired Door Control, a US-based distributor in Florida, which strengthened our position in this part of the US market. An acquisition of AM Group in Australia was also announced at end of the year. Offering: Products, service and components in entrance auto- mation. The product range includes automatic swing, sliding and revolving doors, industrial doors, garage doors, high-perfor- mance doors, docking solutions, hangar doors, gate automation, components for overhead sectional doors and sensors. From 2020 the division also includes high security fencing and gates. Markets: Entrance Systems is a global leader with sales worldwide. It has sales companies in 35 countries and distrib- utors in 90 countries. Service operations account for nearly one-third of sales. Comment on market trends Mogens Jensen Executive Vice President and Head of Entrance Systems division On 1 February 2020, Christopher Norbye was appointed as EVP and Head of Entrance Systems. Mogens Jensen is EVP and assumed the new position as Head of Entrance Systems Industrial and Residential Business Segments. ASSA ABLOY ANNUAL REPORT 2019 What trends have you seen in the market in 2019? One of the large trends in the market is connected doors. We have intensively invested in this technology in 2019 and success- fully prototyped the technology. We expect several connected products to be launched in 2020 and they will offer new end user benefits like monitoring of status, less interruption and increase the service level for our customers. Which product groups/seg- ments grew mostly and why? Field service has been a major focus for us in 2019. We have invested in both field service technicians as well as in sales. As a result, we have seen strong growth in 2019 and we will continue to invest in field service in 2020. We have also seen strong growth in large hangar doors, in particular for the airline industry. This is a trend we expect to continue in the coming years. What were your main operational challenges during the year? Since the foundation of Entrance Systems in 2006, we have success fully grown from SEK 3bn to above SEK 25 bn in annual revenue. To enable continued and accelerated growth, we have reviewed our organiza- tional structure at 2019. In the beginning of the year, we merged two of our large business areas, Industrial Door and Docking Solutions with High Performance Doors Solutions to create Industrial Doors business area. As a next step, in October, we announced a new divisional structure around four business segments: Pedestrian, Industrial, Residential and Perimeter Security. The purpose of this structure is to realize further synergies between the different business areas, increased focus on the product areas and to ensure a structure facilitating future growth. Another challenge has been the stagnation of the US resi- dential market, which after strong growth up to 2018 flat- tened out in 2019. Finally, US tariff implementations and market price adjustments have been a challenge, with a lack of predictability. How does the increased focus on sustainability affect your business? In new product development, sustainability is one of our main focus areas. We have launched, amongst others, a high insulated sectional door with an 82mm insulated door panel, which meets the highest customer demands. We are working on several other energy saving products in R&D to launch in the coming years. We believe the increased focus on sustainability will continue and we are committed to develop the right products to follow the market demand. 35 ASSA ABLOY’S DIvISIONS Customer solutions around the world Hotel staff enjoy peace of mind with Vostio Location Solutions HID’s Seos ID technology enables seamless access for students CUSTOMER: Due to international hotel chains being faced with many new guests arriving daily, hotels and resorts can be difficult locations to monitor and ensure a safe workplace at all times. For example, housekeepers or room service attendants frequently must enter guestrooms alone and with little knowledge of what they may encounter. Due to the risk that such employees face, hospitality businesses are stepping up to find solutions that keep staff out of harm’s way, with many local governments also passing laws mandating the presence of such solutions. CHALLENGE: As the industry’s leading innovator of security solutions, ASSA ABLOY Global Solutions sought to leverage its expertise in providing hotel staff with an alert device with distress button in order to request immediate help if danger arises. Working closely together with a customers was required and essential in developing a cost-effective solution that could precisely cater to hotel staff needs and adhere to local ordinances. SOLUTION: vostio Location Solutions, with its Staff Safety portal, utilizes the latest advancements made in cloud, IoT and Bluetooth Low Energy (BLE) technology to ensure the rapid arrival of response teams to the precise location of an emergency by providing room proximity location. Equipping each employee with their own alert device, Staff Safety functions through the presence of BLE-gateways, with the closest gateway receiving an alert signal the moment that a distress button is pressed. CUSTOMER: Clemson University, in South Carolina, US, has around 25,000 students enrolled, studying on an extensive campus with seven colleges. CHALLENGE: Clemson University wanted to make it possible for students, faculty and staff to add their IDs to Apple Wallet and use their iPhone and Apple Watch to access buildings on campus, purchase meals and much more. SOLUTION: To support student IDs in Apple Wallet on iPhone and Apple Watch, HID Global provides Seos-enabled credentials, HID iCLASS SE® and HID OMNIKEY® readers, embedded HID iCLASS SE reader modules, and Corbin Russwin and SARGENT® electronic locks from ASSA ABLOY. Through HID’s support of student IDs in Apple Wallet, Clemson students can seam- lessly access residence halls, libraries and fitness centers, buy lunch, make purchases at the university store, print documents and more by placing their iPhone or Apple Watch near a reader where contactless student ID cards are accepted. Key management hugely improved with SMARTair® access control CUSTOMER: vejle Friskole, Denmark, was founded in 1893 and the school has over 200 students. CHALLENGE: Part of Denmark’s ‘Friskole’ (Free School) ethos involves both parents and students participating in activities outside school hours, which created key man- agement problems especially during weekends. Staff spent a very long time handling keys, approximately 5 hours a week in total. They sought an upgraded access control solution, to save site managers this unnecessary manual workload. SOLUTION: Mechanical keys have been replaced by a SMARTair® access control system. Over 80 doors and cabinets around the school are secured with SMARTair® wireless devices. Now, students, teachers and parents each carry their own key fob, programmed to open only permitted doors. With locking devices tailored to different kinds of opening, everyone at the school can open the doors and cabinets they need with a single programmable fob. SMARTair® is easy for the school to manage. Time-consuming challenges with lost keys and general administration of physical keys have been eliminated. Today, staff spend around 5 minutes a week managing their access system. In addition to making everyday life easier and saving staff time and administration costs, SMARTair® has also increased security. 36 ASSA ABLOY ANNUAL REPORT 2019 ASSA ABLOY’S DIvISIONS New Four Seasons Boston carries distinct ASSA ABLOY touches CUSTOMER: The new Four Seasons Hotel and Private Residences, Boston, US, is a 61-story combined residential and guest facility, complete with 215 hotel rooms and 160 private residences. CHALLENGE: Project designers looked for door hardware to solve a couple of chal- lenges: how to carry the triangular exterior design throughout interior spaces and, implement a state-of-the-art access control system. SOLUTION: Both of these objectives were solved with door hardware from ASSA ABLOY Group brands. Teams from ASSA ABLOY Opening Solutions Americas and ASSA ABLOY Global Solutions collaborated to address each project need. The Opening Solutions team worked with the building architects to create a custom lever to be used on all doorways. A specially designed triangular lever that matched the building’s exterior was completed under a program called SPAR (special application request). ASSA ABLOY design engineers worked with the architects to create an initial lever design that was rendered on a 3D printer, allowing for easy tweaks. This lever is installed on Yale hardware used on all secondary doorways and the vingCard locks found in all hotel room/residence entry doors. Electronic access control is provided by vingCard Essence locks that house all lock components, including the reader and mobile access board, inside the door, creating a minimalistic expression. The lock is mobile access ready and connects to an online system that communicates with guest room thermostats for energy management. Complete dock opening solution for new Aldi distribution center CUSTOMER: Aldi is a German-owned supermarket chain with over 10,000 stores in 20 countries. CHALLENGE: Aldi was opening an all-new distribution center in Turnhout, Belgium. One of many innovations that the supermarket chain wanted was the application of exterior dock levelers. To that end, the client called on the services of a specialist: ASSA ABLOY Entrance Systems. SOLUTION: Interior dock levelers are one of the major bottlenecks for distribution centers. They are very bad for thermal insulation because they cause significant loss of energy. Since Aldi considers sustainability a top priority, interior dock levelers were no longer an option, which led them to opt for the exterior version. In addition to the exterior dock leveler assignment, Aldi also entrusted ASSA ABLOY Entrance Systems with components pertaining to the dock shelters, as well as all sectional doors and a scissor-lift table. This resulted in a significant order containing over 600 elements – including doors, shelters, load houses, buffers and wheel guides. Total solution meets customer’s need for upgrade CUSTOMER: GS Tower, in Seoul, Korea, was completed in 1999 and its design conducted by US architect, SOM. This 38-story building has various facilities including an exhibition hall, offices and a theatre. The customer needed to upgrade its building to be more up-to-date and reduce the need for maintenance. CHALLENGE: As a first phase to improve the 20-year-old facilities, the customer needed to upgrade the access control system. This consisted of components from different suppliers, so whenever an issue occurred, they needed to contact individual suppliers to figure out root causes, and the system always had potential maintenance risks. In this regard, the customer preferred a leading total solution provider to provide a more secure and convenient system. SOLUTION: We began with in-depth meetings with the customer to identify their issues and requirements. Then we proposed the most appropriate solution by offering Corbin Russwin electric mortise locks, Securitron shear locks, and Trimec electric strike, dead bolt, electromagnetic locks for smooth operation in access control. Installation began in late 2019 and the solution will provide security, conven- ience and safety to users as well as an easy maintenance service to facility mangers. ASSA ABLOY ANNUAL REPORT 2019 37 ASSA ABLOY IN THE FUTURE ASSA ABLOY to lead into the future In November 2019 ASSA ABLOY celebrated its 25th anniversary since the Group was founded in 1994 through the merger of Abloy in Finland and ASSA in Sweden. We started our remarkable journey as a traditional Nordic-based lock company and have now evolved into the global leader in access solutions. This is the result of strong growth and innovation, customer focus and efficiency improvements. However, the journey has just begun and the market is constantly changing. This page provides an overview of the evolution of our industry that we expect will continue to shape us and our industry in the next 25 years. Security Digitalization The demand for safety, security and convenient solutions for locks and doors will continue to increase. Secure digital and mobile management of identity and authentication will be broadly used in order to determine who should have access when, where and how. Flexible and modular identification technology platforms will serve the ecosystems and connect products and services – such as homes, devices, cars, robots, shipping containers, traffic systems and transport systems. In the future, electromechanical solutions will be the mainstream both in the commercial as well as in the residential segments. Connected resi- dential and industrial devices and machines – enabling the identification, communication, control and monitoring of functions and production of the things connected – will be broadly used and applied. In the retail segment, digital access solutions will enable smart-home applications, efficient home deliveries, home services, care and other services. Mechanical locks Sustainability Mechanical locks will remain an important part of our core business. Although door opening methods are changing, in future our competence in mechanical locks will be a valid and competitive asset. Our innovation over the next ten years is expected to cover both the development of conventional mechanical locks as well as highly complex software platforms for our electromechanical solutions. Sustainable innovation will enable us to reduce the embodied carbon footprint of our products, use materials with a higher recycled content, while reducing energy in use through energy efficiency and energy har- vesting. We consider circular economy principles to extend the useful life and upgradeability of our products, while ensuring maximum recycla- bility of our products at end of life. Connected products Trusted identities Data analysis will be broadly used as a cost efficiency tool, and as a tool to analyze security and energy needs. The use of connected components including microphones, thermostats, cameras and different type of sensors will be common. In the aftermarket, remote service and self healing fea- tures are likely to be mainstream, partly supported by design to improve service access and by cloud-based ‘as a service’ solutions. The usage of trusted IDs that integrate security, privacy and convenience will be common. The level of security and privacy will be high, and the ID is likely to be identical to the person using the access solution. We will have solutions and services to manage the lifecycle of the ID of a person, all the way from the creation of the ID to the termination of it. 38 ASSA ABLOY ANNUAL REPORT 2019 Report of the Board of Directors and Financial statements Contents Report of the Board of Directors Significant risks and risk management Corporate governance Board of Directors Executive Team Internal control – financial reporting Remuneration guidelines for senior executives Consolidated financial statements Sales and income Consolidated income statement Consolidated statement of comprehensive income Comments by division Results by division Financial position Consolidated balance sheet Cash flow Consolidated statement of cash flows Changes in consolidated equity Parent company financial statements Income statement – Parent company Statement of comprehensive income – Parent company Balance sheet – Parent company Cash flow statement – Parent company Change in equity – Parent company 40 42 46 50 52 55 56 58 58 59 59 60 61 62 63 64 65 66 67 67 67 67 68 68 Notes 1 Significant accounting and valuation principles 2 Sales revenue 3 Auditors’ fees 4 Other operating income and expenses 5 Share of earnings in associates 6 Leases 7 Expenses by nature 8 Depreciation and amortization 9 Exchange differences in the income statement 10 Financial income 11 Financial expenses 12 Tax on income 13 Earnings per share 14 Intangible assets 15 Property, plant and equipment 16 Right-of-use assets 17 Shares in subsidiaries 18 Investments in associates 19 Deferred tax 20 Other financial assets 21 Inventories 22 Trade receivables 23 Parent company’s equity 24 Share capital, number of shares and dividend per share 25 Post-employment employee benefits 26 Other provisions 27 Other current liabilities 28 Accrued expenses and deferred income 29 Assets pledged against liabilities to credit institutions 30 Contingent liabilities 31 Cash flow items 32 Reserves 33 Business combinations 34 Employees 35 Financial risk management and financial instruments Comments on five years in summary Five years in summary Definitions of key ratios Proposed distribution of earnings Auditor’s report 69 75 76 76 76 76 77 77 77 77 77 77 77 78 80 80 81 81 82 82 82 82 82 82 83 85 85 85 85 85 85 85 86 87 88 94 95 96 97 98 ASSA ABLOY ANNUAL REPORT 2019 39 REPORT OF THE BOARD OF DIRECTORS Report of the Board of Directors The Annual Report of ASSA ABLOY AB (publ.), corporate identity number 556059-3575, contains the consolidated financial statements for the fiscal year January 1 through December 31, 2019. ASSA ABLOY is the global leader in access solutions, dedicated to satisfying end-user needs for security, safety and convenience. Significant events Sales and income Sales increased by 12 percent and totaled SEK 94,029 M (84,048). The increase consisted of organic growth of 3 per- cent (5), acquired growth of 3 percent (4) and discontinued growth of 0 percent (–2). The exchange rate impact on sales was 6 percent (3). Operating income (EBIT) excluding items affecting com- parability increased by 16 percent to SEK 14,920 M (12,909), equivalent to an operating margin of 15.9 percent (15.4). Impairment of operating assets within Asia Pacific reduced operating income in 2018 by SEK 400 M. Items affecting comparability relate to impairment of goodwill and other intangible assets in 2018 of SEK 5,595 M and costs for the new restructuring program that was launched at the end of 2018 of a total of SEK 1,530 M before taxes, of which SEK 312 M was expensed in 2019. Net financial items were SEK –1,037 M (–799). Income before tax excluding items affecting comparability totaled SEK 13,883 M (12,110), an increase of 15 percent. Operating cash flow increased by 27 percent to SEK 14,442 M (11,357). Earnings per share after full dilution, excluding items affect- ing comparability, increased 14 percent to SEK 9.22 (8.09). Restructuring The activity level in the new restructuring program that was launched in late 2018 has been high during the year. About fifty closures of plants and offices are planned over a three- year period and some production will be outsourced, while automation will continue. The total cost of the program is estimated at SEK 1,530 M before tax and was expensed in its entirety in 2018 and 2019. The payback period is expected to be less than three years. Activities related to the previous programs continued with effective cost-cutting measures during the year. In 2019, 1,367 employees left the Group in conjunction with restructuring of the production and office organization. Five plant closures were implemented during the year, along with a number of other restructuring activities, including conversion from production to final assembly in production units. The Group is increasingly concentrating production to its own plants in Asia, Central Europe and Eastern Europe, as well as to outsourcing to external suppliers in low-cost countries. Payments for the restructuring programs totaled SEK 726 M (793) for the year. At year-end 2019, the remaining provi- sions for restructuring measures amounted to SEK 778 M (1,190). Organization A new organizational structure was implemented beginning in 2020 in the Entrance Systems division aimed at facilitating continued accelerated sales growth. Four business segments have been created within the division: Pedestrian, Industrial, Residential and Perimeter Security. Perimeter Security was previously part of the Americas division and was moved to Entrance Systems with the aim of creating new growth opportunities. Operations were transferred between divisions during the year, primarily from EMEA to the business unit Global Solu- tions in the Global Technologies division, with the aim of increasing long-term growth and leveraging existing syner- gies. Sales on an annual basis for the operations that were transferred from other divisions to Global Technologies during the year totaled about SEK 1,000 M. The transfer of operations has been recognized, from the time of the transfer, as internal acquisitions/divestments between the divisions without any retroactive financial translation. Acquisitions and divestments In March 2019 ASSA ABLOY announced that it has signed an agreement for the acquisition of 54 percent of the shares in agta record, a well-established manufacturer and service organization for entrance automation. The company has about 2,600 employees and its sales in 2018 totaled about SEK 3.9 billion. After the acquisition ASSA ABLOY will own about 93 percent of votes and share capital in the company and will subsequently submit an official offer for the remain- ing shares. The acquisition is subject to regulatory approval and is expected close in 2020. The purchase price for the acquisition of 54 percent of the shares amounts to approxi- mately EUR 502 M. As part of the transaction, ASSA ABLOY’s existing holdings in agta record of 39 percent, a shareholding in an associated company, will be revalued at market value through profit or loss at the closing of the acquisition. The expected non-cash revenue in operating income in 2020 amounts to about SEK 2 billion. In February 2019 ASSA ABLOY acquired KEYper Systems, a leading US supplier of electronic and mechanical authoriza- tion systems for keys. The acquisition strengthens the Group’s position in the automotive segment. The company is headquartered in North Carolina, US. In September 2019 ASSA ABLOY acquired LifeSafety Power, a leading US supplier of smart integrated power supply solutions. The acquisition strengthens ASSA ABLOY’s position in access control solutions. The company is head- quartered in Illinois, US. In September 2019 ASSA ABLOY acquired Placard, Australia’s largest secure card manufacturer. The acquisition strengthens ASSA ABLOY’s market position in smart cards in the Pacific region thanks to its large customer base. The company is headquartered in Melbourne, Australia. 40 ASSA ABLOY ANNUAL REPORT 2019 In October 2019 ASSA ABLOY acquired the international identity solutions business of De La Rue, a leading passport manufacturer based in the UK. The acquisition strengthens ASSA ABLOY’s market position through an expanded offering within digital citizen ID solutions. The operation is head- quartered in Basingstoke, UK. In November 2019 ASSA ABLOY announced that it signed an agreement to acquire AM Group, an Australian manufac- turer of industrial doors within entrance automation. The company, which specializes in innovative entrance automa- tion, is a good complement to ASSA ABLOY’s geographic coverage in Australia. The company is headquartered in Sydney, Australia. The acquisition is subject to regulatory approval and is expected close during the first quarter of 2020. Other noteworthy acquisitions during the year include Spence Doors, a leading manufacturer of doors for the commercial market in Australia. The total purchase price of acquisitions of businesses during the year, including adjustments for acquisitions from previous years, was SEK 3,813 M and the acquisition analyses indicate that goodwill and other intangible assets with an indefinite useful life amounted to SEK 3,026 M. Estimated deferred considerations totaled SEK 249 M. Additional acquisitions of non-controlling interests occurred during the year for SEK 19 M (229). Research and development ASSA ABLOY’s expenditure on research and development during the year totaled SEK 3,566 M (2,893), equivalent to 3.8 percent (3.4) of sales. The pace of innovation remained high throughout the year, in areas such as digital and mobile solutions, products with increased sustainability and energy-saving products. New products launched in the past three years accounted for 27 percent of sales for the year. Sustainable development A number of ASSA ABLOY units outside Sweden carry on licensable activities and hold equivalent licenses under local legislation. ASSA ABLOY’s units worldwide are working sys- tematically and purposefully to reduce their environmental impact. In accordance with the Swedish Annual Accounts Act, Chapter 6. Section 11, ASSA ABLOY opted to prepare the Sustainability Report as a separate report from the Annual Report. The Sustainability Report has been submitted to the auditor at the same time as the Annual Report. The 2019 Sustainability Report, reporting on the Group’s prioritized environmental activities and providing other information on sustainable development, is available on the company’s website, assaabloy.com. REPORT OF THE BOARD OF DIRECTORS Internal control and financial reporting ASSA ABLOY’s internal audit and internal control functions have dedicated internal auditors employed in all divisions. More reviews were conducted in recent years, and work con- tinued during the year to strengthen internal control and compliance in the business in general. Special emphasis has been placed on financial reporting and internal control com- pliance issues related to the internal control framework that has been in effect for some time. Tax matters In 2015 the Finnish Tax Administration decided not to allow tax deductions for interest expenses in the Finnish opera- tions for the years 2008–2012. The decision was appealed to a higher court. In 2017, the earlier decision was reconsidered to ASSA ABLOY’s advantage, but the decision was appealed by the Finnish tax authority. In 2019, the earlier decision was reconsidered once again and this time to ASSA ABLOY’s disadvantage. The total tax exposure is expected to amount to around SEK 920 M, of which SEK 740 M was paid in 2019. The deci- sion was appealed to a higher court. Overall, the decision had no material effect on the Group’s tax expense for 2019. Transactions with related parties No transactions occurred between ASSA ABLOY and related parties that significantly affected the company’s financial position and performance. Significant events after the financial year-end No significant events occurred after the financial year-end and up to the date of adoption of the Annual Report for ASSA ABLOY AB. Proposed distribution of earnings The Board of Directors and the President propose that the 2020 Annual General Meeting should approve a dividend of SEK 3.85 (3.50) per share, representing an increase of 10 per- cent. The proposal for profit distribution can be found in its entirety on page 97 of the Annual Report. Outlook Long-term outlook ASSA ABLOY anticipates an increase in demand for security solutions in the long term. A focus on customer value and innovations as well as leverage on ASSA ABLOY’s strong position will accelerate growth and increase profitability. Organic sales growth is expected to continue at a good rate. The operating margin (EBIT) and operating cash flow are expected to develop well. ASSA ABLOY ANNUAL REPORT 2019 41 REPORT OF THE BOARD OF DIRECTORS Significant risks and risk management Risk management Uncertainty about future developments and the course of events is a natural risk for any business. Risk-taking in itself provides opportunities for continued economic growth, but naturally the risks may also have a negative impact on busi- ness operations and company goals. It is therefore essential to have a systematic and efficient risk assessment process and an effective risk management program in general. The purpose of risk management at ASSA ABLOY is not to avoid risks, but to take a controlled approach to identifying, man- aging and minimizing the effects of these risks. This work is based on an assessment of the probability of the risks and their potential impact on the Group. ASSA ABLOY is an international Group with a wide geo- graphical spread, involving exposure to various forms of stra- tegic, operational and financial risks. Strategic risks refer to changes in the business environment with potentially signifi- cant effects on ASSA ABLOY’s operations and business objec- tives. Operational risks comprise risks directly attributable to business operations, entailing a potential impact on the Group’s financial position and performance. Financial risks mainly comprise financing risk, currency risk, interest rate risk, credit risk, and risks associated with the Group’s pension obligations. Organization ASSA ABLOY’s Board of Directors has overall responsibility for risk management within the Group and determines the Group’s strategic focus based on recommendations from the Executive Team. In view of the decentralized structure of ASSA ABLOY, and to keep risk analysis and risk management as close as possible to the actual risks, a large proportion of operational risk management takes place at division and business unit levels. Responsibility ASSA ABLOY’s Board of Directors has overall responsibility for the Group’s strategic direction in close consultation with the Executive Team. Divisions and business units have overall responsibility for management of operational risks, in accordance with the ASSA ABLOY’s decentralized approach to organization, responsibility and authority. In the case of financial risks, allocation of responsibilities and control of the Group’s financing activities are regulated in a financial policy adopted by the Board of Directors. Treasury then has the main responsibility for financial risks within the frame- work established in the financial policy, with the exception of credit risks relating to operational business activities, which are managed locally at company level and monitored at divi- sion level. Review process Strategic risks, such as competitors, brand positioning and so on, are regularly reviewed at ASSA ABLOY AB’s board meet- ings. The Group’s operational risk management is continu- ously monitored by the Executive Team through divisional reporting and divisional board meetings. For further infor- mation on monitoring and management of operational risks, see page 44. Financial operations are centralized in a Treasury function, which manages most financial transactions as well as finan- cial risks with a Group-wide focus. ASSA ABLOY’s Treasury monitors the Group’s short- and long-term financing, finan- cial cash management, currency risk and other financial risk management. 42 ASSA ABLOY ANNUAL REPORT 2019 REPORT OF THE BOARD OF DIRECTORS ASSA ABLOY’s risks STRATEGIC RISKS OPERATIONAL RISKS FINANCIAL RISKS Changes in the business environment with potentially significant effects on opera- tions and business objectives. Risks directly attributable to business oper- ations with a potential impact on financial position and performance. • Country-specific risks • Customer behavior • Competitors • Brand positioning • Reputational risk • Legal risks • Environmental risks • Tax risks • Acquisition of new businesses • Restructuring measures • Price fluctuations and availability of raw materials • Credit losses • Insurance risks • Risks relating to internal control Financial risks with a potential impact on financial position and performance. • Financing risk • Currency risk • Interest rate risk • Credit risk • Risks associated with pension obligations Strategic risks The risks of this nature encountered by ASSA ABLOY include various forms of business environment risks with an impact on the security market in general, mainly changes in cus- tomer behavior, competitors and brand positioning. In addi- tion, there are country-specific risks. Country-specific risks ASSA ABLOY has global market penetration, with sales and production in a large number of countries. The emphasis is on western Europe and North America, but the proportion of sales in Asia and in central and eastern Europe has increased in recent years. Consequently, the Group has increased expo- sure to the emerging markets, which may entail a higher risk profile for country-specific risks in the form of inadequate compliance, policy decisions, overall changes in regulations and more. Customer behavior Changes in customer behavior in general and the actions of competitors affect demand for different products and their profitability. Customers and suppliers, including the Group’s relationships with them, are subject to continuous local review. Competitors As regards competitors, risk analyses are carried out both centrally and locally. Brand positioning The Group owns a number of the strongest brands in the industry, including several global brands that complement the ASSA ABLOY master brand. Local product brands are gradually being linked increasingly to the master brand. Reputational risk Activities to maintain and further strengthen ASSA ABLOY’s good reputation are constantly ongoing. These include ensuring compliance with ASSA ABLOY’s Code of Conduct for employees and the Code of Conduct for business part- ners. These codes express the Group’s values with regard to matters such as business ethics, human rights and working conditions, as well as the environment, health and safety. Operational risks Operational risks comprise risks directly attributable to busi- ness operations, with a potential impact on the Group’s financial position and performance. They include legal and environmental risks, tax risks, acquisition of new businesses, restructuring measures, availability and price fluctuations of raw materials, and credit losses. Risks relating to compliance with laws and regulations and to internal control and finan- cial reporting are also included in this category. See page 44 for a more detailed description of the management of these risks. ASSA ABLOY ANNUAL REPORT 2019 43 REPORT OF THE BOARD OF DIRECTORS Significant risks and risk management ASSA ABLOY’s operational risks and risk management Operational risks Risk management Comments Legal risks Environmental risks The Group continuously monitors anticipated and implemented changes in legislation in the countries in which it operates. Ongoing and potential dis- putes and other legal matters are reported regularly to the Group’s central legal function. Policies and guidelines on compliance with applicable competition, export control, anti- corruption and data protection legislation have been implemented. Ongoing and potential environmental risks are regularly monitored in the operations. External expertise is brought in for environmental assess- ments when necessary. Tax risks Ongoing and potential tax cases are regularly reported to the Group’s central tax function. Acquisition of new businesses Restructuring measures The restructuring programs mainly entail some production units changing direction prin- cipally to final assembly, while certain units are closed. Price fluctuations and availabil- ity of raw materials Credit losses Insurance risks Risks relating to internal control Acquisitions are carried out by a number of people with considerable acquisition experience and with the support of, for example, legal and financial consultants. Acquisitions are carried out according to a uniform and predefined Group-wide process. This consists of four documented phases: strategy, evaluation, implementation and integration. The restructuring programs are carried on as a series of projects with stipulated activities and schedules. The various projects in the respective restructuring program are systematically monitored on a regular basis. Raw materials are purchased and handled primarily at division and business unit level. Regional com- mittees coordinate these activities with the help of senior coordinators for selected material com ponents. Trade receivables are spread across a large number of customers in many markets. No individual customer in the Group accounts for more than 1 percent of sales. Commercial credit risks are managed locally at company level and monitored at division level. A Group-wide insurance program is in place, mainly relating to property, business interruption and lia- bility risks. This program covers all business units. The Group’s exposure to the risk areas listed above is regulated by means of its own captive insurance company. The organization is considered to be relatively trans- parent, with a clear allocation of responsibilities. A well-established Controller organization at both division and Group level monitors financial report- ing quality. Instructions about the allocation of responsibilities, authorization and procedures for ordering, sourcing and plant management are laid down in an inter- nal control manual. Compliance is evaluated annu- ally for all operating companies, combined with an action plan for concrete improvements. An annual internal audit of financial reporting is performed for selected Group companies on a rotating basis. At year-end 2019, there are considered to be no outstanding legal disputes that may lead to significant costs for the Group. Prioritized environmental activities and other information on sustainable development are reported in the Group’s Sustainability Report. At year-end 2019, there are considered to be no ongoing tax cases with a significant impact on the Group’s earnings. The outcome of a tax case decision in Finland during the year was to ASSA ABLOY’s disadvantage. For further information see the Report of the Board of Directors. During the year, acquisition activity continued to be high at ASSA ABLOY, with acquisitions of several businesses. The Group’s acquisitions in 2019 are reported in greater detail in the Report of the Board of Directors and in Note 33, Business combinations. A new restructuring program was launched at the end of 2018 involving the closure of about fifty factories and offices. The program was expensed in 2018 and 2019. The scope, costs and savings of the restructuring programs are presented in more detail in the Report of the Board of Directors. For further information about procurement of materials, see Note 7, Expenses by nature. Receivables from each customer are relatively small in relation to total trade receivables. The risk of significant credit losses for the Group is considered to be limited, but has increased in pace with the Group’s expansion in recent years in emerging markets. The Group’s insurance cover is considered to be generally adequate, providing a reasonable balance between assessed risk exposure and insurance costs. ASSA ABLOY’s internal audit and internal con- trol functions have dedicated internal auditors employed in all divisions. More reviews were conducted in recent years. Internal control and other related issues are reported in more detail in the Report of the Board of Directors, section on Corporate governance. Further information on risk management relat- ing to financial reporting can be found in the Report of the Board of Directors, section on Corporate governance. See also the section ‘Basis of preparation’ in Note 1. 44 ASSA ABLOY ANNUAL REPORT 2019 Financial risks The Group’s financial risks mainly comprise financing risk, currency risk, interest rate risk, credit risk, and risks associ- ated with the Group’s pension obligations. A large number of financial instruments are used to manage these risks. Accounting principles, risk management and risk exposure are described in more detail in Notes 1 and 35, as well as Note 25, Post-employment employee benefits. Financing risk Financing risk refers to the risk that financing the Group’s capital requirements and refinancing outstanding loans become more difficult or more expensive. It can be reduced by maintaining an even maturity profile for borrowing and a solid credit rating. The risk is further reduced by substantial unutilized confirmed credit facilities. Currency risk Since ASSA ABLOY sells its products in countries worldwide and has companies in a large number of countries, the Group is exposed to the effects of exchange rate fluctuations. These fluctuations affect Group earnings when the income state- ments of foreign subsidiaries are translated to Swedish kronor (translation exposure), and when products are exported and sold in countries outside the country of production (transaction exposure). Translation exposure is primarily related to earnings in USD and EUR. This type of exposure is not hedged. Currency risk in the form of transaction expo- sure, i.e. the relative values of exports and imports of goods, is expected to increase over time due to rationalization of production and sourcing. In accordance with financial policy, the Group only hedged a very limited part of current cur- rency flows in 2019. As a result, exchange rate fluctuations had a direct impact on business operations. Exchange rate fluctuations also affect the Group’s debt-equity ratio and equity. The difference between the assets and liabilities of foreign subsidiaries in the respective foreign currency is affected by exchange rate fluctuations and causes a translation difference, which affects the Group’s comprehensive income. A general weakening of the Swedish krona leads to an increase in net debt, but at the same time increases the Group’s equity. At year-end, the largest foreign net assets were denominated in USD and EUR. REPORT OF THE BOARD OF DIRECTORS Interest rate risk With respect to interest rate risks, interest rate changes have a direct impact on ASSA ABLOY’s net interest expense. The net interest expense is also impacted by the size of the Group’s net debt and its currency composition. Net debt was SEK 33,050 M (29,246) at year-end 2019. Debt was mainly denominated in USD and EUR. Group Treasury analyzes the Group’s interest rate exposure and calculates the impact on income of interest rate changes on a rolling 12-month basis. In addition to raising variable-rate and fixed-rate loans, various interest rate swaps are used to adjust interest rate sensitivity. Credit risk Credit risk arises in ordinary business activities and as a result of financial transactions. Trade receivables are spread across a large number of customers, which reduces credit risk. Credit risks relating to operational business activities are managed locally at company level and monitored at division level. Financial risk management exposes ASSA ABLOY to certain counterparty risks. Such exposure may arise, for example, as a result of the placement of surplus cash, bor- rowings and derivative financial instruments. Counterparty limits are set for each financial counterparty and are con- tinuously monitored. Pension obligations At year-end 2019, ASSA ABLOY had obligations for pensions and other post-employment benefits of SEK 9,530 M (8,107). The Group manages pension assets valued at SEK 6,184 M (5,227). Provisions in the balance sheet for defined benefit and defined contribution plans and post-employment medi- cal benefits totaled SEK 3,346 M (2,880). Changes in the value of assets and liabilities from year to year are due partly to the development of equity and interest rate markets and partly to the actuarial assumptions made. Significant remeasurement of obligations and plan assets is recognized on a current basis in the balance sheet and in other compre- hensive income. The assumptions made include discount rates and anticipated inflation and salary increases. ASSA ABLOY ANNUAL REPORT 2019 45 REPORT OF THE BOARD OF DIRECTORS Corporate governance ASSA ABLOY AB is a Swedish public limited liability company with registered office in Stockholm, Sweden, whose Series B share is listed on Nasdaq Stockholm. ASSA ABLOY’s corporate governance is based on the Swed- ish Companies Act, the Annual Accounts Act, Nasdaq Stock- holm’s Rule Book for Issuers and the Swedish Corporate Gov- ernance Code (the Code), as well as other applicable external laws, rules and regulations, and internal rules and regulations. This Corporate Governance Report has been prepared as part of ASSA ABLOY’s application of the Code. ASSA ABLOY follows the Code’s principle to “comply or explain” and in 2019 ASSA ABLOY has one deviation to explain. The Nomina- tion Committee deviates from Rule 2.4 of the Code in that the Vice Chairman of the Board of Directors, Carl Douglas (Investment AB Latour), is also the Chairman of the Nomina- tion Committee. The reason for this deviation is that the major shareholders consider it to be important to have the representative from the largest shareholder as Chairman of the Nomination Committee. The Corporate Governance Report is examined by ASSA ABLOY’s auditor. ASSA ABLOY’s objective is that its activities should gener- ate good long-term returns for its shareholders and other stakeholders. An effective scheme of corporate governance for ASSA ABLOY can be summarized in a number of interact- ing components, which are described below. Corporate governance structure Shareholders 3 9 5 6 Nomination Committee Auditor Remuneration Committee Audit Committee 1 2 4 7 7 8 General Meeting Board of Directors CEO Executive Team Divisions Important external rules and regulations • Swedish Companies Act • Annual Accounts Act • Nasdaq Stockholm’s Rule Book for Issuers • Swedish Corporate Governance Code (www.bolagsstyrning.se) Important internal rules and regulations • Articles of Association • Board of Directors’ rules of procedure • Financial Policy • Accounting Manual • Communication Policy • Insider Policy • Internal control procedures • Code of Conduct and Anti-Bribery Policy At year-end 2019, ASSA ABLOY had 29,784 share- 1 Shareholders holders (31,143). ASSA ABLOY’s principal shareholders are Investment AB Latour (9.5 percent of the share capital and 29.4 percent of the votes) and Melker Schörling AB (3.1 per- cent of the share capital and 10.9 percent of the votes). For- eign shareholders accounted for 69.5 percent (70.5) of the share capital and 47.5 percent (48.1) of the votes. The ten largest shareholders accounted for 36.5 percent (36.9) of the share capital and 56.7 percent (56.9) of the votes. For further information on shareholders, see page 103. ASSA ABLOY’s Articles of Association contains a pre- emption clause for owners of Series A shares regarding shares of Series A. A shareholders’ agreement exists between the Douglas and the Schörling families and their related companies that includes an agreement on right of first refusal if any party disposes of Series A shares. The Board of Directors of ASSA ABLOY is not aware of any other share- holders’ agreements or other agreements between share- holders in ASSA ABLOY. Share capital and voting rights ASSA ABLOY’s share capital at the end of 2019 amounted to SEK 370,858,778 distributed among a total of 1,112,576,334 shares, comprising 57,525,969 Series A shares and 1,055,050,365 Series B shares. The total number of votes amounted to 1,630,310,055. Each Series A share carries ten votes and each Series B share one vote. All shares have a par value of around SEK 0.33 and give shareholders equal rights to the com pany’s assets and earnings. Repurchase of own shares Since 2010, the Board of Directors has requested and received a mandate from the Annual General Meeting to repurchase and transfer ASSA ABLOY Series B shares. The aim has been, among other things, to secure the company’s undertakings in connection with its long-term incentive programs (LTI). The 2019 Annual General Meeting authorized the Board of Directors to acquire, during the period until the next Annual General Meeting, a maximum number of Series B shares so 46 ASSA ABLOY ANNUAL REPORT 2019 that after each repurchase ASSA ABLOY holds a maximum 10 percent of the total number of shares in the company. ASSA ABLOY holds a total of 1,800,000 (1,800,000) Series B shares after repurchases. These shares account for around 0.2 percent (0.2) of the share capital and each share has a par value of around SEK 0.33. The purchase consideration amounted to SEK 103 M (103). No shares were repurchased in 2019. Share and dividend policy ASSA ABLOY’s Series B share is listed on the Nasdaq Stock- holm Large Cap. At the end of 2019, ASSA ABLOY’s market capitalization amounted to SEK 243,654 M, calculated on both Series A and Series B shares. The Board of Directors’ objective is that, in the long term, the dividend should be equivalent to 33–50 percent of income after standard tax, but always taking into account ASSA ABLOY’s long-term financing requirements. 2 General Meeting Shareholders’ rights to decide on the affairs of ASSA ABLOY are exercised at the General Meeting. Shareholders who are registered in the share register on the record date and have duly notified their intent to attend are entitled to take part in the General Meeting, either in person or by proxy. Resolutions at the General Meeting are normally passed by simple majority. For certain matters, however, the Swedish Companies Act prescribes that a proposal should be supported by a higher majority. Individual shareholders who wish to submit a matter for consideration at the General Meeting can send such request to ASSA ABLOY’s Board of Directors at a special address published on the company’s website well before the Meeting. The Annual General Meeting should be held within six months of the end of the company’s financial year. Matters considered at the Annual General Meeting include: dividend; adoption of the income statement and balance sheet; dis- charge of the members of the Board of Directors and the CEO from liability; election of members of the Board of Directors, Chairman of the Board of Directors and auditor; and determination of remuneration guidelines for senior executives and fees for the Board of Directors and auditor. An Extraordinary General Meeting may be held if the Board of Directors considers this necessary or if ASSA ABLOY’s auditor or shareholders holding at least 10 percent of the shares so request. 2019 Annual General Meeting The Annual General Meeting was held in April 2019 at Moderna Museet (Museum of Modern Art), Skeppsholmen, Stockholm, and was attended by shareholders representing 47.6 percent of the share capital and 64.3 percent of the votes. The Annual General Meeting’s resolutions included the following. • Dividend of SEK 3.50 per share. • Lars Renström, Carl Douglas, Eva Karlsson, Birgitta Klasén, Lena Olving, Sofia Schörling Högberg and Jan Svensson were re-elected as members of the Board of Directors. Further, Lars Renström was re-elected as Chairman of the Board of Directors, and Carl Douglas was re-elected as Vice Chairman. • PricewaterhouseCoopers AB was re-appointed as the company’s auditor. • Remuneration of the Board of Directors. • Remuneration guidelines for senior executives. • Authorization to the Board of Directors regarding repur- chase and transfers of own Series B shares. • A long-term incentive program for senior executives and other key employees in the Group (LTI 2019). REPORT OF THE BOARD OF DIRECTORS For more information about the Annual General Meeting, including the minutes, please see ASSA ABLOY’s website assaabloy.com. 2020 Annual General Meeting ASSA ABLOY’s next Annual General Meeting will be held at Moderna Museet (Museum of Modern Art), Skeppsholmen, Stockholm at 3:30 p.m. on 29 April 2020. According to the instructions for the Nomination 3 Nomination Committee Committee adopted at the 2018 Annual General Meeting, the Nomination Committee shall be composed of represent- atives of the five largest shareholders in terms of voting rights registered in the shareholders register maintained by Euroclear Sweden AB as of 31 August the year before the Annual General Meeting who wish to participate on the Nomination Committee. The Nomination Committee prior to the 2020 Annual General Meeting comprises Carl Douglas (Investment AB Latour), Mikael Ekdahl (Melker Schörling AB), Shireesh Vasupalli (GIC Pte Ltd), Marianne Nilsson (Swedbank Robur funds) and Liselott Ledin (Alecta). Carl Douglas is Chairman of the Nomination Committee. Should the ownership struc- ture change, the composition of the Nomination Committee may change to reflect such changes. The Nomination Committee has the task of preparing, on behalf of the shareholders, proposals regarding the election of Chairman of the General Meeting; members of the Board of Directors, Chairman of the Board, Vice Chairman of the Board; auditor; fees for the board members including division between the Chairman, Vice Chairman and the otherboard members, as well as fees for committee work; fees to the company’s auditor, and any changes of the instructions for the Nomination Committee. The Audit Committee assists the Nomination Committee in work associated with the proposal regarding appointment of the external auditor. Prior to the 2020 Annual General Meeting, the Nomination Committee makes an assessment of whether the current Board of Directors is appropriately composed and fulfills the requirements imposed on the Board of Directors by the company’s present situation and future direction. The annual evaluation of the Board of Directors and its work is part of the basis for this assessment. Moreover, the Nomination Committee applies ASSA ABLOY’s diversity policy for the Board of Directors, which is based on Rule 4.1 of the Code, when preparing its proposal for election of members of the Board of Directors. The search for suitable board members is carried on throughout the year and proposals for new board members are based in each individual case on a profile of requirements established by the Nomination Committee. Shareholders wishing to submit proposals to the Nomination Committee can do so by e-mailing: nominationcommittee@assaabloy.com. The Nomination Committee’s proposals for the 2020 Annual General Meeting are published, at the latest, in conjunction with the formal notification of the Annual Gen- eral Meeting, which is expected to be issued around 30 March 2020. In accordance with the Swedish Companies Act, the 4 Board of Directors Board of Directors is responsible for the organization and administration of the Group and for ensuring satisfactory control of bookkeeping, asset management and other finan- cial circumstances. The Board of Directors decides on the Group’s overall objectives, strategies, significant policies, acquisitions and divestments as well as investments of major importance. Acquisitions and divestments with a value (on a debt-free basis) exceeding SEK 200 M are decided by the ASSA ABLOY ANNUAL REPORT 2019 47 REPORT OF THE BOARD OF DIRECTORS Corporate governance Board of Directors. The threshold amount presumes that the matter relates to acquisitions or divestments in accordance with the strategy agreed by the Board of Directors. The Board of Directors approves the Annual Report and Interim Reports, proposes a dividend and remuneration guidelines for senior executives to the Annual General Meeting, and makes decisions concerning the Group’s financial structure. The Board of Directors’ other ongoing duties include: • appointing, evaluating and if necessary, dismissing the CEO, • approving the CEO’s significant assignments outside the company, • establishing appropriate guidelines to govern the compa- ny’s conduct in society with the aim of ensuring long-term value-creating capability, • ensuring that appropriate systems are in place for moni- toring and controlling the company’s operations and the risks for the company associated with its operations, • ensuring that there is satisfactory control of the compa- ny’s compliance with laws and other regulations relevant to the company’s operations, and its compliance with internal guidelines, and • ensuring that external information provided by the com- pany is transparent, accurate, relevant and reliable. Each year, the Board of Directors reviews and adopts the Board of Directors’ rules of procedure, which is the docu- ment that governs the work of the Board and the distribu- tion of duties between the Board of Directors and the CEO. The rules of procedure include instructions for the CEO, instructions relating to financial reporting and internal con- trol, and instructions to the Remuneration Committee and the Audit Committee. Included in the rules of procedure is a description of the role of Chairman of the Board. In addition to organizing and leading the work of the Board of Directors, the Chairman’s duties include maintaining contact with the CEO to continu- ously monitor the Group’s operations and development, consulting with the CEO on strategic issues, representing the company in matters concerning the ownership structure, ensuring that the Board receives satisfactory information and data on which to base decisions and ensuring that Board decisions are implemented. In addition, the Chairman should ensure that the work of the Board of Directors is evaluated annually. The Board of Directors has at least four ordinary meetings and one statutory meeting per year. An ordinary meeting is always held in connection with the company’s publication of its Year-end Report and Interim Reports. At least once a year the Board of Directors visits one of the Group’s operations, combined with a board meeting. In addition, extraordinary board meetings are held when necessary. All meetings follow an approved agenda. Prior to each meeting, a draft agenda, including documentation, is provided to all members of the Board of Directors. The Board of Directors has a Remuneration Committee and an Audit Committee. The purpose of these Committees is to deepen and streamline the work of the Board of Direc- tors and to prepare matters in these areas. The members of the Committees are appointed annually by the Board of Directors at the statutory board meeting. Board of Directors’ composition The Board of Directors, including the Chairman and Vice Chairman of the Board, is elected annually at the Annual General Meeting for the period until the end of the next Annual General Meeting and shall, according to the Articles of Association, comprise a minimum of six and a maximum of ten members elected by the Meeting. Two of the members are appointed by the employee organizations in accordance with Swedish law. The employee organizations also appoint two deputies. The Board of Directors has consisted of seven elected members and two employee representatives since the 2019 Annual General Meeting. No board members are included in the Executive Team. The diversity policy that ASSA ABLOY applies with respect to the company’s Board of Directors is based on Rule 4.1 of the Code. The objective is that the composition of the Board of Directors, taking into account the company’s operations, stage of development and other circumstances, shall be appropriate, characterized by versatility and breadth regard- ing qualifications, experience and background of the elected members, and strive to achieve gender equality. In 2019 the Nomination Committee has taken the diversity policy into account when preparing its proposal for election of members of the Board of Directors prior to the Annual General Meeting. After the election at the 2019 Annual General Meeting, the Board of Directors consists of four women and three men elected by the Meeting, which is in line with the Swedish Cor- porate Governance Board’s aspiration for each gender to rep- resent a share of at least 40 percent of the Board of Directors. In addition, in-depth reviews of operations were conducted during the year at selected divisions in order to broaden the expertise of the Board of Directors within ASSA ABLOY. Board of Directors’ work in 2019 The Board of Directors held nine meetings during the year. At the ordinary board meetings the CEO reported on the Group’s performance and financial position, including the outlook for the coming quarters. Acquisitions and divest- ments were also discussed to the extent they arose. More important matters dealt with by the Board of Direc- tors during the year comprised a number of acquisitions, including agta record, LifeSafety Power, Placard, De La Rue’s international identity solutions business, the AM Group and Summary of Board of Directors’ work and committee meetings in 2019 Ordinary board meeting Year-end results Dividend Annual Report Final Audit Report Sustainability report Proposals to Annual General Meeting Evaluation Executive Team Acquisitions Ordinary board meeting Interim Report Q1 Acquisitions January February March April May June Remuneration Committee meeting Audit Committee meeting Extraordinary board meeting Notice Annual General Meeting Audit Committee meeting Statutory board meeting Appointment committee members Adoption Board of Directors’ rules of procedure and significant policies Signatory powers At the ordinary board meetings the CEO also reported on the Group’s performance and financial position, including the outlook for the coming quarters. 48 ASSA ABLOY ANNUAL REPORT 2019 REPORT OF THE BOARD OF DIRECTORS Spence Doors. During the year, the Board of Directors also conducted in-depth reviews of the Group’s operations in the Global Technologies division’s business unit Global Solutions and the EMEA division, and visited the Asia Pacific division’s operations in Guangzhou, China. The Board of Directors’ work is summarized in the timeline on pages 48–49. An evaluation of the Board of Directors’ work is conducted annually in the form of a web-based survey, which each board member responds to individually. A summary of the results is presented to the Board of Directors. Board members who wish can access the complete results of the evaluation. The Secretary to the Board of Directors presents the complete results of the evaluation to the Nomination Committee. 5 Remuneration Committee Lars Renström (Chairman) and Jan Svensson. In 2019 the Remuneration Committee comprised The Remuneration Committee has the task of drawing up remuneration guidelines for senior executives, which the Board of Directors proposes to the Annual General Meeting for resolution. The Board of Directors’ proposal for guide- lines prior to the 2020 Annual General Meeting is set out on pages 56–57. The Remuneration Committee also prepares, monitors and evaluates matters regarding salaries, bonus, pension, severance pay and incentive programs for the CEO and other senior executives. The Committee has no decision-making powers. The Committee held two meetings in 2019. Its work included preparing a proposal for the remuneration to the Executive Team, evaluating existing incentive programs, and preparing a proposal for a new long-term incentive program. Remuneration Committee meetings are minuted; a copy of the minutes is enclosed with the materials provided to the Board and a verbal report is given at board meetings. 6 Audit Committee (Chairman), Birgitta Klasén and Sofia Schörling Högberg. In 2019 the Audit Committee comprised Jan Svensson The duties of the Audit Committee include continuous monitoring and quality assurance of ASSA ABLOY’s financial reporting. Regular communication is maintained with the company’s external auditor, including on the focus and scope of the audit. The Audit Committee is also responsible for eval- uating the audit assignment and obtaining the results of the Swedish Inspectorate of Auditors’ quality control of the audi- tor, as well as informing the Board of Directors of the results of the evaluation. The Audit Committee also has the task of supporting the Nomination Committee in providing a pro- posal for the appointment of external auditor. Furthermore, the Audit Committee shall review and monitor the impartial- ity and independence of the auditor, paying particular atten- tion to whether the auditor provides the company with ser- vices other than auditing services. The Audit Committee establishes guidelines for procurement of services other than audit services from the company’s auditor, but otherwise, the Committee has no decision-making powers. The Committee held four ordinary meetings in 2019. The company’s external auditor and representatives from senior management also participated at these meetings. In 2019 the Committee also held one extra meeting due to the pro- curement and proposal for appointing an external auditor. More important matters dealt with by the Audit Committee during the year included internal control, financial state- ments and valuation matters, procurement and proposals for choosing an external auditor, tax matters, insurance and risk management matters and legal risk areas. Audit Com- mittee meetings are minuted; a copy of the minutes is enclosed with the materials provided to the Board and a verbal report is given at board meetings. Remuneration of the Board of Directors The General Meeting passes a resolution on the remuneration to be paid to board members. The 2019 Annual General Meet- ing passed a resolution on board fees totaling SEK 6,675,000 (excluding remuneration for committee work) to be allocated between the members as follows: SEK 2,350,000 to the Chair- man, SEK 900,000 to the Vice Chairman, and SEK 685,000 to each of the other members elected by the Annual General Meeting. As remuneration for committee work, the Chairman of the Audit Committee is to receive SEK 275,000, the Chair- man of the Remuneration Committee SEK 150,000, members of the Audit Committee (except the Chairman) SEK 200,000 each, and member of the Remuneration Committee (except the Chairman) SEK 75,000. The Chairman and other board members have no pension benefits or severance pay agreements. The employee repre- sentatives do not receive board fees. For further information on the remuneration of board members in 2019, see Note 34. Attendance 2019, Board of Directors and Committees Board members Lars Renström Carl Douglas Ulf Ewaldsson Eva Karlsson Birgitta Klasén Lena Olving Sofia Schörling Högberg Jan Svensson Rune Hjälm Mats Persson Board of Directors Audit Committee Remuneration Committee 2/2 2/2 5/5 5/5 5/5 9/9 9/9 2/3 9/9 9/9 9/9 9/9 9/9 9/9 9/9 The maximum number of meetings varies due to resignation in 2019. Ordinary board meet- ing Interim Report Q2 Acquisitions Ordinary board meeting Acquisitions Presentation Global Solutions Ordinary board meeting and visit to operations Visit Asia Pacific Ordinary board meeting Interim Report Q3 Ordinary board meeting Presentation EMEA Acquisitions July August September October November December Audit Committee meeting Extra Audit Committee meeting Audit Committee meeting Remuneration Committee meeting ASSA ABLOY ANNUAL REPORT 2019 49 REPORT OF THE BOARD OF DIRECTORS Board of Directors Board members elected by the 2019 Annual General Meeting Lars Renström Carl Douglas Eva Karlsson Birgitta Klasén Lena Olving Sofia Schörling Högberg Jan Svensson Lars Renström Chairman. Board member since 2008. Born 1951. Master of Science in Engineering and Master of Science in Business and Economics. President and CEO of Alfa Laval AB 2004– 2016. President and CEO of Seco Tools AB 2000–2004. President and Head of Division of Atlas Copco Rock Drilling Tools 1997– 2000. Previously a number of senior positions at ABB and Ericsson. Other appointments: Chairman of Tetra Laval Group. Shareholdings (including through companies and related natural parties): 30,000 Series B shares. Carl Douglas Vice Chairman. Board member since 2004. Born 1965. BA (Bachelor of Arts) and D. Litt (h.c.) (Doctor of Letters). Self-employed. Other appointments: Vice Chairman of Securitas AB. Board member of Investment AB Latour. Shareholdings (including through companies and related natural parties): 41,595,729 Series A shares and 63,900,000 Series B shares through Investment AB Latour. Eva Karlsson Board member since 2015. Born 1966. Master of Science in Engineering. Vice President Supply Arcam EBM since 2020. President and CEO of Armatec AB 2014–2019, CEO of SKF Sverige AB and Global Manu- facturing Manager 2011–2013, Director of Industrial Marketing & Product Development Industrial Market AB SKF 2005–2010, various positions in the SKF Group primarily within Manufacturing Management. Other appointments: Board member of Bräcke diakoni, Valcon A/S and Ratos AB. Shareholdings (including through companies and related natural parties): – Sofia Schörling Högberg Board member since 2017. Born 1978. BSc (Bachelor of Science) in Business Administration. Other appointments: Board member of Melker Schörling AB, Securitas AB and Hexagon AB. Shareholdings (including through companies and related natural parties): 15,930,240 Series A shares and 18,027,992 Series B shares through Melker Schörling AB and 418,800 Series B shares through Edeby- Ripsa Skogsförvaltning AB. Jan Svensson Board member since 2012. Born 1956. Degree in Mechanical Engineering and Mas- ter of Science in Business and Economics. President and CEO of Investment AB Latour 2003–2019. Previously CEO of AB Sigfrid Stenberg 1986–2002. Other appointments: Chairman of AB Fager- hult, Troax Group AB (publ), Alimak Group AB (publ) and Tomra Systems ASA. Board member of Loomis AB, Stena Metall AB, Herenco Holding AB and Climeon AB (publ). Shareholdings (including through companies and related natural parties): 6,000 Series B shares. Birgitta Klasén Board member since 2008. Born 1949. Master of Science in Engineering and degree in Business and Economics. Independent IT consultant (Senior IT Advisor). CIO and Head of Information Management at EADS (European Aeronautics Defence and Space Company) 2004–2005. CIO and Sen- ior Vice President at Pharmacia 1996–2001 and previously CIO at Telia. Various positions at IBM 1976–1994. Other appointments: Board member of Avanza and Benefie Ltd. Shareholdings (including through companies and related natural parties): 21,000 Series B shares. Lena Olving Board member since 2018. Born 1956. Master of Science in Mechanical Engineering. President and CEO of Mycronic AB (publ) 2013–2019. COO and Deputy CEO of Saab AB (publ) 2008–2013. Various positions within Volvo Car Corporation 1980–1991 and 1995–2008, including five years as Senior Vice President of Volvo Cars Asia Pacific and seven years in the Executive Management Team. CEO of Samhall Högland AB 1991–1994. Other appointments: Chairman of the Royal Swedish Opera and Academic Work. Board member of Investment AB Latour, Munters Group AB, NXP, ScandiNova Systems AB and Stena Metall AB. Fellow of the Royal Swedish Academy of Engineering Sciences (IVA) and board member of IVA’s Business Executives Council (IVA:s Näringslivsråd). Shareholdings (including through companies and related natural parties): – 50 ASSA ABLOY ANNUAL REPORT 2019 Appointments and shareholdings as at 31 December 2019 unless stated otherwise. Board members appointed by employee organizations REPORT OF THE BOARD OF DIRECTORS Rune Hjälm Mats Persson Bjarne Johansson Nadja Wikström Rune Hjälm Board member since 2017. Born 1964. Employee representative, IF Metall. Chairman of European Works Council (EWC) in the ASSA ABLOY Group. Shareholdings (including through companies and related natural parties): – Mats Persson Board member since 1994. Born 1955. Employee representative, IF Metall. Shareholdings (including through companies and related natural parties): – Bjarne Johansson Deputy board member since 2015. Born 1966. Employee representative, IF Metall. Shareholdings (including through companies and related natural parties): – Nadja Wikström Deputy board member since 2017. Born 1959. Employee representative, Unionen. Shareholdings (including through companies and related natural parties): – ASSA ABLOY’s Board of Directors fulfills the requirements for independ- ence in accordance with the Swedish Corporate Governance Code. Independent of the company and its management Independent of the company’s major shareholders Yes Yes Yes Yes Yes Yes Yes Born 1951 1965 1966 1949 1956 1978 1956 1964 1955 1966 1959 Yes No Yes Yes No No No Remuneration Committee Chairman – – – – – Member – – – – Audit Committee Series A shares1 Series B shares1 – – – Member – Member Chairman – – – – – 30,000 41,595,729 63,900,000 – – – – 21,000 – 15,930,240 18,446,792 – – – – – 6,000 – – – – Independence of the Board of Directors Name Lars Renström Carl Douglas Eva Karlsson Birgitta Klasén Lena Olving Sofia Schörling Högberg Jan Svensson Position Chairman Vice Chairman Board member Board member Board member Board member Board member The Board of Directors’ composition and shareholdings Name Lars Renström Carl Douglas Eva Karlsson Birgitta Klasén Lena Olving Position Chairman Vice Chairman Board member Board member Board member Sofia Schörling Högberg Board member Jan Svensson Rune Hjälm Mats Persson Board member Board member, employee representative Board member, employee representative Bjarne Johansson Deputy, employee representative Nadja Wikström Deputy, employee representative 1 Shareholdings through companies and related natural parties. Elected 2008 2004 2015 2008 2018 2017 2012 2017 1994 2015 2017 Appointments and shareholdings as at 31 December 2019 unless stated otherwise. ASSA ABLOY ANNUAL REPORT 2019 51 REPORT OF THE BOARD OF DIRECTORS Executive Team Nico Delvaux Erik Pieder Lucas Boselli Mogens Jensen Anders Maltesen Nico Delvaux President and CEO and Head of Global Technologies division since 2018. Born 1966. Master of Engineering in Electromechanics and executive MBA. Previous positions: President and CEO of Metso Corporation August 2017–February 2018. Previously various positions in the Atlas Copco Group, including Business Area President Compressor Technique 2014–2017, Business Area President Construction Technique 2011–2014, and various positions in sales, marketing, service, acquisition- integration management and General Manager in markets including Benelux, Italy, China, Canada, and the United States 1991–2011. Shareholdings (including through companies and related natural parties): 40,298 Series B shares and 94,787 call options. Erik Pieder Executive Vice President and Chief Financial Officer (CFO) since 2019. Born 1968. MBA and Master of Laws. Previous positions: Various positions in the Atlas Copco Group 1996–2019, including Vice President Business Control Compressor Technique. Shareholdings: 1,266 Series B shares. Lucas Boselli Executive Vice President and Head of Americas division since 2018. Born 1976. Bachelor of Science in Industrial Engineering. Previous positions: Various positions in the ASSA ABLOY Group, including President of ASSA ABLOY Central and South America 2014–2018 and President of Yale Latin America 2012–2014. Previously various positions in Ingersoll Rand 2000–2010. Shareholdings: 19,952 Series B shares. Mogens Jensen Executive Vice President and Head of Entrance Systems division since 2018. Born 1958. Master of Science in Mechanical Engineering and MBA. Previous positions: Various positions in the ASSA ABLOY Group, including BA President Industrial Door and Docking Solutions, Entrance Systems division 2016–2017, Market Region Manager Scandinavia, EMEA division 2006–2016 and Managing Director Ruko A/S Denmark. Previously various Managing Director positions. Shareholdings: 20,232 Series B shares. Anders Maltesen Executive Vice President and Head of Asia Pacific division since 2017. Born 1965. Bachelor’s degree in Marketing and Bachelor’s degree in Financial and Manage- ment Accounting. Previous positions: Regional General Manager and President, Asia Pacific, GE Energy, Power Services 2015–2017, Manag- ing Director, Asia Pacific, Alstom Thermal Services 2014–2015, Vice President, East Asia, Alstom Thermal Services 2011–2014, General Manager, board member, Tianjin Alstom Hydro Co. Ltd 2003–2011. Previously various positions within Alstom. Shareholdings: 8,182 Series B shares. Christopher Norbye Executive Vice President and Head of Entrance Systems division since 2020. Born 1973. Master of Business Administration and Bachelor of Science. Previous positions: President of Industrial Door Solutions within Entrance Systems division 2017–2020, Executive Vice President Orchid Orthopedics 2013–2016, President Sandvik Medical Solutions 2011–2013, COO Sandvik Medical Solutions 2009–2011, Manager for Sandvik M&A and business development 2005–2008, Andersen Consulting 2001–2004, American Express 1999–2001. Shareholdings: 2,489 Series B shares. Christopher Norbye Changes in the Executive Team Chris Bone left the Executive Team and the position of Executive Vice President and Chief Technology Officer (CTO) on 30 November 2019. Björn Lidefelt assumed the posi- tion of Executive Vice President and Head of Global Technologies busi- ness unit HID Global beginning on 13 January 2020. He succeeded Stefan Widing who left the Group in January 2020. Christopher Norbye assumed the position of Executive Vice President and Head of the Entrance Systems division beginning on 1 February 2020. He succeeded Mogens Jensen, who is continuing on the Executive Team and also assuming the new position as Head of business seg- ments Industrial and Residential. within the Entrance Systems division. 52 ASSA ABLOY ANNUAL REPORT 2019 Appointments and shareholdings as at 31 December 2019 unless stated otherwise. REPORT OF THE BOARD OF DIRECTORS Maria Romberg Ewerth Christophe Sut Neil Vann Stefan Widing Maria Romberg Ewerth Executive Vice President and Chief Human Resources Officer (CHRO) since 2019. Born 1978. Bachelor’s degree in Human Resources and MBA. Previous positions: Senior Vice President Human Resources ASSA ABLOY AB 2013– 2019, Vice President Human Resources ASSA ABLOY Entrance Systems 2011–2013. HR-manager and HR-director ASSA ABLOY Entrance Systems 2008–2011. Previously HR-positions in various companies: JELD-WEN Sverige AB, VALEO Engine Cooling AB and Swedish Meats 2003–2008. Shareholdings: 13,282 Series B shares. Christophe Sut Executive Vice President and Head of Global Technologies business unit Global Solutions since 2016. Born 1973. Master of Science in Business and Marketing, Bachelor of Science in Language and Mathematics. Previous positions: Various positions in the ASSA ABLOY Group 2001–2010 and 2012– 2014, including CTO and Vice President Business Development ASSA ABLOY Hospitality and Platform Director for ASSA ABLOY AB. Niscayah Group 2010–2012. SPIT France (ITW group) 1999–2001 and SAM Outillage 1997–1999. Shareholdings: 5,922 Series B shares. Neil Vann Executive Vice President and Head of EMEA division since 2018. Born 1971. Degree in Manufacturing Engineering. Previous positions: Various positions in the ASSA ABLOY Group, including Market Region Manager ASSA ABLOY UK 2014–2018, Market Region Manager Italy and Greece 2012–2014 and Vice President Operations EMEA 2011–2012. Previously various posi- tions within ASSA ABLOY, Yale and Chubb 1987–2001. Shareholdings: 12,461 Series B shares. Stefan Widing Executive Vice President and Head of Global Technologies business unit HID Global since 2015. Born 1977. Master of Science in Applied Physics and Electrical Engineering and Bachelor of Social Science in Business Administration. Previous positions: Various positions in the ASSA ABLOY Group, including Director of Product Management and General Manager of Shared Technologies Unit 2006–2015. Previously various positions in the Saab Group 2001–2006. Shareholdings: – Björn Lidefelt Executive Vice President and Head of Global Technologies business unit HID Global since 2020. Born 1981. Master of Science in Industrial Engineering and Management. Previous positions: Various positions in the ASSA ABLOY Group, including Chief Commercial Officer 2017–2020, and General Manager ASSA ABLOY China (security products) 2013–2016. Shareholdings: 2,191 Series B shares. Björn Lidefelt Appointments and shareholdings as at 31 December 2019 unless stated otherwise. ASSA ABLOY ANNUAL REPORT 2019 53 REPORT OF THE BOARD OF DIRECTORS Corporate governance CEO and Executive Team 7 Organization The Executive Team consists of the CEO, the Heads of the Group’s divisions, as well as HID Global and Global Solutions, the Chief Financial Officer and the Chief Human Resources Officer. As of February 2020, the Head of business segments Industrial and Residential within the Entrance Systems divi- sion is also part of the Executive Team. For a presentation of the CEO and the other members of the Executive Team, see pages 52–53. 8 Divisions – decentralized organization ASSA ABLOY’s operations are decentralized. Opera- tions are organizationally divided into five divisions: EMEA, Americas, Asia Pacific, Global Technologies and Entrance Systems. The fundamental principle is that the divisions should be responsible, as far as possible, for business operations, while various functions at ASSA ABLOY’s Group Centre are responsible for coordination, monitoring, policies and guidelines at an overall level. Decentralization is a deliberate strategic choice based on the industry’s local nature and a conviction of the benefits of a divisional control model. The Group’s structure results in a geographical and strategic spread of responsibility ensuring short decision- making paths. ASSA ABLOY’s operating structure is designed to create maximum transparency, to facilitate financial and opera- tional monitoring, and to promote the flow of information and communication across the Group. The five divisions are divided into around 50 business units. These consist in turn of a large number of sales and production units, depending on the structure of the business unit concerned. Apart from monitoring by unit, monitoring of products and markets is also carried out. Policies and guidelines Significant policies and guidelines in the Group include financial control, communication issues, insider issues, the Group’s brands, sustainability issues, business ethics, data protection and export control. ASSA ABLOY’s financial policy and accounting manual provide the framework for financial control and monitoring. ASSA ABLOY’s communication policy aims to ensure that information is provided at the right time and in compliance with applicable rules and regu- lations. ASSA ABLOY has adopted an insider policy to com- plement applicable insider legislation. This policy applies to individuals in managerial positions at ASSA ABLOY AB (including subsidiaries) as well as certain other categories of employees. Brand guidelines aim to protect and develop the major assets that the Group’s brands represent. ASSA ABLOY had adopted a Code of Conduct for employ- ees and a separate ASSA ABLOY Code of Conduct for busi- ness partners. The Codes, which are based on a set of inter- nationally accepted conventions, define the values and guidelines that should apply both within the Group and for ASSA ABLOY’s business partners with regard to matters such as business ethics, human rights and working conditions, as well as the environment, health and safety. Moreover, ASSA ABLOY has adopted policies and guide- lines on compliance with competition, export control, anti-corruption and data protection legislation applicable to the Group. At the 2019 Annual General Meeting, Pricewater- 9 Auditor houseCoopers (PwC) was re-appointed as the company’s external auditor up to the end of the 2020 Annual General Meeting. In connection with the 2019 Annual General Meeting, PwC notified that the authorized public account- ant Bo Karlsson would remain the auditor in charge. In addi- tion to ASSA ABLOY, Bo Karlsson, born 1966, is responsible for auditing SKF, Scania and Investment AB Latour. PwC has been the Group’s auditor since its formation in 1994. PwC submits the audit report for ASSA ABLOY AB, the Group and a large majority of the subsidiaries worldwide. The audit of ASSA ABLOY AB also includes the administration by the Board of Directors and the CEO. The auditor in charge attends Audit Committee meetings as well as the February board meeting, at which he reports his observations and recommendations concerning the Group audit for the year. The external audit is conducted in accordance with Inter- national Standards in Auditing (ISA), and generally accepted auditing standards in Sweden. The audit of the financial statements for legal entities outside Sweden is conducted in accordance with statutory requirements and other applica- ble rules in each country. In 2019 ASSA ABLOY decided to initiate procurement of audit services to prepare for the appointment of an external auditor at the 2020 Annual General Meeting. For information about the fees paid to auditors and other assignments carried out in the Group in the past three financial years, see Note 3 and the Annual Report for 2018, Note 3. 54 ASSA ABLOY ANNUAL REPORT 2019 Internal control – financial reporting REPORT OF THE BOARD OF DIRECTORS ASSA ABLOY’s internal control process for financial reporting is designed to provide reasonable assurance of reliable finan- cial reporting, which is in compliance with generally accepted accounting principles, applicable laws and regula- tions, and other requirements for listed companies. Control environment The Board of Directors is responsible for effective internal control and has therefore established fundamental docu- ments of significance for financial reporting. These docu- ments include the Board of Directors’ rules of procedure and instructions to the CEO, the Code of Conduct, financial policy, and an annual financial evaluation plan. Regular meetings are held with the Audit Committee. The Group has an internal audit function whose primary objective is to ensure reliable financial reporting and good internal control. All units in the Group apply uniform accounting and reporting instructions. Internal control guidelines have been established and are reviewed annually for all operating com- panies. These Group-wide guidelines have a relatively broad scope and concern various processes such as ordering, sourcing, financial statements, plant management, compli- ance with various policies, legal matters, and HR matters. The Code of Conduct has been regularly reviewed and updated, and compliance is monitored systematically in operations. Risk assessment Risk assessment includes identifying and evaluating the risk of material errors in accounting and financial reporting at Group, division and local levels. A number of previously established documents govern the procedures to be used for accounting, finalizing accounts, financial reporting and review. A major focus has been on auditing the reconciliation between local accounts and consolidated reporting in recent years. The entire Group uses a financial reporting system with pre-defined report templates. Control activities The Group’s controller and accounting organization at both central and division levels plays a significant role in ensuring reliable financial information. It is responsible for complete, accurate and timely financial reporting. A global financial internal audit function has been established and carries out annual financial evaluations in accordance with the plan annually adopted by the Audit Committee. The results of the financial evaluations are submitted to the Audit Committee and the auditors. Further, in 2019, compliance with the Group’s anti-corruption policy was reviewed in Asia, South America and Europe. In 2019 ASSA ABLOY further strengthened the internal audit and internal control functions in terms of staffing and expanded the number of audits. Each division has employed full-time internal auditors who audit the companies and monitor internal control. Information and communication Reporting and accounting manuals as well as other financial reporting guidelines are available to all employees con- cerned on the Group’s intranet. A regular review and analysis of financial outcomes is carried out at both business unit and division levels and as part of the Board of Directors’ estab- lished operating structure. The Group also has established procedures for external communication of financial informa- tion, in accordance with the rules and regulations for listed companies. Review process The Board of Directors and the Audit Committee evaluate and review the Annual Report and Interim Reports prior to publication. The Audit Committee monitors the financial reporting and other related issues, and regularly discusses these issues with the external auditors. All business units report their financial results monthly in accordance with the Group’s accounting principles. This reporting serves as the basis for quarterly reports and a monthly legal and operating review. Operating reviews conform to a structure in which sales, earnings, cash flow, capital employed and other impor- tant key figures and trends for the Group are compiled, and form the basis for analysis and actions by management and controllers at different levels. Financial reviews take place quarterly at divisional board meetings, monthly in the form of performance reviews and through more informal analysis. Other important Group- wide components of internal control are the annual business planning process and regular forecasts. The Group-wide internal control guidelines are reviewed during the year in all operating companies through self- assessment. An action plan focused on concrete measures was implemented several years ago to further improve basic processes with an impact on the company’s financial position. ASSA ABLOY ANNUAL REPORT 2019 55 REPORT OF THE BOARD OF DIRECTORS Remuneration guidelines for senior executives The Board of Directors’ proposal of guidelines for remuneration to senior executives Scope The Board of Directors proposes that the Annual General Meeting adopts the following guidelines for the remunera- tion and other employment conditions of the President and CEO and other members of the ASSA ABLOY Executive Team (the “Executive Team”). These guidelines are applicable to remuneration agreed, and amendments to remuneration already agreed, after adoption of the guidelines by the Annual General Meeting 2020. These guidelines do not apply to any remuneration decided or approved by the General Meeting. Employment conditions of a member of the Executive Team that is employed or resident outside Sweden or that is not a Swedish citizen, may be duly adjusted for compliance with mandatory rules or established local practice, taking into account, to the extent possible, the overall purpose of these guidelines. Promotion of ASSA ABLOY’s business strategy, long-term interests and sustainability One of the strategies for value creation followed by ASSA ABLOY is Evolution through people. With the objective that ASSA ABLOY shall continue to be able to recruit and retain competent employees, the basic principle being that remu- neration and other employment conditions shall be offered on market conditions and be competitive, taking into account both global remuneration practice and practice in the home country of each member of the Executive Team. These guidelines enable ASSA ABLOY to offer the Executive Team a total remuneration that is on market conditions and competitive. Prerequisites are thereby established for suc- cessful implementation of the Group’s business strategy, which on overall level is to lead the trend towards the world’s most innovative and well-designed access solutions, as well as safeguarding ASSA ABLOY’s long-term interests, including its sustainability. More information about ASSA ABLOY’s business strategy and ASSA ABLOY’s sustainability report is available on ASSA ABLOY’s website assaabloy.com. ASSA ABLOY has on-going share-based long-term incen- tive programs in place that have been resolved by the Gen- eral Meeting and which are therefore excluded from these guidelines. Future share-based long-term incentive pro- grams proposed by the Board of Directors and submitted to the General Meeting for approval will be excluded for the same reason. The purpose of the share-based long-term incentive program is to strengthen ASSA ABLOY’s ability to recruit and retain competent employees, to contribute to ASSA ABLOY providing a total remuneration that is on mar- ket conditions and competitive, and to align the interests of the shareholders with the interests of the employees concerned. Through a share-based long-term incentive program, the employees’ remuneration is tied to ASSA ABLOY’s future earnings and value growth. At present the performance criteria used is linked to earnings per share. The programs are further conditional upon the participant’s own investment and holding period of several years. More infor- mation about these programs is available on ASSA ABLOY’s website assaabloy.com. Types of remuneration The total yearly remuneration to the members of the Execu- tive Team shall be on market conditions and be competitive and also reflect each member of the Executive Team’s responsibility and performance. The total yearly remunera- tion shall consist of fixed base salary, variable cash remunera- tion, pension benefits and other benefits (which are speci- fied below excluding social security costs). Additionally, the General Meeting may – and irrespective of these guidelines – resolve on, among other things, share-related or share price-related remuneration. The variable cash remuneration shall be linked to prede- termined and measurable targets, which are further described below, and may amount to not more than 75 percent of the yearly base salary. The members of the Executive Team shall be covered by defined contribution pension plans, for which pension pre- miums are based on each member’s yearly base salary and is paid by ASSA ABLOY during the period of employment. The pension premiums shall amount to not more than 35 percent of the yearly base salary. Other benefits, such as company car, life insurance, extra health insurance or occupational healthcare, should be pay- able to the extent this is considered to be in line with market conditions in the market concerned for each member of the Executive Team. Premiums and other costs relating to such benefits may totally amount to not more than 10 percent of the yearly base salary. Furthermore, housing allowance benefit may be added in line with ASSA ABLOY’s policies and costs relating to such benefit may totally amount to not more than 25 percent of the yearly base salary. Premiums and other costs relating to other benefits and housing allow- ance benefit may, however, totally amount to not more than 30 percent of the yearly base salary. Criteria for awarding variable cash remuneration The variable cash remuneration shall be linked to predeter- mined and measurable financial targets, such as earnings per share (EPS), earnings before interest and taxes (EBIT), cash flow and organic growth and can also be linked to strategical and/or functional targets individually adjusted on the basis of responsibility and function. These targets shall be designed so as to contribute to ASSA ABLOY’s business strat- egy and long-term interests, including its sustainability, by for example being linked to the business strategy or pro- mote the senior executive’s long-term development within ASSA ABLOY. 56 ASSA ABLOY ANNUAL REPORT 2019 REPORT OF THE BOARD OF DIRECTORS The Remuneration Committee shall for the Board of Directors prepare, monitor and evaluate matters regarding variable cash remuneration to the Executive Team. Ahead of each yearly measurement period for the criteria for awarding variable cash remuneration the Board of Directors shall, based on the work of the Remuneration Committee, estab- lish which criteria that are deemed to be relevant for the upcoming measurement period. To which extent the criteria for awarding variable cash remuneration has been satisfied shall be determined when the measurement period has ended. Evaluations regarding fulfilment of financial targets shall be based on determined financial basis for the relevant period. Variable cash remuneration can be paid after the measurement period has ended or be subject to deferred payment. Paid variable cash remuneration can be claimed back when such right follows from general principles of law. Duration of employment and termination of employment The members of the Executive Team shall be employed until further notice. If notice of termination is made by ASSA ABLOY, the notice period may not exceed 12 months for the CEO and 6 months for the other members of the Executive Team. If the CEO is given notice, ASSA ABLOY is liable to pay, including severance pay and remuneration under the notice period, the equivalent of maximum 24 months’ base salary and other employment benefits. If any other member of the Executive Team is given notice, ASSA ABLOY is liable to pay a maximum of 6 months’ base salary and other employment benefits plus severance pay amounting to a maximum of an additional 12 months’ base salary. If notice of termination is made by a member of the Executive Team, the notice period may not exceed 6 months, with no right to severance pay. A member of the Executive Team may, for such time when the member is not entitled to severance pay, be compen- sated for non-compete undertakings. Such compensation shall amount to not more than 60 percent of the monthly base salary at the time of the termination and shall only be paid as long as the non-compete undertaking is applicable, at longest a period of 12 months. Remuneration and employment conditions for employees In the preparation of the Board of Directors’ proposal for these remuneration guidelines, remuneration and employ- ment conditions for employees of ASSA ABLOY have been taken into account by including information on the employees’ total remuneration, the components of the remuneration and increase and growth rate over time in the Remuneration Committee’s and the Board of Directors’ basis of decision when evaluating whether the guidelines and the limitations set out herein are reasonable. The decision-making process to determine, review and implement the guidelines The Remuneration Committee’s tasks include preparing the Board of Directors’ decision to propose guidelines for remu- neration to the Executive Team. The Board of Directors shall prepare a proposal for new guidelines at least every fourth year and submit it to the Annual General Meeting. The guide- lines shall be in force until new guidelines are adopted by the General Meeting. The Remuneration Committee shall also monitor and evaluate programs for variable remuneration to the Executive Team, the application of the guidelines for remuneration to the Executive Team as well as the applicable remuneration structures and remuneration levels in ASSA ABLOY. The members of the Remuneration Committee are independent of the company and its management. The CEO and other members of the Executive Team do not participate in the Board of Directors’ processing of and resolutions regarding remuneration-related matters in so far as they are affected by such matters. Deviation from the guidelines The Board of Directors may temporarily resolve to deviate from the guidelines, in whole or in part, if in a specific case there is special cause for the deviation and a deviation is nec- essary to serve ASSA ABLOY’s long-term interests, including its sustainability, or to ensure ASSA ABLOY’s financial viabil- ity. As set out above, the Remuneration Committee’s tasks include preparing the Board of Directors’ resolutions in remuneration-related matters. This includes any resolutions to deviate from the guidelines. Transitional provisions applicable for the Annual General Meeting 2020 The total expensed remuneration of the Executive Team, including previous commitments not yet due for payment is reported in the Annual Report 2019 in Note 34. ASSA ABLOY ANNUAL REPORT 2019 57 Consolidated financial statements Sales and income • Net sales increased by 12 percent to SEK 94,029 M (84,048). Organic growth was 3 percent (5). Growth from acquisitions and divestments amounted to 3 percent (2). • Operating income (EBIT) excluding items affecting comparability increased by 16 percent to SEK 14,920 M (12,909), equivalent to an operating margin of 15.9 percent (15.4). • Earnings per share after full dilution and excluding items affecting comparability increased by 14 percent till SEK 9.22 (8.09). Sales The Group’s sales for 2019 totaled SEK 94,029 M (84,048), representing a 12-percent increase. Change in sales % Organic growth Acquisitions and divestments Exchange rate effects Total 2018 2019 5 2 3 10 3 3 6 12 The total change in sales for 2019 was 12 percent (10). Organic growth was 3 percent (5) and acquired growth and divestments contributed 3 percent (4) and 0 percent (–2). The exchange rate impact on sales was 6 percent (3). Sales by product group Mechanical locks, lock systems and fittings accounted for 25 percent (26) of total sales. Electromechanical and electronic locks rose to 31 percent (30) of sales and entrance automa- tion accounted for 27 percent (28). Security doors and hard- ware accounted for 17 percent (16) of sales. Cost structure Total wage costs, including social security expenses and pen- sion expenses, amounted to SEK 27,001 M (24,485), equiva- lent to 29 percent (29) of sales. The average number of employees was 48,992 (48,353). The Group’s material costs amounted to SEK 33,885 M (30,461), equivalent to 36 percent (36) of sales and other purchasing costs totaled SEK 15,345 M (15,319), equivalent to 16 percent (18) of sales. Depreciation and amortization of non-current assets amounted to SEK 3,387 M (1,963), equivalent to 4 percent (2) of sales. Operating income Operating income (EBIT) for 2019 amounted to SEK 14,608 M (6,096). Operating income excluding items affecting com- parability increased by 16 percent to SEK 14,920 M (12,909), primarily due to continued growth in operations, efficiency improvements, acquisitions and exchange rate effects. The equivalent operating margin was 15.9 percent (15.4). Impairment of operating assets in the Asia Pacific division of SEK 400 M had a negative impact on the operating margin for 2018. Items affecting comparability The Group launched a new restructuring program in 2018 with a total estimated cost before taxes of SEK 1,530 M, of which SEK 1,218 M was expensed in conjunction with the launch in 2018 and SEK 312 M in 2019. The program involves the closure of about fifty plants and offices over a three-year period. No impairment loss was reported for goodwill and other intangible assets during the year. In 2018, impairment losses totaling SEK 5,595 M were reported for equivalent items in Asia Pacific. Income before tax Income before tax excluding items affecting comparability totaled SEK 13,883 M (12,110). The positive exchange rate effect before taxes amounted to SEK 627 M (315). Net financial items were SEK –1,037 M (–799). The profit margin was 14.8 percent (14.4). The Parent company’s operating income for 2019 con- tinued to be at a high level, totaling SEK 1,523 M (1,801). Taxes The Group’s tax expense totaled SEK 3,574 M (2,542), equiv- alent to an effective tax rate excluding items affecting com- parability of 26.2 percent (25.8). The most recent restructur- ing program, launched in 2018, increased the effective tax rate for 2019 with the equivalent of 0.1 (0.5) percentage points. Impairment of goodwill and other intangible assets in 2018 further increased the effective 2018 tax rate to a total of 48 percent. Earnings per share Earnings per share before and after full dilution and exclud- ing items affecting comparability amounted to SEK 9.22 (8.09), an increase of 14 percent. Sales and operating income SEK M 100,000 80,000 60,000 40,000 20,000 0 15 16 17 18 19 SEK M 15,000 12,000 9,000 6,000 3,000 0 Sales Omsättning Operating income1 Rörelseresultat1 1 Excluding items affecting com- parability 2016, 2018 and 2019. 58 ASSA ABLOY ANNUAL REPORT 2019 Consolidated income statement SEK M Sales Cost of goods sold Gross income Selling expenses Consolidated statement of comprehensive income Note 2 3 4 14 5 6–9, 25, 34 10 9, 11, 25 12 13 13 Note Administrative expenses Research and development costs Other operating income and expenses Impairment of goodwill and other intangible assets Share of earnings in associates Operating income Financial income Financial expenses Income before tax Tax on income Net income Net income attributable to: Parent company’s shareholders Non-controlling interests Earnings per share Before and after dilution, SEK Before and after dilution and excluding items affecting comparability, SEK SEK M Net income Other comprehensive income: Items that will not be reclassified to profit or loss Actuarial gain/loss on post-employment benefit obligations 25 Deferred tax from actuarial gain/loss on post-employment benefit obligations Total Items that may be reclassified subsequently to profit or loss Share of other comprehensive income of associates Cash flow hedges Net investment hedges Exchange rate difference Tax attributable to items that may be reclassified subsequently to profit or loss Total Total comprehensive income Total comprehensive income attributable to: Parent company’s shareholders Non-controlling interests CONSOLIDATED FINANCIAL STATEMENTS 2018 84,048 –51,345 32,703 –13,594 –4,395 –2,893 –296 –5,595 167 6,096 20 –819 5,297 –2,542 2,755 2,753 2 2.48 8.09 2018 2,755 39 –34 6 87 2 –8 2,089 –8 2,163 4,923 4,923 1 2019 94,029 –56,499 37,530 –14,768 –4,786 –3,566 51 – 147 14,608 15 –1,052 13,571 –3,574 9,997 9,993 4 9.00 9.22 2019 9,997 –362 81 –281 86 – –5 1,556 –4 1,632 11,348 11,343 5 Sales by product group, 2019 Earnings per share before and after dilution Mekaniska lås, låssystem och tillbehör, 28% (29) Entrance automation, 27% (28) Mechanical locks, lock systems Entréautomatik, 28% (27) and fittings, 25% (26) Elektromekaniska och elektroniska lås, 26% (23) Electromechanical and Säkerhetsdörrar och beslag, 18% (20) electronic locks, 31% (30) Security doors and hardware, 17% (16) SEK 10 8 6 4 2 0 Earnings per share before Vinst per aktie efter and after dilution1 skatt och utspädning1 15 16 17 18 19 1 Excluding items affecting com- parability 2016, 2018 and 2019. ASSA ABLOY ANNUAL REPORT 2019 59 CONSOLIDATED FINANCIAL STATEMENTS Comments by division ASSA ABLOY is organized into five divisions. EMEA (Europe, Middle East and Africa), Americas (North and South America) division and Asia Pacific (Asia and Oceania) division manufacture and sell mechanical and electromechanical locks, security doors and hardware in their respective geographical markets. Global Technolo- gies operates worldwide in the product areas of access control systems, secure card issuance, identification technology and hotel locks. Entrance Systems is a global supplier of entrance automation products and service. EMEA Sales totaled SEK 21,144 M (20,201), with organic growth of 2 percent (2). Acquired units contributed 0 percent (5) net to sales. Operating income excluding items affecting compa- rability amounted to SEK 3,396 M (3,256), with an operating margin (EBIT) of 16.1 percent (16.1). Return on capital employed was 18.4 percent (20.1). Operating cash flow before interest paid was SEK 3,515 M (2,819). Strongest growth within EMEA was demonstrated by the Middle East, Central and eastern Europe and Scandinavia, while the sales trend in the UK and France was weaker. Sales of electromechanical locks with digital and mobile solutions continued to increase sharply during the year. Initiatives focused on innovation and new products continued during the year, at the same time that continued efficiency initia- tives retained a high operating margin for EMEA. Americas Sales totaled SEK 23,172 M (19,817), with organic growth of 7 percent (9). Acquired units contributed 2 percent (1) net to sales. Operating income excluding items affecting compa- rability amounted to SEK 4,673 M (3,941), with an operating margin (EBIT) of 20.2 percent (19.9). Return on capital employed was 23.6 percent (22.5). Operating cash flow before interest paid was SEK 5,263 M (3,903). Demand continued to be strong in North America and sta- ble in Latin America for most markets. Growth was extremely strong in the US for the commercial customer segment, as well as for the smart lock product area in the private residen- tial market. Profitability continued to be very good and cash flow was strong. Asia Pacific Sales totaled SEK 10,689 M (9,949), with organic growth of –1 percent (4). Acquired units contributed 5 percent (1) to sales. Operating income excluding items affecting compara- bility amounted to SEK 879 M (492), with an operating margin (EBIT) of 8.2 percent (4.9). Impairment of operating assets reduced operating income in 2018 by a total of SEK 400 M. Return on capital employed was 10.3 percent (4.8). Operating cash flow before interest paid was SEK 622 M (811). Growth was robust in Oceania and stable in India and Southeast Asia. However, demand remained weak in China, at the same time that market conditions deteriorated in South Korea. Implementation of a new business strategy and organization in China continued during the year. The acquisition in Oceania strengthened the market position in the region. The division’s operating margin excluding items affecting comparability declined, but the effect was miti- gated by continued streamlining initiatives and staff cuts. Global Technologies Sales totaled SEK 15,423 M (11,951), with organic growth of 5 percent (8). Acquired units contributed 16 percent (4) net to sales. Operating income excluding items affecting compa- rability amounted to SEK 2,890 M (2,387), with an operating margin (EBIT) of 18.7 percent (20.0). Return on capital employed was 14.0 percent (14.0). Operating cash flow before interest paid was SEK 3,183 M (2,463). Strong growth was seen in the HID Global business unit during the year, especially in mature markets. A number of acquisitions in HID also further strengthened the market position. Global Solutions showed strong organic growth and good profitability. Investments in R&D continued in 2019. Entrance Systems Sales totaled SEK 25,553 M (23,762), with organic growth of 2 percent (4). Acquired units contributed 1 percent (1) to sales. Operating income excluding items affecting compara- bility amounted to SEK 3,652 M (3,358), with an operating margin (EBIT) of 14.3 percent (14.1). Return on capital employed was 16.2 percent (16.9). Operating cash flow before interest paid was SEK 3,655 M (2,772). Service reported strong growth, while demand for equip- ment was generally weaker. Previously strong growth in the US slowed down during the year. A new business organiza- tion was announced during the year to begin in 2020, with the purpose of boosting organic growth. An agreement for the acquisition of agta record was signed during the year. The operating margin increased compared with the previous year and cash flow was strong. Other The costs of Group-wide functions, such as corporate man- agement, accounting and finance, supply management and Group-wide product development, totaled SEK 570 M (525). Elimination of sales between the Group’s segments is included in “Other”. External sales, 2019 Legend Legend Americas, 25% (23) Legend Asia Pacific, 10% (11) Global Technologies, 16% (14) Entrance Systems, 27% (28) 60 ASSA ABLOY ANNUAL REPORT 2019 Legend EMEA, 22% (24) Legend CONSOLIDATED FINANCIAL STATEMENTS Results by division SEK M Sales, external Sales, internal Sales Organic growth Acquisitions and divestments Exchange rate differences Share of earnings in associates Operating income (EBIT) excluding items affecting comparability1 Operating margin (EBIT) excluding items affecting comparability1 Restructuring costs Impairment goodwill and other intangible assets Operating income (EBIT) Operating margin (EBIT) Net financial items Tax on income Net income Capital employed – of which goodwill EMEA Americas Asia Pacific Global Technologies Entrance Systems Other Total 2018 2019 2018 2019 19,908 20,707 19,737 23,082 293 438 79 90 2018 8,875 1,074 2019 2018 2019 2018 2019 2018 2019 2018 2019 9,477 11,864 15,321 23,665 25,442 0 – 84,048 94,029 1,213 87 102 97 110 –1,6312 –1,9532 – – 20,201 21,144 19,817 23,172 9,949 10,689 11,951 15,423 23,762 25,553 –1,630 –1,953 84,048 94,029 2% 5% 5% – 2% 0% 3% – 9% 1% 0% – 7% 2% 8% – 4% 1% 3% 17 –1% 5% 3% 17 8% 4% 3% 3 5% 16% 8% 4% 1% 4% 2% 1% 5% 5 147 124 – – – – – – – – 5% 2% 3% 3% 3% 6% 167 147 3,256 3,396 3,941 4,673 492 879 2,387 2,890 3,358 3,652 –525 –570 12,909 14,920 16.1% –438 16.1% –185 19.9% –225 – – – 20.2% – – 4.9% –130 –5,595 2,818 13.9% 3,211 15.2% 3,716 18.8% 4,673 –5,233 20.2% –52.6% 8.2% –6 – 873 8.2% 20.0% –218 – 18.7% –4 – 14.1% –108 14.3% –116 – –100 – – – – – – 15.4% –1,218 15.9% –312 –5,595 – 2,170 18.2% 2,885 18.7% 3,250 13.7% 3,535 13.8% –625 –570 6,096 14,608 – – 7.3% 15.5% –799 –1,037 –2,542 –3,574 2,755 9,997 16,883 18,659 18,506 19,678 10,709 11,121 13,327 14,105 7,455 3,892 9,053 18,511 22,329 20,742 23,024 –951 –539 81,146 92,204 4,168 13,245 15,459 12,240 12,809 – – 53,413 57,662 – of which other intangible assets and property, plant and equipment 3,971 4,092 3,813 4,423 2,340 2,469 4,866 5,632 4,378 70 9 990 1 – – 499 – 5 587 260 637 – 19 463 23 44 1,819 4,451 1,499 1,935 – of which right-of-use assets – of which investments in associates Return on capital employed excluding items affecting comparability1 Operating income (EBIT) Restructuring costs Impairment of goodwill, etc. Depreciation and amortization Net capital expenditure Amortization of lease liabilities Change in working capital 20.1% 18.4% 22.5% 23.6% 4.8% 10.3% 14.0% 14.0% 16.9% 16.2% 2,818 3,211 3,716 4,673 –5,233 873 2,170 2,885 3,250 3,535 438 – 464 –500 – –401 185 – 813 –454 –295 53 225 – 367 –327 – –78 – – 569 –348 –149 517 130 5,595 292 –6 – 33 6 – 381 –220 –100 –319 218 – 522 –281 – –165 4 – 793 –366 –129 108 – 294 –170 – –5 –709 116 – 794 –276 –477 –38 Operating cash flow, by division 2,819 3,515 3,903 5,263 811 622 2,463 3,183 2,772 3,655 Non-cash items Interest paid and received Operating cash flow Average number of employees 11,717 11,373 8,768 9,360 11,492 11,016 4,624 5,594 11,463 11,313 288 336 48,353 48,992 1 Items affecting comparability relate to restructuring costs as well as impairment of goodwill and other intangible assets in 2018. 2 Of which eliminations SEK –1,953 M (–1,631). The segments have been determined on the basis of report- ing to the CEO, who monitors the overall performance and makes decisions on resource allocation. The breakdown of sales is based on customer sales in the respective country. Sales between segments are carried out at arm’s length. The different segments generate their revenue from the manufacture and the sale of mechanical, electromechanical and electronic locks, lock systems and fittings, and security doors and hardware. For further information on sales, see Note 2. Operating income, 20191, 2 Average number of employees, 2019 Legend Legend Legend Legend Legend EMEA, 22% (24) Legend Legend EMEA, 24% (24) Legend Americas, 30% (29) Legend Asia Pacific, 6% (4) Global Technologies, 19% (18) Entrance Systems, 23% (25) 1 “Other” is not included in the calcula- tion. See section Comments by division for what is included in “Other”. 2 Excluding items affecting comparability. Americas, 19% (18) Legend Asia Pacific, 23% (24) Global Technologies, 11% (10) Entrance Systems, 23% (24) ASSA ABLOY ANNUAL REPORT 2019 61 151 124 19,518 21,191 – – – –625 100 – 24 –36 – 244 –293 –458 –662 19 – – 119 2,434 3,731 2,595 16.2% 17.0% –570 6,096 14,608 – – 36 3 –9 1,218 5,595 1,963 312 – 3,387 –1,319 –1,662 – –1,159 –61 –1,076 148 –602 12,477 15,635 –324 –869 –458 –662 –324 –869 11,357 14,442 CONSOLIDATED FINANCIAL STATEMENTS Financial position • Capital employed amounted to SEK 92,204 M (81,146). • Return on capital employed remained high at 17.0 percent (16.2). • The net debt/equity ratio was 0.56 (0.56). SEK M Capital employed – of which goodwill Net debt Equity – of which non-controlling interests 2018 81,146 53,413 29,246 51,900 10 2019 92,204 57,662 33,050 59,154 11 Capital employed Capital employed in the Group, defined as total assets less interest-bearing assets and non-interest-bearing liabilities including deferred tax liabilities, amounted to SEK 92,204 M (81,146). The return on capital employed excluding items affecting comparability was 17.0 percent (16.2). Intangible assets amounted to SEK 70,355 M (64,861). The increase is mainly due to the effects of completed acqui- sitions. During the year, goodwill and other intangible assets with an indefinite useful life have arisen to a preliminary value of SEK 3,026 M as a result of completed acquisitions and adjustments of acquisitions made in previous years. A valuation model, based on discounted future cash flows, is used for impairment testing of goodwill and other intangible assets with an indefinite useful life. Property, plant and equipment amounted to SEK 8,498 M (8,070). Capital expenditure on property, plant and equip- ment and intangible assets, less sales of property, plant and equipment and intangible assets, totaled SEK 1,662 M (1,319). Total depreciation and amortization amounted to SEK 3,387 M (1,963). Trade receivables amounted to SEK 15,701 M (14,496) and inventories totaled SEK 11,276 M (11,316). The average collection period for trade receivables was 52 days (52). Material throughput time was 90 days (96). The Group is making systematic efforts to increase capital efficiency. Net debt Net debt amounted to SEK 33,050 M (29,246), of which pension commitments and other post-employment benefits accounted for SEK 3,346 M (2,880). was also affected by the implementation of IFRS 16, accord- ing to which future lease commitments of SEK 3,739 M are included in the calculation of net debt. External financing The Group’s long-term loan financing mainly consists of a GMTN Program of SEK 17,886 M (14,229), of which SEK 15,814 M (12,996) is long-term, Private Placement Program in the US totaling USD 295 M, of which USD 225M (295) is long-term, and a loan from financial institutions such as the European Investment Bank (EIB) of EUR 37 M (37) and USD 120 M (121), and a loan from the Nordic Investment Bank of EUR 55 M (55). During the year, eleven new issues were made under the GMTN program for a total amount of SEK 4,615 M. Other changes in long-term loans are mainly due to some of the originally long-term loans now having less than 1 year to maturity. The size of the loans increased due to currency fluctuations, especially regarding the USD. A total of SEK 4,615 M was raised in new long-term loans, while SEK 2,903 M in originally long-term loans matured during the year. The Group’s short-term loan financing mainly consists of two Commercial Paper Programs for a maximum USD 1,000 M (1,000) and SEK 5,000 M (5,000) respectively. At year-end, however, the outstanding balance under the Commercial Paper programs was SEK 0 M (2,752). In addi- tion, substantial credit facilities are available, mainly in the form of a Multi- Currency Revolving Credit Facility of EUR 1,200 M (900). During the year, a new financing commit- ment of EUR 230 M was also received from the EIB, which had not yet been used at year-end. The interest coverage ratio, defined as income before tax excluding items affecting comparability plus net interest, divided by net interest, was 15.2 (17.1). Fixed interest terms increased during the year, with an average term of 34 months (26) at year-end. Cash and cash equivalents amounted to SEK 442 M (538) and are invested in banks with high credit ratings. Some of the Group’s main financing agreements contain a customary Change of Control clause. This clause means that lenders have the right in certain circumstances to demand the renegotiation of conditions or to terminate the agree- ments should control of the company change. Net debt was increased by acquisitions, the dividend to shareholders and exchange rate effects during the year, while it was reduced by a continued strong positive operat- ing cash flow. Over the whole period net debt changed marginally although it fluctuated during the year. Net debt Equity Consolidated equity was SEK 59,154 M (51,900) at year-end. The return on equity was 18.0 percent (5.4). The equity ratio was 50.1 percent (48.7). The debt/equity ratio, defined as net debt divided by equity, was 0.56 (0.56). Net debt Capital employed and return on capital employed SEK M 40,000 30,000 20,000 10,000 0 Net debt Nettoskuldsättning Net debt/equity ratio Nettoskuldsättning/ Eget kapital 0.8 0.6 0.4 0.2 0.0 SEK M 100,000 80,000 60,000 40,000 20,000 0 % 25 20 15 10 5 0 15 16 17 18 19 15 16 17 18 19 Sysselsatt kapital Capital employed Return on capital employed1 Avkastning på sysselsatt kapital1 1 Excluding items affecting compara- bility 2016, 2018 and 2019. 62 ASSA ABLOY ANNUAL REPORT 2019 Consolidated balance sheet SEK M ASSETS Non-current assets Intangible assets Property, plant and equipment Right-of-use assets Investments in associates Other financial assets Deferred tax assets Total non-current assets Current assets Inventories Trade receivables Current tax receivables Other current receivables Prepaid expenses and accrued income Derivative financial instruments Short-term investments Cash and cash equivalents Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Equity Parent company’s shareholders Share capital Other contributed capital Reserves Retained earnings Equity attributable to the Parent company’s shareholders Non-controlling interests Total equity Non-current liabilities Long-term loans Non-current lease liabilities Deferred tax liabilities Pension provisions Other non-current provisions Other non-current liabilities Total non-current liabilities Current liabilities Short-term loans Current lease liabilities Derivative financial instruments Trade payables Current tax liabilities Current provisions Other current liabilities Accrued expenses and deferred income Total current liabilities TOTAL EQUITY AND LIABILITIES CONSOLIDATED FINANCIAL STATEMENTS Note 2018 2019 14 15 16 18 20 19 21 22 35 35 35 24 32 35 35 19 25 26 35 35 35 26 27 28 64,861 70,355 8,070 119 2,434 152 1,354 8,498 3,731 2,595 104 1,205 76,991 86,487 11,316 14,496 457 1,327 1,256 117 71 538 29,577 106,568 371 9,675 5,096 36,748 51,890 10 51,900 11,276 15,701 704 1,510 1,673 202 55 442 31,563 118,050 371 9,675 6,728 42,369 59,143 11 59,154 19,398 21,100 91 1,764 2,880 745 1,406 2,588 2,368 3,346 722 1,002 26,283 31,127 7,594 – 116 7,893 1,943 891 3,551 6,396 5,460 1,151 150 7,908 1,536 630 3,765 7,170 28,385 106,568 27,769 118,050 ASSA ABLOY ANNUAL REPORT 2019 63 CONSOLIDATED FINANCIAL STATEMENTS Cash flow • Operating cash flow remained strong and amounted to SEK 14,442 M (11,357). • The total purchase price of investments in subsidiaries was SEK 3,813 M (6,752). Operating cash flow SEK M Operating income (EBIT) Restructuring costs Goodwill impairment Depreciation and amortization Net capital expenditure Change in working capital Amortization of lease liabilities Interest paid and received Non-cash items Operating cash flow 2018 6,096 1,218 5,595 1,963 –1,319 –1,076 2019 14,608 312 – 3,387 –1,662 148 – –1,159 –662 –458 –869 –324 11,357 14,442 Operating cash flow/Income before tax 0.941 1.041 1 Excluding items affecting comparability. The Group’s operating cash flow amounted to SEK 14,442 M (11,357), equivalent to 104 percent (94) of income before tax excluding items affecting comparability. Net capital expenditure Net capital expenditure on intangible assets and property, plant and equipment totaled SEK 1,662 M (1,319), equiva- lent to 76 percent (67) of depreciation and amortization on intangible assets and property, plant and equipment. The low net investments during the comparison period are attributable to property divestments in Sweden and South Korea. Change in working capital SEK M Inventories Trade receivables Trade payables Other working capital Change in working capital 2018 –983 –340 –439 686 –1,076 2019 572 –229 –443 248 148 The material throughput time was 90 days (96) at year-end. Capital tied up in working capital decreased somewhat dur- ing the year, which had an impact on cash flow of SEK 148 M (–1,076) overall. The change is mainly attributable to decreased capital tied up in inventories. Relationship between cash flow from operating activities and operating cash flow SEK M 2019 2018 Cash flow from operating activities Restructuring payments Net capital expenditure Amortization of lease liabilites Reversal of tax paid Operating cash flow 9,225 793 –1,319 – 2,658 12,665 726 –1,662 –1,159 3,872 11,357 14,442 Investments in subsidiaries The total purchase price of investments in subsidiaries amounted to SEK 3,813 M (6,752), of which the cash flow effect was SEK 3,903 M (5,503). Acquired cash and cash equivalents totaled SEK 120 M (437). Change in net debt Net debt was mainly affected by the strong positive operat- ing cash flow, the dividend to shareholders, acquisitions and exchange rate differences. In addition, net debt was also affected by implementation of IFRS 16, which increased net debt at the beginning of the year by SEK 3,711 M. SEK M Net debt at 1 January Effects of the transition to IFRS 16 Operating cash flow Restructuring payments Tax paid on income Acquisitions and divestments Dividend Actuarial gain/loss on post-employment benefit obligation Change in lease liabilities Exchange rate differences, etc. Net debt at 31 December 2018 25,275 – 2019 29,246 3,711 –11,357 –14,442 793 2,658 6,390 3,666 –39 – 1,862 726 3,872 4,764 3,888 362 –242 1,165 29,246 33,050 Income before tax and operating cash flow Capital expenditure SEK M 15,000 12,000 9,000 6,000 3,000 0 Income before tax1 Resultat före skatt1 Operating cash flow2 Operativt kassaflöde2 SEK M 4,000 3,000 2,000 1,000 15 16 17 18 19 1 Excluding items affecting compara- bility 2016, 2018 and 2019. 2 Excluding restructuring payments 0 15 16 17 18 19 Net capital expenditure Nettoinvesteringar Depreciation and amortization Avskrivningar Net capital expenditure % of Nettoinvesteringar sales i % av omsättningen % 4 3 2 1 0 64 ASSA ABLOY ANNUAL REPORT 2019 Consolidated statement of cash flows SEK M OPERATING ACTIVITIES Operating income Depreciation and amortization Impairment of goodwill and other intangible assets Reversal of restructuring costs Restructuring payments Other non-cash items Cash flow before interest and tax Interest paid Interest received Tax paid on income Cash flow before changes in working capital Change in working capital Cash flow from operating activities INVESTING ACTIVITIES Investments in property, plant and equipment and intangible assets Sales of property, plant and equipment and intangible assets Investments in subsidiaries Divestments of subsidiaries Divestments of associates Other investments and divestments Cash flow from investing activities FINANCING ACTIVITES Dividend Long-term loans raised Long-term loans repaid Amortization of lease liabilities Note 8 14 31 31 14, 15 14, 15 33 31 35 35 Purchase of shares in subsidiaries from non-controlling interest Stock purchase plans Change in short-term loans, etc. Cash flow from financing activities CASH FLOW CASH AND CASH EQUIVALENTS Cash and cash equivalents at 1 January Cash flow Effect of exchange rate differences in cash and cash equivalents Cash and cash equivalents at 31 December 35 CONSOLIDATED FINANCIAL STATEMENTS 2018 6,096 1,963 5,595 1,218 –793 –458 13,621 –675 14 –2,658 10,302 –1,076 9,225 –1,793 474 –5,503 395 0 0 2019 14,608 3,387 – 312 –726 –324 17,257 –885 16 –3,872 12,516 148 12,665 –1,842 181 –3,903 84 16 0 –6,427 –5,464 –3,666 4,483 –2,849 –18 –229 –60 –390 –2,728 70 459 70 9 538 –3,888 4,615 –2,903 –1,159 –19 –21 –3,926 –7,301 –100 538 –100 4 442 ASSA ABLOY ANNUAL REPORT 2019 65 CONSOLIDATED FINANCIAL STATEMENTS Changes in consolidated equity Note Share capital 371 24 SEK M Opening balance 1 January 2018 Net income Other comprehensive income Total comprehensive income Dividend Stock purchase plans Total contributions by and distributions to Parent company’s shareholders Change in non-controlling interest Total transactions with shareholders Parent company’s shareholders Other contributed capital Reserves Retained earnings Non- controlling interests 9,675 2,932 2,164 2,164 Closing balance 31 December 2018 24 371 9,675 5,096 Opening balance 1 January 2019 according to adopted Annual Report Changed accounting principle New opening balance 1 January 2019 Net income Other comprehensive income Total comprehensive income Dividend Stock purchase plans Total contributions by and distributions to Parent company’s shareholders Change in non-controlling interest Total transactions with shareholders 371 371 9,675 5,096 9,675 5,096 1,631 1,631 1 24 Closing balance 31 December 2019 24 371 9,675 6,728 37,670 2,753 6 2,759 –3,666 –15 –3,681 – –3,681 36,748 36,748 –234 36,514 9,993 –281 9,713 –3,888 27 –3,861 5 –3,856 42,369 9 2 –1 1 – – – – – 10 10 – 10 4 1 5 – – – –4 –4 11 Total 50,657 2,755 2,168 4,923 –3,666 –15 –3,681 – –3,681 51,900 51,900 –234 51,666 9,997 1,351 11,348 –3,888 27 –3,861 1 –3,860 59,154 Equity per share after dilution and return on equity after tax Dividend and earnings per share SEK 60 50 40 30 20 10 0 15 16 17 18 19 % 30 25 20 15 10 5 0 Eget kapital per aktie efter utspädning, SEK Equity per share after dilution, SEK Return on equity after tax, % Avkastning på eget kapital efter skatt, % SEK 10 8 6 4 2 0 Utdelning per aktie Dividend per share Vinst per aktie efter Earnings per share after utspädning1 dilution1 15 16 17 18 19 1 Excluding items affecting compara- bility 2016, 2018 and 2019. 66 ASSA ABLOY ANNUAL REPORT 2019 Parent company financial statements PARENT COMPANY FINANCIAL STATEMENTS Income statement – Parent company SEK M Administrative expenses Research and development costs Capitalized work for own account Other operating income and expenses Operating income Financial income Financial expenses Income before appropriations and tax Group contributions Change in excess depreciation and amortization Tax on income Net income Note 3, 6, 8, 9 6, 8, 9 4 9, 34 10 9, 11 12 Statement of comprehensive income – Parent company SEK M Net income Other comprehensive income Total comprehensive income 2018 –1,911 –1,119 81 4,750 1,801 2,805 –654 3,951 1,608 –113 –650 4,796 2018 4,796 – 4,796 2019 –2,188 –1,480 19 5,172 1,523 4,910 –1,471 4,962 851 –233 –446 5,134 2019 5,134 – 5,134 Balance sheet – Parent company SEK M ASSETS Non-current assets Intangible assets Property, plant and equipment Shares in subsidiaries Other financial assets Total non-current assets Current assets Receivables from subsidiaries Other current receivables Prepaid expenses and accrued income Cash and cash equivalents Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Equity Restricted equity Share capital Revaluation reserve Statutory reserve Fund for development expenses Non-restricted equity Share premium reserve Retained earnings including net income for the year Total equity Untaxed reserves Non-current liabilities Long-term loans Other non-current liabilities Total non-current liabilities Current liabilities Short-term loans Trade payables Current liabilities to subsidiaries Current tax liabilities Other current liabilities Accrued expenses and deferred income Total current liabilities TOTAL EQUITY AND LIABILITIES Note 2018 2019 14 15 17 20 35 23 24 35 35 28 2,997 37 34,738 1,782 39,554 3,108 20 34,541 1,774 39,443 17,169 19,475 17 9 0 17,195 56,749 371 275 8,905 219 787 13,053 23,610 678 13,771 50 13,821 1,697 198 16,228 94 5 419 18,641 56,749 224 23 0 19,722 59,165 371 275 8,905 219 787 14,326 24,883 911 16,877 – 16,877 1,696 190 14,098 – 8 502 16,494 59,165 ASSA ABLOY ANNUAL REPORT 2019 67 PARENT COMPANY FINANCIAL STATEMENTS Cash flow statement – Parent company Note 8 SEK M OPERATING ACTIVITIES Operating income Depreciation and amortization Cash flow before interest and tax Interest paid and received Dividends received Tax paid and received Cash flow before changes in working capital Change in working capital Cash flow from operating activities INVESTING ACTIVITIES Investments in property, plant and equipment and intangible assets Investments in subsidiaries Other investments Cash flow from investing activities FINANCING ACTIVITES Dividend Loans raised Loans repaid Cash flow from financing activities CASH FLOW CASH AND CASH EQUIVALENTS Cash and cash equivalents at 1 January Cash flow Cash and cash equivalents at 31 December 2018 2019 1,801 609 2,410 –287 2,479 –556 4,046 1,326 5,372 –115 –526 0 –641 –3,666 5,249 –6,314 –4,731 0 0 0 0 1,523 643 2,166 –278 4,623 –701 5,810 1,724 7,534 –740 –728 – –1,468 –3,888 4,615 –6,793 –6,066 0 0 0 0 Change in equity – Parent company SEK M Restricted equity Non-restricted equity Share capital Revaluation reserve Statutory reserve Fund for develop- ment expenses Share premium reserve Retained earnings Total Opening balance 1 January 2018 371 275 8,905 139 787 12,017 22,494 Net income Total comprehensive income Dividend Stock purchase plans Reclassifications Total transactions with shareholders Closing balance 31 December 2018 Opening balance 1 January 2019 Net income Total comprehensive income Dividend Stock purchase plans Total transactions with shareholders 371 371 275 275 8,905 8,905 80 80 219 219 787 787 Closing balance 31 December 2019 371 275 8,905 219 787 4,796 4,796 4,796 4,796 –3,666 –3,666 –15 –80 –3,761 13,053 –15 – –3,681 23,610 13,053 23,610 5,134 5,134 5,134 5,134 –3,888 –3,888 27 –3,861 14,326 27 –3,861 24,883 68 ASSA ABLOY ANNUAL REPORT 2019 Notes NOTES Note 1 Significant accounting and valuation principles Group ASSA ABLOY applies International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), the Swedish Annual Accounts Act and the Swedish Financial Reporting Board’s RFR 1 Supplementary Accounting Rules for Corporate Groups. The accounting principles are based on IFRS as endorsed by 31 December 2019 and have been applied to all years pre- sented, unless stated otherwise. This Note describes the most significant accounting principles that have been applied in the preparation of the financial statements, which comprise the information provided on pages 40–97. Basis of preparation ASSA ABLOY’s consolidated financial statements have been prepared in accordance with IFRS as endorsed by the EU. The consolidated financial statements have been prepared in accordance with the cost method, except for financial assets and liabilities (including derivatives) measured at fair value through profit or loss. The total amount in tables and statements might not always summarize as there are rounding differences. The aim is to have each line item corre- sponding to the source and it might therefore be rounding differences in the total. Key estimates and assessments for accounting purposes The preparation of financial statements requires estimates and assessments to be made for accounting purposes. The management also makes assess- ments when applying the Group’s accounting principles. Estimates and assessments may affect the income statement and balance sheet as well as the supplementary information provided in the financial statements. Consequently, changes in estimates and assessments may lead to changes in the financial statements. Estimates and assessments play an important part in the measurement of items such as identifiable assets and liabilities in acquisitions, in impairment testing of goodwill and other assets, as well as in determining actuarial assumptions for calculating employee benefits. Estimates and assessments also affect valuation of deferred taxes, other provisions and deferred consid- erations, as well as valuation of right-of-use assets and lease liabilities where the Group, when estimating the term of a lease, assesses the likelihood that any extension options will be exercised. Estimates and assessments are continually evaluated and are based on both historical experience and reason able expectations about the future. The Group considers that estimates and assessments relating to impair- ment testing of goodwill and other intangible assets with indefinite useful life are of material importance to the consolidated financial statements. The Group tests carrying amounts for impairment on an annual basis. The recoverable amounts of cash generating units are determined by calculat- ing their values in use. The calculations are based on certain assumptions about the future which, for the Group, are associated with the risk of mate- rial adjustments in carrying amounts during the next financial year. Material assumptions and the effects of reasonable changes in them are described in Note 14. The actuarial assumptions made when calculating post-employment employee benefits also have material importance for the consolidated financial statements. For information on these actuarial assumptions, see Note 25. New and revised standards applied by the Group The Group has applied the following standards for the first time for the financial year beginning 1 January 2019: • IFRS 16 Leases • IFRIC 23 Uncertainty over income tax treatments The Group has applied IFRS 16 from 1 January 2019. During the transition, all leases, with the exception of short-term leases and leases for low-value assets, are recognized in the consolidated balance sheet. Under the standard, an asset (the right to use the leased item) and a financial liability to make lease payments are recognized. For leases previously classified as finance leases according to IAS17, the carrying amount for the right-of-use and lease liability correspond to the value of the finance lease as at 31 December 2018. The Group’s lease liability as of 1 January 2019 is SEK 3,802 M. Additional information about the financial effects of the tran sition to IFRS 16 can be found in Note 6. The Group applies the simplified approach to the transition and therefore does not restate comparative figures. In addition, the Group has chosen not to recognize right of use and lease liability regarding obligations for short-term leases and low-value leases. IFRIC 23 explains how an entity should determine the method with which a transaction should be measured and recognized when there is uncertainty over income tax treatments. The Group applies the new guidance com- mencing on 1 January 2019. In conjunction with the application, the Group reassessed its uncertain tax positions based on the new guidance, which resulted in an increased provision for uncertain income taxes of SEK 234 M. The Group has chosen a modified retrospective approach for initial applica- tion of the interpretation, in which comparative figures is not restated. The effect of initial application is recognized as an adjustment to equity in 2019. New and revised IFRS not yet effective The Group has chosen to early adopt the “Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform”, as published in September 2019. In accordance with the transition provisions, the amendments have been applied retroactively to hedging relationships that existed at the beginning of the reporting period or were subsequently identified. The amendments provide temporary relief from applying specific hedge accounting requirements for hedging relationships directly affected by IBOR reform. The reliefs have the effect that IBOR reform should not gener- ally cause hedge accounting to terminate. However, any hedge ineffective- ness should continue to be recorded in the income statement. No other new standards or interpretations that have been published but have not come into force as of the closing date are expected to have a material impact on future financial reports. Consolidated financial statements The consolidated financial statements include ASSA ABLOY AB (the Parent company) and all companies over which the Group has control. The Group controls an entity when the Group is exposed to, or has the rights to, varia- ble returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Companies acquired during the year are included in the consolidated financial statements with effect from the date when a controlling interest arose. Companies divested during the year are included in the consolidated financial statements up to the date when a controlling interest ceased. The consolidated financial statements have been prepared in accordance with the purchase method, which means that the cost of shares in subsidiar- ies was eliminated against their equity at the acquisition date. In this con- text, equity in subsidiaries is determined on the basis of the fair value of assets, liabilities and contingent liabilities at the acquisition date. Conse- quently, only that part of the equity in subsidiaries that has arisen after the acquisition date is included in consolidated equity. The Group determines on an individual basis for each acquisition whether a non-controlling inter- est in the acquired company shall be recognized at fair value or at the inter- est’s proportional share of the acquired company’s net assets. Any negative difference, negative goodwill, is recognized as revenue immediately after determination. Deferred considerations are classified as financial liabilities and revalued through profit or loss in operating income. Significant deferred considera- tions are discounted to present value. Acquisition-related transaction costs are expensed as incurred. Intra-Group transactions and balance sheet items, and unrealized profits on transactions between Group companies are eliminated in the consoli- dated financial statements. Non-controlling interests Non-controlling interests are based on the subsidiaries’ accounts with application of fair value adjustments resulting from a completed acquisition analysis. Non-controlling interests’ share in subsidiaries’ earnings is recognized in the income statement, in which net income is attributed to the Parent company’s shareholders and to non-controlling interests. ASSA ABLOY ANNUAL REPORT 2019 69 NOTES Note 1 cont. Non-controlling interests’ share in subsidiaries’ equity is recognized separately in consolidated equity. Transactions with non-controlling interests are recognized as transactions with the Group’s shareholders in equity. Associates Associates are defined as companies which are not subsidiaries but in which the Group has a significant (but not a controlling) interest. This generally refers to companies in which the Group’s shareholding represents between 20 and 50 percent of the voting rights. Investments in associates are accounted for in accordance with the equity method. In the consolidated balance sheet, shareholdings in associ- ates are recognized at cost, and the carrying amount is adjusted for the share of associates’ earnings after the acquisition date. Dividends from asso- ciates are recognized as a reduction in the carrying amount of the holdings. The share of associates’ earnings is recognized in the consolidated income statement in operating income as the holdings are related to business operations. Segment reporting Operating segments are reported in accordance with internal reporting to the chief operating decision maker. Chief operating decision maker is the function that is responsible for allocation of resources and assessing perfor- mance of the operating segments. The divisions form the operational struc- ture for internal control and reporting and also constitute the Group’s seg- ments for external financial reporting. The Group’s business is divided into five divisions. Three divisions are based on products sold in local markets in the respective division: EMEA, Americas and Asia Pacific. Global Technolo- gies and Entrance Systems consist of products sold worldwide. Foreign currency translation Functional currency corresponds to local currency in each country where Group companies operate. Transactions in foreign currencies are translated to functional currency by application of the exchange rates prevailing on the transaction date. Foreign exchange gains and losses arising from the settle- ment of such transactions are normally recognized in the income state- ment, as are those arising from translation of monetary balance sheet items in foreign currencies at the year-end rate. Exceptions are transactions relat- ing to qualifying cash flow hedges, which are recognized in other compre- hensive income. Receivables and liabilities are measured at the year-end rate. In translating the accounts of foreign subsidiaries prepared in functional currencies other than the Group’s presentation currency, all balance sheet items except net income are translated at the year-end rate and net income is translated at the average rate. The income statement is translated at the average rate for the period. Exchange differences arising from the transla- tion of foreign subsidiaries are recognized as translation differences in other comprehensive income. The table below shows the weighted average rate and the closing rate for important currencies used in the Group, relative to the Group’s presenta- tion currency (SEK). Country Currency 2018 2019 2018 2019 Average rate Closing rate United Arab Emirates Argentina Australia Brazil Canada Switzerland Chile China Czech Republic Denmark Euro zone United Kingdom Hong Kong Hungary Israel AED ARS AUD BRL CAD CHF CLP CNY CZK DKK EUR GBP HKD HUF ILS 2.37 0.33 6.49 2.39 6.71 8.91 2.57 0.20 6.56 2.39 7.10 9.50 2.45 0.23 6.34 2.32 6.60 9.12 2.54 0.16 6.51 2.30 7.13 9.58 0.014 0.013 0.013 0.012 1.31 0.40 1.38 10.27 11.57 1.11 0.032 2.42 1.37 0.41 1.42 10.57 12.02 1.20 0.032 2.64 1.31 0.40 1.38 10.29 11.37 1.15 0.032 2.38 1.33 0.41 1.40 10.44 12.23 1.20 0.032 2.69 Country India Kenya South Korea Mexico Malaysia Norway New Zealand Poland Romania Thailand Turkey US South Africa Currency INR KES KRW MXN MYR NOK NZD PLN RON THB TRY USD ZAR Average rate Closing rate 2018 0.128 0.086 0.0079 0.4522 2019 0.134 0.092 0.0081 0.4872 2018 0.128 0.088 0.0081 0.4561 2019 0.131 0.092 0.0081 0.4954 2.15 1.06 6.01 2.41 2.21 0.27 1.88 8.70 0.66 2.27 1.07 6.22 2.46 2.23 0.30 1.67 9.43 0.65 2.16 1.03 6.03 2.40 2.21 0.28 1.71 8.98 0.62 2.27 1.06 6.26 2.45 2.18 0.31 1.57 9.32 0.67 Revenue The Group recognizes revenue from contracts with customers based on the five-step model described in IFRS 15. Revenue is recognized when the entity satisfies a performance obligation by transferring a promised good or ser- vice to a customer. The good or service is transferred when the customer acquires control over the asset, which may happen either over time or at a particular point in time. Under the five-step model an entity must complete the following steps before revenue can be recognized: Identify contracts with customers, iden- tify performance obligations, determine the transaction price, allocate the transaction price to each of the separate performance obligations, and finally recognize the revenue attributable to each performance obligation. At the beginning of the customer contract ASSA ABLOY determines whether the goods and/or services that are promised in the agreement comprise one performance obligation or several separate performance obligations. A performance obligation is defined as a distinct promise to transfer a good or a service to the customer. A promised good or service is distinct if both of the following criteria are met: a) the customer can benefit from the good or service separately or together with other resources that are readily available to the customer and b) the Group's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. When determining the transaction price, which is the amount of considera- tion promised in the contract, the Group takes into account any variable considerations, such as cash discounts, volume-based discounts, and right of returns. The transaction price includes variable consideration only if it is highly probable that a significant reversal of the revenue is not expected to occur in a future period. ASSA ABLOY receives payment in advance from customers to a limited extent. No customer contracts within the Group relating to the sale of goods or services are assessed to contain a significant financing component. The Group does not recognize any contract costs since the Group applies the practical expedient permitted by the standard, under which incremen- tal costs of obtaining a contract are recognized as an expense when incurred if the amortization period of the asset that the Group otherwise would have recognized is one year or less. ASSA ABLOY allocates the transaction price for each performance obliga- tion on the basis of a stand-alone selling price. The stand-alone selling price is the price for which the Group would sell the good or service separately to a customer. In cases where a stand-alone selling price is not directly observ- able, it is usually calculated based on the adjusted market assessment approach or the expected cost plus a margin approach. Any discounts are allocated proportionately to all performance obliga- tions in the contract, provided there is not observable evidence that the discount does not relate to all performance obligations. ASSA ABLOY recognizes revenue when the Group satisfies a performance obligation by transferring a good or service to a customer, i.e. as the cus- tomer gains control over the asset. A performance obligation is met either over time or at a particular point in time. ASSA ABLOY recognizes revenue over time if any of the following criteria are met: 70 ASSA ABLOY ANNUAL REPORT 2019 Note 1 cont. a) the customer simultaneously receives and consumes the benefits pro- vided by the Group’s performance as the Group performs an obligation b) the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced c) the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date. Revenue that is not recognized over time is recognized at a given point in time, i.e. the point in time when the customer gains control over the asset. The Group’s revenue mainly consists of product sales. Service related to products sold represents a limited share of revenue. Revenue for the sale of the Group’s products is recognized at a given point in time when the cus- tomer gains control over the product, usually at the time of delivery. ASSA ABLOY also carries out installation services, which are recognized over time. For shorter installation jobs, revenue is recognized in practice upon comple- tion of installation. Revenue from service contracts is recognized over time. For product sales, a receivable is recognized when the goods have been delivered, since this is usually the point in time when the consideration becomes unconditional. Payment terms for trade receivables differ among geographic markets. The average collection period for trade receivables in 2019 was 52 days. Intra-Group sales Transactions between Group companies are carried out at arm’s length and thus at market prices. Intra-Group sales are eliminated from the consoli- dated income statement, and profits on such transactions have been eliminated in their entirety. Government grants Grants and support from governments, public authorities and the like are recognized when there is reasonable assurance that the company will comply with the conditions attaching to the grant and that the grant will be received. Grants relating to assets are recognized after reducing the carrying amount of the asset by the amount of the grant. Research and development Research expenditure is expensed as incurred. Development expenditure is recognized in the balance sheet to the extent that it is expected to generate future economic benefits for the Group and provided such benefits can be reliably measured. Capitalized development expenditure is amortized over the expected useful life. Such intangible assets, which are not yet in use, are tested annu- ally for impairment. Expenditure on the further development of existing products is expensed as incurred. Borrowing costs Borrowing costs are interest expenses and other expenses directly related to borrowing. Borrowing costs directly attributable to the acquisition, con- struction or production of a qualifying asset (an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are recognized as an expense in the period in which they are incurred. Tax on income The income statement includes all tax that is to be paid or received for the current year, adjustments relating to tax due for previous years, and changes in deferred tax. These taxes have been calculated at nominal amounts, in accordance with the tax regulations in each country, and in accordance with tax rates that have either been decided or have been notified and can confi- dently be expected to be confirmed. For items recognized in the income statement, associated tax effects are also recognized in the income state- ment. The tax effects of items recognized directly against equity or in other comprehensive income are themselves recognized against equity or in other comprehensive income. The liability method is used in accounting for deferred tax. This means that deferred tax is recognized on all temporary differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets relating to tax losses carried for- ward or other future tax allowances are recognized to the extent that it is NOTES probable that the allowance can be offset against taxable income in future taxation. Deferred tax liabilities for temporary differences relating to invest- ments in subsidiaries are not recognized in the consolidated financial statements, since the Parent company can control the time at which the temporary differences are reversed, and it is not considered likely that such reversal will occur in the foreseeable future. Deferred tax assets and deferred tax liabilities are offset when there is a legal right to do so and when deferred taxes relate to the same tax authority. The Group applies IFRIC 23 from 1 January 2019 and measures each uncertain tax position using either the most likely amount or the expected value, based on the method expected to reflect the outcome in the best way. Assessments are reconsidered when there is new information that affects earlier judgments. Cash flow statement The cash flow statement has been prepared according to the indirect method. The recognized cash flow includes only transactions involving cash payments. Cash and cash equivalents Cash and cash equivalents include cash and bank balances, and short-term financial investments that mature within three months of the acquisition date. Goodwill and acquisition-related intangible assets Goodwill represents the positive difference between the acquisition cost and the fair value of the Group’s share of the acquired company’s identifia- ble net assets at the acquisition date, and is recognized at cost less accumu- lated impairment losses. Goodwill is allocated to cash generating units and is tested annually to identify any impairment loss. Cash generating units are subject to systematic annual impairment testing using a valuation model based on discounted future cash flows. Deferred tax assets based on local tax rates are recognized in terms of tax-deductible goodwill (with corre- sponding reduction of the goodwill value). Such deferred tax assets are expensed as the tax deduction is utilized. Other acquisition-related intangi- ble assets consist chiefly of various types of intellectual property rights, such as brands, technology and customer relationships. Identifiable acquisi- tion-related intellectual property rights are initially recognized at fair value at the acquisition date and subsequently at cost less accumulated amortiza- tion and impairment losses. Amortization is on a straight-line basis over the estimated useful life and amounts to 5–12 years for technology and 8–15 years for customer relationships. Acquisition-related intangible assets with an indefinite useful life are tested for impairment annually in the same way as goodwill. Other intangible assets An intangible asset that is not acquisition-related is recognized only if it is likely that the future economic benefits associated with the asset will flow to the Group, and if the cost of the asset can be reliably measured. Such an asset is initially recognized at cost and is amortized over its estimated useful life, usually between three and five years. The carrying amount is the cost less accumulated amortization and impairment losses. Property, plant and equipment Property, plant and equipment are recognized at cost less accumulated depreciation and impairment losses. Cost includes expenditure directly attributable to acquisition of the asset. Subsequent expenditure is capital- ized if it is probable that economic benefits associated with the asset will flow to the Group, and if the cost can be reliably measured. Expenditure on repairs and maintenance is expensed as incurred. Depreciable amount is the cost of an asset less its estimated residual value. Land is not depreciated. For other assets, cost is depreciated over the estimated useful life, which for the Group results in the following average depreciation periods: • Buildings 25–50 years • Land improvements 10–25 years. • Machinery 7–10 years • Equipment 3–6 years ASSA ABLOY ANNUAL REPORT 2019 71 NOTES Note 1 cont. The residual value and useful life of assets are reviewed at each reporting date and adjusted when necessary. Gain or loss on the disposal of property, plant and equipment is recognized in the income statement as ‘Other oper- ating income’ or ‘Other operating expenses’, and consists of the difference between the selling price and the carrying amount. Leases Within the Group there are a large number of current leases, mostly relating to offices, premises and vehicles. From 1 January 2019 the Group applies IFRS 16 Leases and recognizes a right-of-use asset and a lease liability corre- sponding to the present value of future lease payments in the balance sheet on the day the leased asset is made available for use. In calculating the pres- ent value, the Group’s incremental borrowing rate by currency is used. The right-of-use asset is depreciated on a straight-line basis over the lease term, or over the period of use of the underlying asset if the lease transfers ownership of the underlying asset to the Group by the end of the lease term. Depreciation is recognized as an expense in profit or loss, while interest expense attributable to the lease liability is recognized in net financial items. The Group has chosen not to recognize any right of use or lease liability regarding obligations for short-term leases and low-value leases. Lease payments relating to such leases are reported as operating expenses over the lease term. For periods before 2019 the Group recognizes leases in accordance with IAS 17 which means that lease payments are expensed on a straight-line basis over the term of the lease and are recognized as operating expenses. Impairment Assets with an indefinite useful life are not amortized but are tested for impairment on an annual basis. For impairment testing purposes, assets are grouped at the lowest organizational level where there are separate identifi- able cash flows, so-called cash generating units (CGU). For assets that are depreciated/amortized, impairment testing is carried out when events or circumstances indicate that the carrying amount may not be recoverable. Impairment losses are recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. The recoverable amount is the higher of an asset’s fair value less selling expenses and its value in use. Inventories Inventories are valued in accordance with the ‘first in, first out’ principle at the lower of cost and net realizable value at the reporting date. Deductions are made for internal profits arising from deliveries between Group compa- nies. Work in progress and finished goods include both direct costs incurred and a fair allocation of indirect production costs. Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Regarding provisions for expected credit losses on trade receivables, see the section Impairment of financial assets. The year’s change in expected credit losses is recognized in the income statement as selling expenses. Financial assets Financial assets include cash and cash equivalents, trade receivables, short-term investments, derivatives and other financial assets. Under IFRS 9, the Group classifies financial assets in the categories finan- cial assets at amortized cost, financial assets at fair value through profit or loss, or financial assets at fair value through other comprehensive income. Financial liabilities at amortized cost Financial assets at amortized cost mainly comprise trade receivables and cash and cash equivalents. A financial asset is measured at amortized cost if the asset is held within a business model whose objective is to hold financial assets to collect their contractual cash flows, and the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets in this category are initially recognized at fair value plus transaction costs that are directly related to the purchase and then at amortized cost. Financial assets at fair value through other comprehensive income A financial asset is measured at fair value through other comprehensive income if the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and also the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets in this category are initially recognized at fair value plus transaction costs that are directly related to the purchase and then at fair value through other comprehensive income. As of the reporting date the Group has no financial assets in this category. Financial assets at fair value through profit or loss Financial assets that are not recognized in any of the other categories are measured at fair value through profit or loss. Financial assets in this category are initially recognized at fair value. Transaction costs related to financial assets recognized in this category are expensed directly in the income statement. As of the reporting date, this category comprises shares and participations. Impairment of financial assets The Group applies the IFRS 9 simplified approach to measuring expected credit losses for trade receivables. Under this approach, a provision is made for lifetime expected credit losses for the trade receivable. For calculation of expected credit losses, the trade receivables are grouped based on the num- ber of days past due. Expected credit losses on trade receivables that are not past due are primarily based on actual credit losses from recent years. Impairment that would be considered for other financial assets that are within the scope of expected credit losses have been assessed to be immaterial. Financial liabilities Financial liabilities include deferred considerations, loan liabilities, trade payables and derivative instruments. Recognition depends on how the liability is classified. The Group classifies financial liabilities in the categories: financial liabilities at amortized cost and financial liabilities at fair value through profit or loss. Financial liabilities are initially measured at fair value less, for a financial liability that is not measured at fair value through profit or loss, transaction costs that are directly related to the acquisition or issue of the financial liability. After initial recognition, financial liabilities are recognized either at amortized cost or at fair value through profit or loss, depending on the classification of the financial liability. Financial liabilities at fair value through profit or loss This category includes derivatives with a negative fair value that are not used for hedge accounting and deferred considerations. Liabilities are measured at fair value on a continuous basis and changes in value are recognized in the income statement. Loan liabilities Loan liabilities are initially valued at fair value, net of transaction costs, and subsequently at amortized cost. Amortized cost is determined based on the effective interest rate calculated when the loan was raised. Accordingly, surplus values and negative surplus values as well as direct issue expenses are allocated over the term of the loan. Non-current loan liabilities have an anticipated term of more than one year, while current loan liabilities have a term of less than one year. Trade payables Trade payables are initially valued at fair value, and subsequently at amortized cost using the effective interest method. 72 ASSA ABLOY ANNUAL REPORT 2019 Note 1 cont. Recognition and measurement of financial assets and liabilities Acquisitions and sales of financial assets are recognized on the trade date, the date on which the Group commits to purchase or sell the asset. Trans- action costs are initially included in fair value for all financial instruments, except for those recognized at fair value through profit or loss where the transaction cost is recognized through profit or loss. The fair value of quoted investments is based on current bid prices. In the absence of an active mar- ket for an investment, the Group applies various measurement techniques to determine fair value. These include use of available information on current arm’s length transactions, comparison with equivalent assets and analysis of discounted cash flows. A financial asset is derecognized from the balance sheet when the right to receive cash flows from the asset expires or is transferred to another party through the transfer of all the risks and benefits associated with the asset to the other party. A financial liability is derecognized from the balance sheet when the obligation is fulfilled, cancelled or expires, see above. Financial assets and liabilities are offset against each other and the net amount is recognized in the balance sheet when there is a legal right of set- off and there is an intention to settle the items by a net amount. See note 35 for disclosures about offsetting of financial assets and liabilities. Derivative instruments and hedging Derivative instruments are recognized in the balance sheet at the transac- tion date and are measured at fair value, both initially and in subsequent revaluations. The method for recognizing profit or loss depends on whether the derivative instrument is designated as a hedging instrument, and if so, the nature of the hedged item. For derivatives not designated as hedging instruments, changes in value are recognized on a continuous basis through profit or loss under financial items, either as income or expense. The Group designates derivatives as follows: i) Fair value hedge: a hedge of the fair value of an identified liability; ii) Cash flow hedge: a hedge of a certain risk associated with a forecast cash flow for a certain transaction; or iii) Net investment hedge: a hedge of a net investment in a foreign subsidiary. When entering into the hedge transaction, the Group documents the relationship between the hedging instrument and hedged items, as well as its risk management strategy for the hedge. The Group also documents its assessment, both on inception and on a regular basis, of whether the deriva- tive instruments used in hedge transactions are effective in offsetting changes in fair value attributable to the hedged items. The fair value of forward exchange contracts is calculated at net present value based on prevailing forward rates on the reporting date, while interest rate swaps are measured by estimating future discounted cash flows. For information on the fair value of derivative instruments, see Note 35, ‘Financial risk management and financial instruments’. Derivatives at fair value, with a maturity of more than 12 months, are classified as non-current interest-bearing liabilities or receivables. Other derivatives are classified as current interest-bearing liabilities and investments respectively. Fair value hedges For derivatives that are designated and qualify as fair value hedges, changes in value of both the hedged item and the hedging instrument are recog- nized on a continuous basis in the income statement (under financial items). Fair value hedges are used to hedge interest rate risk in borrowing linked to fixed interest terms. If the hedge would no longer qualify for hedge accounting, the fair value adjustment of the carrying amount is dissolved through profit or loss over the remaining term using the effective interest method. Cash flow hedges For derivatives that are designated and qualify as cash flow hedges, changes in value of the hedging instrument are recognized on a continuous basis in other comprehensive income for the part relating to the effective portion of the hedges. Gain or loss arising from ineffective portions of derivatives is recognized directly in the income statement under financial items. When a hedging instrument expires, is sold or no longer qualifies for hedge account- ing, and accumulated gains or losses relating to the hedge are recognized in equity, these gains/losses remain in equity and are taken to income, while NOTES the forecast transaction is finally recognized in the income statement. When a forecast transaction is no longer expected to occur, the accumu- lated gain or loss recognized in equity is immediately transferred to Other comprehensive income in the income statement. When a forecast transac- tion is no longer expected to occur, the gain or loss recognized in Other comprehensive income is recognized directly under financial items. Net investment hedges For derivatives that are designated and qualify as net investment hedges, the portion of value changes in fair value designated as effective is recog- nized in other comprehensive income. The ineffective portion of the gain or loss is recognized directly in profit or loss for the period under financial items. Accumulated gain or loss in other comprehensive income is recog- nized in the income statement when the foreign operation, or part thereof, is sold. Provisions A provision is recognized when the Group has a legal or constructive obligation resulting from a past event and it is probable that an outflow of resources will be required to settle the obligation, and that a reliable estimate of the amount can be made. Provisions are recognized at a value equivalent to the outflow of resources that will probably be required to settle the obligation. The amount of a provision is discounted to present value where the effect of time value is considered material. Assets and liabilities of disposal group classified as held for sale Assets and liabilities are classified as held for sale when their carrying amounts will principally be recovered through a sale and when such a sale is considered highly probable. They are recognized at the lower of carrying amount and fair value less selling expenses. As of the reporting date the Group had no assets or liabilities classified as held for sale. Remuneration of employees The Group operates both defined contribution and defined benefit pension plans. Comprehensive defined benefit plans are found chiefly in the US, the UK and Germany. Post-employment medical benefits are also provided, mainly in the US, and are reported in the same way as defined benefit pen- sion plans. Calculations relating to the Group’s defined benefit plans are performed by independent actuaries and are based on a number of actuarial assumptions such as discount rate, future inflation and salary increases. Obligations are valued on the reporting date at their discounted value. For funded plans, obligations are reduced by the fair value of the plan assets. Actuarial gains and losses resulting from experience-based adjustments and changes in actuarial assumptions are recognized in other comprehensive income during the period they arise. The pension expense for defined bene- fit plans is spread over the employee’s service period. The Group’s payments relating to defined contribution pension plans are recognized as an expense in the period to which they relate, based on the services performed by the employee. Swedish Group companies calculate tax on pension costs based on the difference between pension expense determined in accordance with IAS 19 and pension expense determined in accordance with the regulations applicable in the legal entity. Equity-based incentive programs The Group has equity-based remuneration plans in the form of ASSA ABLOY’s long-term incentive program presented for the first time at the 2010 Annual General Meeting. Detailed information about the structure of the various programs can be found in Note 34 Employees. For the long-term incentive program, personnel costs during the vesting period are recog- nized based on the shares’ fair value on the allotment date, that is, when the company and the employees entered into an agreement on the terms and conditions for the program. The long-term incentive program through 2017 comprised two parts: a matching part where the employee receives one share for every share the latter invests during the term of the program, and a performance-based part where the outcome is based on the company’s financial results (EPS target) during the period. The program requires that the employee continues to invest in the long-term incentive program and that the latter remains employed in the ASSA ABLOY Group. Beginning in 2018, no matching portion is included in the long-term incentive programs. ASSA ABLOY ANNUAL REPORT 2019 73 Property, plant and equipment Property, plant and equipment owned by the Parent company are recog- nized at cost less accumulated depreciation and any impairment losses in the same way as for the Group. They are depreciated over their estimated useful life, which is 5–10 years for equipment and 4 years for IT equipment. Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. From 1 January 2018 the Parent company has applied the IFRS 9 simplified approach to measuring the expected credit loss allowance for trade receivables. However, the expected credit losses attributable to the Parent company’s trade receivables have been assessed to be immaterial. Pension obligations The Parent company’s pension obligations are accounted for in accordance with FAR RedR 4 and are covered by taking out insurance with an insurance company. Leases The Parent company recognizes all lease agreements in accordance with RFR2 and has chosen to recognize all leases as operating leases. Shares in subsidiaries Shares in subsidiaries are recognized at cost less impairment losses. When there is an indication that the value of shares and interests in subsidiaries or associates has fallen, the recoverable amount is calculated. If this is lower than the carrying amount, an impairment loss is recognized. Impairment losses are recognized in Financial expenses in the income statement. Financial instruments Derivative instruments are recognized at fair value. Changes in the value of derivatives are recognized in profit or loss. Group contributions The Parent company recognizes Group contributions in accordance with RFR 2. Group contributions received and paid are recognized under appro- priations in the income statement. The tax effect of Group contributions is recognized in accordance with IAS 12 in the income statement. Contingent liabilities The Parent company has guarantees on behalf of its subsidiaries. Such an obligation is classified as a financial guarantee in accordance with IFRS. For these guarantees, the Parent company applies the alternative rule in RFR 2, reporting these guarantees as a contingent liability. NOTES Note 1 cont. Fair value is based on the share price on the allotment date; a reduction in fair value relating to the anticipated dividend has not been made as the par- ticipants are compensated for this. The employees pay a price equivalent to the share price on the investment date. The vesting terms are not stock mar- ket based and affect the number of shares that ASSA ABLOY will give to the employee when matching. If an employee stops investing in the program, all remaining personnel costs are immediately recognized in the income state- ment. Personnel costs for shares relating to the performance-based pro- gram are calculated on each accounting date based on an assessment of the probability of the performance targets being achieved. The costs are cal- culated based on the number of shares that ASSA ABLOY expects to need to settle at the end of the vesting period. When allocating shares, social security contributions must be paid in some countries to the value of the employee’s benefit. This value is based on fair value on each accounting date and recognized as a provision for social security contributions. The long-term incentive programs are essentially equity settled and an amount equivalent to the personnel cost is recognized against retained earnings in equity. In the income statement, the personnel cost is allocated to the respective function. Earnings per share Earnings per share before dilution is calculated by dividing the net income attributable to the Parent company’s shareholders by the weighted average number of outstanding shares (less treasury shares). Earnings per share after dilution is calculated by dividing the net income attributable to the Parent company’s shareholders by the sum of the weighted average number of ordinary shares and potential ordinary shares that may give rise to a dilutive effect. The dilutive effect of potential ordinary shares is only recognized if their conversion to ordinary shares would lead to a reduction in earnings per share after dilution. Dividend Dividend is recognized as a liability after the Annual General Meeting has approved the dividend. Parent company The Group’s Parent company, ASSA ABLOY AB, is responsible for Group man- agement and provides Group-wide functions. The Parent company’s reve- nue consists of intra-Group franchise and royalty revenues. The significant balance sheet items consist of shares in subsidiaries, intra-Group receiva- bles and liabilities, and external borrowing. The Parent company has pre- pared its annual accounts in accordance with the Swedish Annual Accounts Act (1995:1554) and the Swedish Financial Reporting Board’s RFR 2 Accounting for Legal Entities. RFR 2 requires the Parent company, in its annual accounts, to apply all the International Financial Reporting Stand- ards (IFRS) adopted by the EU in so far as this is possible within the frame- work of the Annual Accounts Act and with regard to the relationship between accounting and taxation. The recommendation states which exceptions from and additions to IFRS should be made. Revenue The Parent company’s revenue consists of intra-Group franchise and royalty revenues. These are recognized in the income statement as ‘Other operat- ing income’ to make clear that the Parent company has no product sales like other Group companies with external operations. Dividend Dividend revenue is recognized when the right to receive payment is considered certain. Research and development costs Research and development costs are expensed as incurred. Intangible assets Intangible assets comprise patented technology and other intangible assets. They are amortized over 4–5 years. 74 ASSA ABLOY ANNUAL REPORT 2019 Note 2 Sales revenue Distribution of revenue from contracts with customers Sales by product group EMEA Americas Asia Pacific Global Technologies Entrance Systems SEK M 2018 2019 Mechanical locks, lock systems and fittings 10,076 10,232 2018 7,650 3,876 8,220 70 2019 8,734 5,339 8,985 114 2018 4,978 2,332 2,627 12 2019 5,035 2018 11 2019 186 2,492 11,938 15,089 3,143 18 2 – 147 2018 2019 9 891 – 8 747 – – 22,862 24,798 6,605 3,155 365 6,727 3,678 508 NOTES Other Group 2018 –678 –779 –70 –103 2019 2018 2019 –710 22,046 23,486 –1,018 24,863 29,376 –104 13,933 15,849 –121 23,205 25,318 20,201 21,144 19,817 23,172 9,949 10,689 11,951 15,423 23,762 25,553 –1,630 –1,953 84,048 94,029 EMEA Americas Asia Pacific 2018 2019 2018 2019 2018 17,597 18,435 43 43 606 100 840 951 106 593 18,071 21,358 102 827 1,053 134 1,582 1,629 14 99 8 26 110 7 Global Technologies Entrance Systems 2018 3,016 5,718 493 441 2019 2018 2019 3,863 11,397 11,937 7,657 10,405 11,650 562 410 89 60 83 54 2019 552 1,082 52 15 551 923 48 15 6,610 1,802 6,633 2,355 2,008 2,471 1,302 1,333 275 459 508 495 Other Group 2018 –663 –688 –35 –28 –126 –91 2019 2018 2019 –733 31,941 34,097 –850 35,036 41,490 –37 –24 2,278 1,342 2,392 1,308 –177 10,843 11,422 –132 2,608 3,319 20,201 21,144 19,817 23,172 9,949 10,689 11,951 15,423 23,762 25,553 –1,630 –1,953 84,048 94,029 Electromechanical and electronic locks Security doors and hardware Entrance automation Total Sales by continent SEK M Europe North America Central and South America Africa Asia Oceania Total Customer sales by country SEK M US China Sweden United Kingdom France Germany Canada Australia Netherlands Finland Norway Mexico South Korea Belgium Denmark Spain Poland Group 2018 2019 30,970 36,972 4,768 4,551 3,728 3,960 3,310 2,659 2,100 2,090 1,964 1,657 1,407 1,736 1,550 1,449 1,223 1,014 4,919 4,739 4,135 4,087 3,678 2,882 2,625 2,279 2,045 1,776 1,636 1,616 1,597 1,450 1,294 1,056 SEK M Brazil Italy Switzerland India Austria New Zealand South Africa United Arab Emirates Ireland Czech Republic Saudi Arabia Singapore Hong Kong Chile Philippines Israel Japan Group 2018 945 889 902 624 609 490 592 609 427 451 374 311 298 373 247 294 220 2019 1,018 986 971 711 673 672 612 553 530 494 457 387 374 357 315 300 294 SEK M Thailand Colombia Portugal Hungary Turkey Russia Malaysia Romania Estonia Kazakhstan Indonesia Egypt Slovakia Croatia Vietnam Group 2018 2019 239 238 208 219 277 212 237 206 182 126 172 69 158 126 121 278 262 240 231 230 219 217 196 191 183 163 155 155 134 127 Other countries Total 2,469 2,556 84,048 94,029 Remaining performance obligations The total transaction price allocated to unsatisfied performance obligations at the reporting date amounts to SEK 12,760 M. Of this amount, SEK 12,151 M is expected to be recognized as revenue in 2020, while an estimated SEK 609 M will be recognized as revenue in 2021 or later. As of 31 December 2018 the total transaction price allocated to unsatis- fied performance obligations was SEK 12,282 M. Contract assets and contract liabilities The Group recognizes the following revenue-related contract assets and contract liabilities: Contract assets SEK M Accrued revenue Total Contract liabilities SEK M Non-current advances from customers and deferred revenue Current advances from customers and deferred revenue Total Group 2018 272 272 2019 607 607 Group 2018 31 1,722 1,753 2019 52 1,836 1,888 Contract assets during the year have increased by SEK 335 M, primarily as a result of more and larger ongoing projects as of the reporting date than the previous year. Contract liabilities have increased by SEK 135 M. Acquired companies account for SEK 158 M of this increase. Divested companies have not had any effect on this item. The total contract liability as at 31 December 2018 of SEK 1,753 M has in all important respects been recognized in 2019. ASSA ABLOY ANNUAL REPORT 2019 75 NOTES Note 3 Auditors’ fees Note 6 Leases SEK M Audit assignment PwC Others Audit-related services in addition to audit assignment PwC Tax advice PwC Others Other services PwC Others Total Group Parent company 2018 2019 2018 2019 56 16 1 8 9 17 14 122 64 18 1 10 12 25 11 141 5 – 1 0 1 1 0 7 4 – 1 1 1 0 0 7 The auditors’ fee for PwC in Sweden during the year was SEK 8 M (8) and the fee for extra services was SEK 4 M (2). Note 4 Other operating income and expenses SEK M Rental income Business-related taxes Profit on sales of non-current assets Profit/loss on sales of subsidiaries Transaction expenses from acquisitions Exchange rate differences Impairment operating assets, etc., in China Restructuring costs Remeasurement of deferred considerations Other, net Total Group 2018 2019 14 –54 265 11 –107 –51 –400 –142 296 –128 –296 12 –52 63 – –169 –58 – –47 358 –56 51 Parent company Other operating income in the Parent company consists mainly of franchise and royalty revenues from subsidiaries. Note 5 Share of earnings in associates SEK M Agta record AG Goal Co., Ltd PT Jasuindo Arjo Wiggins Security SARA Loading Bay Ltd Saudi Crawford Doors Ltd Others Total Group 2018 146 2019 121 17 3 –1 2 – 17 5 –1 4 0 167 147 The share of earnings in agta record AG has been estimated on the basis of the associated company’s latest available financial report, which is the pub- lished Interim Report for the first half of 2019. Accounting of leases for the Group From 1 January 2019 the Group applies IFRS 16 Leases and recognizes a right-of-use asset and a lease liability corresponding to the present value of future lease payments in the balance sheet. For previous years, leases are recognized in accordance with IAS 17 and lease payments are expensed on a straight-line basis over the term of the lease. For the Group, lease payments totaled SEK 1,084 M in 2018. As at 31 December 2018 the nominal value of agreed future lease payments was SEK 4,144 M of which SEK 1,144 M falls due for payment in 2019, SEK 2,483 M falls due for payment in 2020–2023 and SEK 517 M falls due for payment in 2024 or later. Lease payments mainly relate to rented premises and vehicles The Group has no single substantial leases since the agreements are spread over a large number of subsidiaries. Effects of the transition to IFRS 16 For the transition to IFRS 16, the Group’s liability arising from obligations for operating leases is SEK 3,718 M. Adjusted for advance lease payments, the liability was SEK 3,711 M. The Group’s total lease liability at the beginning of 2019, including financial lease liability recognized in accordance with IAS 17, was SEK 3,802 M. The lease liability based on the Group's operating lease obligations as at 31 December 2018 is derived as shown in the table below. SEK M Obligations, operating leases, as at 31 December 2018 Less: Obligations, short-term leases and low-value leases Less: Reclassifications, new assessments, etc. Adjusted lease obligations as at 31 December 2018. Effect of discount at incremental borrowing rate Less: Advance lease payments Plus: Liabilities, finance leases, as at 31 December 2018 Lease liability as at 1 January 2019 Group 2019 4,144 –187 –8 3,950 –231 –7 91 3,802 The carrying amount for right-of-use assets attributable to operating leases measured according to IFRS 16 as at 1 January 2019 was SEK 3,718 M. This amount included SEK 3,043 M for buildings and land, while the remainder was primarily attributable to cars and other vehicles. The Group has chosen to measure right-of-use for an amount equal to the lease liability as at the reporting date, adjusted for accrued and advance lease payments. The value of finance leases recognized in accordance with IAS 17 as at 31 December 2018 was SEK 119 M. The total value of the Group’s right-of-use assets as at 1 January 2019 was therefore SEK 3,837 M. When measuring right-of-use and lease liability, the Group made esti- mates and assumptions such as whether any options to extend or terminate a lease agreement will be exercised. The discount rate was determined based on the Group’s incremental borrowing rate in different currencies. The average incremental borrowing rate as at 1 January 2019 was 2.4 percent. The new standard increases capital employed in the Group, with a corre- sponding increase in net debt. The new standard will therefore have a slightly positive impact on operating income since part of the leasing expense is recognized as an interest expense in net financial items. The new standard had no significant effect on net income in 2019, nor is it expected to have any significant effect going forward. In the statement of cash flows the lease payments are split between inter- est paid in cash flow from operating activities and amortization of lease lia- bilities in financing activities. This means that the standard has a positive effect on the Group’s cash flow from operating activities. In operating cash flow, the Group has chosen to include amortization of lease liabilities as an operating component from 1 January 2019. The Group’s operating cash flow will therefore continue to be comparable with earlier periods. In the transition to IFRS 16, the Group has applied the cumulative catch-up approach as transition method and therefore does not restate any comparative information. However, the Group has chosen to report right- of-use assets and lease liabilities on separate lines in the balance sheet from 2019. As a result, assets and liabilities relating to finance leases accounted for in accordance with IAS 17 are being reclassified to new balance sheet lines in the comparison periods. 76 ASSA ABLOY ANNUAL REPORT 2019 Note 6 cont. For more information about right-of-use assets and lease liabilities, see note 16 and note 35, as well as the Group’s accounting principles. Accounting of leases for the Parent company The Parent company recognizes all lease agreements in accordance with RFR2 and has chosen to recognize all leases as operating leases. Operating leases in the Parent company mainly relate to rented premises and cars. SEK M Lease payments during the year Total Nominal value of agreed future lease payments: Due for payment in: (2019) 2020 (2020) 2021 (2021) 2022 (2022) 2023 (2023) 2024 Total Parent company 2018 2019 11 11 13 11 4 0 0 28 13 13 13 5 1 0 0 19 NOTES Note 11 Financial expenses SEK M Intra-Group interest expenses Interest expenses, other liabilities1 Interest expenses, interest rate swaps Interest expenses, currency- derivatives Exchange rate differences on financial instruments Fair value adjustments shares and interests Other financial expenses Total Group Parent company 2018 – –633 30 2019 – –785 34 –169 –239 7 – –54 –819 –4 – –58 –1,052 2018 –284 –194 – – –18 –136 –22 –654 2019 –276 –288 – – –5 –876 –26 –1,471 1 Of which 18 (–23) is fair value adjustments on derivatives, non-hedge accounting, for the Group. Note 12 Tax on income SEK M Current tax Tax attributable to prior years Group Parent company 2018 –3,069 82 –34 479 2019 –2,175 –701 –59 –638 –2,542 –3,574 2018 –640 18 –2 –26 –650 2019 –405 –19 –8 –14 –446 Note 7 Expenses by nature In the income statement costs are broken down by function. Below, these same costs are broken down by nature: Withholding tax Deferred tax Total SEK M Remuneration of employees (note 34) Direct material costs Depreciation and amortization (notes 8, 14, 15) Other purchase expenses Total Note 8 Depreciation and amortization Group 2018 24,485 30,461 1,963 15,319 72,228 2019 27,001 33,885 3,387 15,345 79,619 SEK M Intangible assets Machinery Equipment Buildings Land improvements Right-of-use assets Total Group Parent company 2018 2019 802 549 364 220 10 18 1,963 956 605 392 224 9 1,201 3,387 2018 593 2019 625 – 16 – – – – 18 – – – 609 643 Note 9 Exchange differences in the income statement SEK M Exchange differences recognized in operating income Exchange differences recognized in financial expenses Total Note 10 Financial income SEK M Earnings from investments in subsidiaries Earnings from investments in associates Intra-Group interest income Other financial income External interest income and similar items Total Group Parent company 2018 2019 2018 2019 –51 7 –44 –58 –4 –63 –41 –18 –59 –15 –5 –20 Group Parent company 2018 2019 2018 2019 – – – 3 17 20 – – – 1 14 15 2,551 4,564 64 190 0 – 59 287 0 – 2,805 4,910 Explanation for the difference between nominal Swedish tax rate and effec- tive tax rate based on income before tax: Percent Swedish income tax rate Effect of foreign tax rates Non-taxable income/ non-deductible expenses Exercised/new, not yet measured tax loss carryforwards Effect of impairment of intangible assets Other Effective tax rate in income state- ment Group 2018 22 2019 21 3 2 2 22 –3 48 4 1 1 – –1 26 Note 13 Earnings per share Earnings per share before and after dilution SEK M Earnings attributable to the Parent company’s shareholders Net profit Parent company 2018 2019 22 – –8 – – – 14 21 – –13 – – – 8 Group 2018 2,753 2,753 2019 9,993 9,993 Weighted average number of shares issued (thousands) 1,110,776 1,110,776 Earnings per share (SEK) 2.48 9.00 None of the Group’s outstanding long-term incentive programs are expected to result in significant dilution in the future. Earnings per share before and after dilution and excluding items affecting comparability Group SEK M Earnings attributable to the Parent company’s shareholders Items affecting comparability after tax1 Net profit 2018 2,753 6,229 8,982 2019 9,993 246 10,240 Weighted average number of shares issued (thousands) 1,110,776 1,110,776 Earnings per share excluding items affecting comparability (SEK) 8.09 9.22 1 Items affecting comparability relate to restructuring costs as well as impairment of goodwill and other intangible assets. ASSA ABLOY ANNUAL REPORT 2019 77 NOTES Note 14 Intangible assets 2019, SEK M Opening accumulated acquisition cost Purchases Acquisitions of subsidiaries Sales, disposals and adjustments Reclassifications Exchange rate difference Closing accumulated acquisition cost Opening accumulated amortization and impairment Sales, disposals and adjustments Reclassifications Amortization Impairment Exchange rate difference Closing accumulated amortization and impairment Carrying amount 2018, SEK M Opening accumulated acquisition cost Purchases Acquisitions of subsidiaries Divestments of subsidiaries Sales, disposals and adjustments Reclassifications Exchange rate difference Closing accumulated acquisition cost Opening accumulated amortization and impairment Sales, disposals and adjustments Reclassifications Amortization Impairment Exchange rate difference Closing accumulated amortization and impairment Carrying amount Other intangible assets consist mainly of customer relations and technol- ogy. The carrying amount of intangible assets with an indefinite useful life, excluding goodwill, amounts to SEK 6,105 M (5,640) and relates to brands. Useful life has been defined as indefinite where the time period, during which an asset is deemed to contribute economic benefits, cannot be determined. In 2018 the Group took an impairment charge of SEK 5,595 M on good- will and other intangible assets related to China. The impairment charge was attributable in its entirety to the Asia Pacific cash-generating unit. Of the total impairment charge, SEK 4,199 M relates to goodwill impairment, while the remaining SEK 1,396 was primarily attributable to brands. The impairment charge was recognized as a separate line item in the income statement, while other amortization and impairment of intangible assets are mainly recognized as cost of goods sold in the income statement. Impairment losses for the year totaled SEK 5 M (5,627), of which SEK 0 M (25) related to restructuring programs. Impairment testing of goodwill and intangible assets with indefinite useful life Goodwill and intangible assets with an indefinite useful life are allocated to the Group’s Cash Generating Units (CGUs), which consist of the Group’s five divisions. For each cash-generating unit, the Group annually tests goodwill and intangible assets with an indefinite useful life for impairment, in accordance with the accounting principle described in Note 1. Recoverable amounts for Cash Generating Units have been determined by calculating value in use. Group Parent company Brands 6,924 0 341 – –4 149 7,410 –1,239 – – –2 – –23 –1,263 6,146 Other intangible assets 10,942 623 955 6 20 271 12,817 –5,179 –10 –2 –954 –5 –120 –6,270 6,547 Total 75,512 624 3,981 6 20 2,054 82,197 –10,651 –10 –2 –956 –5 –218 –11,842 70,355 Intangible assets 6,868 736 – – – – 7,604 –3,871 – – –625 – – –4,496 3,108 Group Parent company Brands 6,344 1 300 – – –2 281 6,924 –101 – 0 –2 –1,142 6 –1,239 5,685 Other intangible assets 8,833 599 1,128 0 –170 114 438 10,942 –3,998 144 –8 –800 –286 –231 –5,179 5,763 Total 65,571 600 6,883 –100 –170 112 2,616 75,512 –4,163 144 –8 –802 –5,627 –195 –10,651 64,861 Intangible assets 6,775 93 – – – – – 6,868 –3,278 – – –593 – – –3,871 2,997 Goodwill 57,646 – 2,685 – 4 1,635 61,970 –4,233 – – – – –76 –4,309 57,662 Goodwill 50,394 – 5,455 –100 – – 1,897 57,646 –64 – – – –4,199 30 –4,233 53,413 These calculations are based on estimated future cash flows, which in turn are based on financial budgets for a three-year period approved by manage- ment. Cash flows beyond the three-year period are extrapolated using estimated growth rates according to the information below. Material assumptions used to calculate values in use: • Budgeted operating margin. • Growth rate for extrapolating cash flows beyond the budget period. • Discount rate after tax used for estimated future cash flows. Management has determined the budgeted operating margin based on pre- vious results and expectations of future market development. A growth rate of 3 percent (3) has been used for all CGUs to extrapolate cash flows beyond the budget period. This growth rate is considered to be a conservative esti- mate. Further, an average discount rate in local currency after tax has been used in the calculations. The difference in value compared with using a discount rate before tax is not deemed to be material. The discount rate has been determined by calculating the weighted average cost of capital (WACC) for each division. 78 ASSA ABLOY ANNUAL REPORT 2019 Note 14 cont. 2019 Overall, the discount rate after tax used varied between 8.0 and 9.0 percent (EMEA 8.0 percent, Americas 8.0 percent, Asia Pacific 9.0 percent, Global Technologies 8.0 percent and Entrance Systems 8.0 percent). Goodwill and intangible assets with an indefinite useful life were allocated to the Cash Generating Units as summarized in the following table: 2019, SEK M Goodwill Intangible assets with indefinite useful life Total EMEA 11,121 237 11,358 Americas Asia Pacific 14,105 1,342 15,447 4,168 744 4,912 Global Technologies 15,459 902 16,361 Entrance Systems 12,809 2,880 15,688 Total 57,662 6,105 63,766 NOTES 2018 Overall, the discount rate after tax used varied between 8.0 and 9.0 percent (EMEA 8.0 percent, Americas 8.0 percent, Asia Pacific 9.0 percent, Global Technologies 8.0 percent and Entrance Systems 8.0 percent). Goodwill and intangible assets with an indefinite useful life were allocated to the Cash Generating Units as summarized in the following table: 2018, SEK M Goodwill Intangible assets with indefinite useful life Total EMEA 10,709 232 10,941 Americas Asia Pacific 13,327 1,012 14,339 3,892 736 4,628 Global Technologies 13,245 815 14,060 Entrance Systems 12,240 2,846 15,086 Total 53,413 5,640 59,053 Sensitivity analysis A sensitivity analysis has been carried out for each cash-generating unit. The results of this analysis are summarized below. 2019 If the estimated operating margin after the end of the budget period had been one percentage point lower than the management’s estimate, the total recoverable amount would be 6 percent lower (EMEA 6 percent, Americas 5 percent, Asia Pacific 11 percent, Global Technologies 5 percent, and Entrance Systems 7 percent). If the estimated growth rate used to extrapolate cash flows beyond the budget period had been one percentage point lower than the basic assump- tion of 3 percent, the total recoverable amount would be 15 percent lower (EMEA 15 percent, Americas 15 percent, Asia Pacific 13 percent, Global Technologies 15 percent, and Entrance Systems 15 percent). If the estimated weighted capital cost used for the Group’s discounted cash flows had been one percentage point higher than the basic assumption of 8.0 to 9.0 percent, the total recoverable amount would be 17 percent lower (EMEA 17 percent, Americas 17 percent, Asia Pacific 14 percent, Global Technologies 17 percent, and Entrance Systems 17 percent). These calculations are hypothetical and should not be viewed as an indi- cation that these factors are any more or less likely to change. The sensitivity analysis should therefore be interpreted with caution. None of the hypothetical cases above would lead to an impairment of goodwill in an individual Cash Generating Unit. 2018 If the estimated operating margin after the end of the budget period had been one percentage point lower than the management’s estimate, the total recoverable amount would be 6 percent lower (EMEA 6 percent, Americas 5 percent, Asia Pacific 10 percent, Global Technologies 5 percent, and Entrance Systems 7 percent). If the estimated growth rate used to extrapolate cash flows beyond the budget period had been one percentage point lower than the basic assump- tion of 3 percent, the total recoverable amount would be 15 percent lower (EMEA 15 percent, Americas 15 percent, Asia Pacific 13 percent, Global Technologies 15 percent, and Entrance Systems 15 percent). If the estimated weighted capital cost used for the Group’s discounted cash flows had been one percentage point higher than the basic assumption of 8.0 to 9.0 percent, the total recoverable amount would be 17 percent lower (EMEA 17 percent, Americas 17 percent, Asia Pacific 14 percent, Global Technologies 17 percent, and Entrance Systems 17 percent). These calculations are hypothetical and should not be viewed as an indi- cation that these factors are any more or less likely to change. The sensitivity analysis should therefore be interpreted with caution. None of the hypothetical cases above would lead to an impairment of goodwill in an individual Cash Generating Unit. ASSA ABLOY ANNUAL REPORT 2019 79 Land and land improvements Machinery Equipment Construction in progress Finance leases Group NOTES Note 15 Property, plant and equipment 2019, SEK M Opening accumulated acquisition cost Purchases Acquisitions of subsidiaries Sales and disposals Reclassifications Exchange rate difference Closing accumulated acquisition cost Opening accumulated depreciation and impairment Sales and disposals Impairment incl. reversals Depreciation and amortization Reclassifications Exchange rate difference Closing accumulated depreciation and impairment Carrying amount 2018, SEK M Opening accumulated acquisition cost Purchases Acquisitions of subsidiaries Divestments of subsidiaries Sales and disposals Reclassification to right-of-use assets Reclassifications Exchange rate difference Buildings 5,958 39 54 –103 167 186 6,301 60 –1 –224 –2 –100 –3,321 2,980 Buildings 5,811 32 61 –82 –357 – 139 354 –3,053 –145 –7,458 –2,889 1,142 10,026 1 87 –28 –12 25 249 157 –22 406 409 1,215 11,226 3,805 228 33 –145 127 155 4,203 8 – –9 – –4 –150 1,064 17 –16 –616 6 –328 –8,395 2,831 132 –2 –381 –2 –130 –3,272 931 Group 1,191 9,503 10 7 –10 –106 – 2 48 277 81 –281 –791 – 583 654 3,763 249 47 –19 –498 – 36 227 3,805 Closing accumulated acquisition cost 5,958 1,142 10,026 Opening accumulated depreciation and impairment Sales and disposals Divestments of subsidiaries Impairment incl. reversals Depreciation and amortization Reclassification to right-of-use assets Reclassifications Exchange rate difference Closing accumulated depreciation and impairment Carrying amount –2,909 –151 –7,241 –2,890 289 28 –46 –220 – –4 –191 –3,053 2,905 18 2 0 –10 – 1 –6 –145 997 771 232 –72 –549 – –80 –519 –7,458 2,568 485 15 –33 –364 – 98 –200 –2,889 916 Land and land improvements Machinery Equipment Construction in progress 684 701 25 –28 –709 19 692 – – – – – – – 692 849 625 2 –3 –2 – –844 57 684 – – – – – – – – – 684 – – – – – – – – – – – – – – – Finance leases 194 15 15 – –2 –203 –31 11 – Total 21,614 1,218 356 –326 –20 793 23,635 –13,544 217 –19 –1,230 2 –563 –15,137 8,498 Total 21,311 1,208 214 –395 –1,756 –203 –115 1,351 21,614 –55 –13,246 0 – – 1,563 278 –151 –18 –1,160 84 –5 –6 – – 84 11 –923 –13,544 8,070 Parent company Equipment 85 4 – –4 – – 85 –47 0 – –18 – – –65 20 Parent company Equipment 63 22 – – – – – – 85 –31 – – – –16 – – – –47 37 Impairment losses for the year totaled SEK 19 M (151), of which SEK 3 M (89) related to restructuring programs. As a result of the transition to IFRS 16 previously recognized finance leases have been reclassified to right-of-use assets. Note 16 Right-of-use assets The following amounts regarding right-of-use assets are recognized in the balance sheet. The following amounts related to leases are recognized in the income statement: SEK M Buildings Machinery Vehicles Other equipment Total Group 2018 119 – – – 2019 2,943 20 705 63 SEK M Amortization attributable to right-of-use assets: Buildings Machinery Vehicles 119 3,731 Other equipment Additions to right-of-use assets for 2019 amounted to SEK 1,016 M. Additional information about the financial effects of the transition to IFRS 16 can be found in Note 6 and in the accounting principles, note 1. Operating expenses relating to: Short-term leases Leases of low-value assets Variable lease payments not included in lease liabilities Interest expenses relating to: Lease liabilities Total Group 2018 2019 –18 – – – – – – –860 –8 –305 –29 –78 –12 –16 –3 –21 –96 –1,404 The total cash flow attributable to leases in 2019 was SEK 1,255 M. 80 ASSA ABLOY ANNUAL REPORT 2019 NOTES Corporate identity number, Registered office Number of shares Share of equity, % Carrying amount, SEK M Parent company Note 17 Shares in subsidiaries Company name ASSA Sverige AB ASSA ABLOY Entrance Systems AB ASSA ABLOY Global Solutions AB ASSA ABLOY Kredit AB ASSA ABLOY Holding AB ASSA ABLOY Försäkrings AB ASSA ABLOY Asia Holding AB ASSA ABLOY OY ASSA ABLOY Norge A/S ASSA ABLOY Danmark A/S ASSA ABLOY Deutschland GmbH ASSA ABLOY Nederland Holding B.V. Pan Pan DOOR Co LTD ASSA ABLOY France SAS HID Global Switzerland S.A. ASSA ABLOY Entrance Systems Austria GmbH ASSA ABLOY Ltd HID Global Ireland Teoranta Mul-T-Lock Ltd ASSA ABLOY Holdings (SA) Ltd ASSA ABLOY Inc ABLOY Canada Inc. ASSA ABLOY of Canada Ltd ASSA ABLOY Australia Pacific Pty Ltd Cerramex, S.A de C.V ASSA ABLOY Mexico, S.A de CV Cerraduras y Candados Phillips S.A de C.V ASSA ABLOY Colombia S.A.S WHAIG Limited ASSA ABLOY Asia Pacific Ltd 556061-8455, Eskilstuna 556204-8511, Landskrona 556666-0618, Stockholm 556047-9148, Stockholm 559180-8646, Stockholm 516406-0740, Stockholm 556602-4500, Stockholm 1094741-7, Joensuu 979207476, Moss CVR 10050316, Herlev HR B 66227, Berlin 52153924, Raamsdonksveer 210800004058002, Dashiqiao 412140907, R.C.S. Versailles CH-232-0730018-2, Granges A-2320 Schwechat 2096505, Willenhall 364896, Galway 520036583, Yavne 1948/030356/06, Roodepoort 039347-83, Oregon 1148165260, Montreal 104722749 RC0003, Ontario ACN 095354582, Oakleigh, Victoria CER8805099Y6, Mexico AAM961204CI1, Mexico CCP910506LK2, Mexico 860009826-8, Bogota EC21330, Bermuda 53451, Hong Kong ASSA ABLOY Entrance Systems IDDS AB 556071-8149, Landskrona ASSA ABLOY Portugal, Unipessoal, Lda (Portugal) PT500243700, Alfragide ASSA ABLOY Mobile Services AB ASSA ABLOY Holding Italia S.p.A. HID SA (Argentina) HID Global SAS CEDES AG ASSA ABLOY East Africa Ltd 556909-5929, Stockholm IT01254420597, Rome CUIT 30-61783980-2, Buenos Aires FR21341213411, Nanterre CHE-101.321-677, Landquart C.20402, Nairobi ASSA ABLOY Brasil Indústria e Comércio Ltda. 02.214.604/0001-66, Salvador Assa Abloy Brasil Sistemas de Segurança Ltda. 01.211.626/0001-00, Sao Paulo Assa Abloy Chile SpA Total 1 The Group’s holdings amount to 100 percent. 96671320-8, Santiago 100 100 100 100 100 100 100 100 100 100 100 100 661 100 100 100 100 100 100 100 100 100 100 100 01 100 01 100 100 100 100 100 100 100 21 100 100 100 01 01 01 197 192 475 6,036 679 145 189 4,257 538 376 1,086 771 1,352 1,964 47 109 3,091 293 901 217 2,410 0 138 242 0 762 0 203 303 72 5,093 0 25 974 0 679 635 90 0 0 0 34,541 70 1,000 1,306,891 400 6,500 60,000 1,000 800,000 150,000 60,500 1 180 – 15,184,271 2,500 1 1,330,000 501,000 13,787,856 100,220 100 1 9,621 48,190,000 4 50,108,549 112 3,115,080 100,100 1,000,000 25,000,000 1 50,000 650,000 2,400 1,000,000 300,000 13,500 170 68,964 10 Group Note 18 Investments in associates Company name Agta record AG Goal Co., Ltd PT Jasuindo Arjo Wiggins Security SARA Loading Bay Ltd Saudi Crawford Doors Ltd Talleres Agui S.A. Others Total Country of registration Number of shares Share of equity 2018, % Share of equity 2019, % Carrying amount 2018, SEK M Carrying amount 2019, SEK M Switzerland Japan Indonesia United Kingdom Saudi Arabia Spain 5,166,945 2,778,790 1,533,412 4,990 800 – 39 46 49 50 40 40 39 46 49 50 40 – 1,800 587 19 14 5 9 1 1,916 637 23 13 5 – 1 2,434 2,595 The share of equity in agta record AG has been estimated on the basis of the associated company’s latest available financial report, which is the published Interim Report for the first half of 2019. For the period January to June, the company’s revenue totaled SEK 2,015 M (1,817) and income after tax was SEK 198 M (136). The company’s assets totaled SEK 4,166 M (3,622) and total liabilities amounted to SEK 1,406 M (1,095). In March 2019 the Group announced that it signed an agreement for the acquisition of 54 percent of the shares in agta record AG. The acquisition is subject to regulatory approval and is expected close in 2020. After the acquisition the Group will hold a 93 percent stake in the company. Further information on the transaction can be found in the Report of the Board of Directors. ASSA ABLOY ANNUAL REPORT 2019 81 NOTES Note 19 Deferred tax SEK M Deferred tax assets Non-current assets Pension provisions Tax loss carryforwards and other tax credits Other deferred tax assets Deferred tax assets Deferred tax liabilities Non-current assets Other deferred tax liabilities Deferred tax liabilities Deferred tax assets, net Change in deferred tax SEK M Opening balance Acquisitions and divestments Recognized in income statement Actuarial gain/loss on post-employment benefit obligations Exchange rate differences Closing balance Maturity analysis Group 2018 2019 SEK M 104 330 149 770 84 430 321 370 1,354 1,205 1,523 242 1,764 –410 1,848 520 2,368 –1,163 Current trade receivables Trade receivables due: < 3 months 3–12 months >12 months Impaired trade receivables: Current Trade receivables due: < 3 months 3–12 months >12 months Group Total 2018 –862 52 529 –34 –95 2019 –410 –183 –678 81 27 Change in loss allowance for trade receivables SEK M Opening balance Acquisitions and divestments of subsidiaries –410 –1,163 Receivables written off The Group has tax loss carryforwards and other tax credits of SEK 3,375 M (3,234) for which deferred tax assets have not been recognized, as it is uncer- tain whether they can be offset against taxable income in future taxation. Reversal of unused amounts Provision for bad debts Exchange rate differences Closing balance Group 2018 2019 10,615 11,201 3,221 930 908 5,059 3,554 1,206 637 5,397 –65 –57 –110 –133 –870 –1,178 14,496 –120 –146 –575 –898 15,701 Group 2018 1,160 15 –262 –85 306 45 1,178 2019 1,178 26 –477 –125 257 39 898 Note 20 Other financial assets Group Parent company SEK M 2018 2019 – 8 106 37 152 – 6 45 52 104 Investments in associates Other shares and interests Non-current interest-bearing receivables Other non-current receivables Total Note 21 Inventories SEK M Materials and supplies Work in progress Finished goods Advances paid Total 2018 1,621 2019 1,621 – – – – 161 1,782 153 1,774 Group 2018 3,057 2,291 5,640 328 2019 3,102 2,402 5,701 71 Note 23 Parent company’s equity The Parent company’s equity is split between restricted and non-restricted equity. Restricted equity consists of share capital, revaluation reserve, statu- tory reserve and the fund for development expenses. The statutory reserve contains premiums (amounts received from share issues that exceed the nominal value of the shares) relating to shares issued up to 2005. Non-restricted equity consists of share premium reserves, retained earnings and net income for the year. Note 24 Share capital, number of shares and dividend per share Number of shares, thousands Series A shares Series B shares Share capi- tal, SEK K Total Opening balance at 1 January 2018 57,525 1,055,052 1,112,576 370,859 Closing balance at 31 December 2018 57,525 1,055,052 1,112,576 370,859 11,316 11,276 Number of votes, thousands 575,259 1,055,052 1,630,311 Impairment of inventories during the year amounted to SEK 487 M (230). Note 22 Trade receivables SEK M Trade receivables Loss allowance Total Trade receivables by currency SEK M USD EUR CNY GBP SEK KRW AUD CAD Other currencies Total 82 Group 2018 15,674 –1,178 14,496 2019 16,598 –898 15,701 Group 2018 5,083 3,478 1,216 762 659 448 269 325 2019 5,376 3,521 1,388 848 643 509 432 376 2,256 2,608 14,496 15,701 Opening balance at 1 January 2019 57,525 1,055,052 1,112,576 370,859 Closing balance at 31 December 2019 57,525 1,055,052 1,112,576 370,859 Number of votes, thousands 575,259 1,055,052 1,630,311 All shares have a par value of around SEK 0.33 (0.33) and give shareholders equal rights to the company’s assets and earnings. All shares are entitled to dividends subsequently determined. Each Series A share carries ten votes and each Series B share one vote. All issued shares are fully paid. The weighted average number of shares was 1,110,776 (1,110,776) dur- ing the year. None of the Group’s outstanding long-term incentive programs are expected to result in significant dilution in the future. The total number of treasury shares as at 31 December 2019 amounted to 1,800,000. No shares have been repurchased during the year. Dividend per share The dividend paid during the financial year totaled SEK 3,888 M (3,666), equivalent to SEK 3.50 (3.30) per share. A dividend for 2019 of SEK 3.85 per share, a total of SEK 4,276 M, will be proposed at the Annual General Meet- ing on Wednesday, 29 April 2020. ASSA ABLOY ANNUAL REPORT 2019 Note 25 Post-employment employee benefits Post-employment employee benefits include pensions and medical bene- fits. Pension plans are classified as either defined benefit plans or defined contribution plans. Pension obligations in the balance sheet mainly relate to defined benefit plans. ASSA ABLOY has defined benefit pension plans in a number of countries. The most comprehensive defined benefit plans are found in the US, the UK and Germany. The defined benefit plans in the US and the UK are secured by assets in pension funds, while the plans in Germany are chiefly unfunded. In the US, there are also unfunded plans for post-employment medical benefits. The operations of pension funds are regulated by national regulations and practice. The responsibility for monitoring the pension plans and their assets rests mainly with the boards of the pension funds, but can also rest more directly with the company. The Group has an overall policy for the lim- its within which asset allocation should be made. Each pension fund adjusts its local asset allocation according to the nature of the local pension obliga- tion, particularly the remaining term and the breakdown between active members and pensioners. The Group has not changed the processes used for managing these risks compared with previous periods. The investments are well diversified so that depreciation of an individual investment should not have any material impact on the plan assets. The majority of assets are invested in shares as the Group considers that shares produce the best long-term return at an acceptable risk level. The total allo- cation to shares should not, however, exceed 60 percent of total assets. Fixed income assets are invested in a combination of ordinary government bonds and corporate bonds but also in inflation-indexed bonds. The aver- age term of these is normally somewhat shorter than the term of the under- lying liability. Bonds should not account for less than 30 percent of assets. A small proportion of assets is also invested in real estate and alternative investments, mainly hedge funds. As at 31 December 2019, shares accounted for 45 percent (43) and fixed income securities for 32 percent (35) of plan assets, while other assets accounted for 23 percent (23). The actual return on plan assets in 2019 was SEK 817 M (–230). NOTES Amounts recognized in the income statement Pension costs, SEK M 2018 2019 Defined contribution pension plans Defined benefit pension plans Post-employment medical benefit plans Total of which, included in: Operating income Net financial items Amounts recognized in the balance sheet Pension provisions, SEK M Provisions for defined benefit pension plans Provisions for post-employment medical benefit plans Provisions for defined contribution pension plans Total 647 175 28 849 771 79 692 186 31 910 824 86 2018 2,296 571 12 2019 2,717 615 14 2,880 3,346 Pensions with Alecta Commitments for old-age pensions and family pensions for salaried employees in Sweden are secured in part through insurance with Alecta. According to UFR 10, this is a defined benefit plan that covers many employ- ers. For the 2019 financial year, the company has not had access to informa- tion making it possible to report this plan as a defined benefit plan. Pension plans in accordance with ITP secured through insurance with Alecta are therefore reported as defined contribution plans. The year’s pension contri- butions that are contracted to Alecta total SEK 29 M (30), of which SEK 13 M (13) relates to the Parent company. Pension contributions are expected to remain largely unchanged in 2020. Alecta’s surplus can be distributed to policyholders and/or the insured. As at 30 September 2019, Alecta’s surplus expressed as the collective con- solidation level amounted preliminarily to 142 percent (142 percent as at 31 December 2018). The collective consolidation level consists of the mar- ket value of Alecta’s assets as a percentage of its insurance commitments calculated according to Alecta’s actuarial calculation assumptions, which do not comply with IAS 19. The collective consolidation level is normally allowed to vary between 125 and 155 percent. If the consolidation level deviates from this range, measures in the form of an adjustment of the premium level should be taken to return to the normal range. Specification of defined benefit pension plans, post-employment medical benefits and plan assets by country US United Kingdom Germany Other countries Total Specification of defined benefits, SEK M Present value of funded obligations Fair value of plan assets Net value of funded plans Present value of unfunded obligations Present value of unfunded medical benefits Net value of defined benefit pension plans Provisions for defined contribution pension plans Total 2018 2,790 2019 3,246 –2,514 –2,983 276 263 – – 276 – 276 – – 263 – 263 2018 2019 99 –21 79 735 – 813 – 813 109 –23 86 780 – 866 – 866 2018 1,968 2019 2,224 –1,735 –1,972 234 – 567 800 – 800 252 – 610 862 – 862 2018 1,352 –958 394 580 5 978 12 990 Key actuarial assumptions United Kingdom Germany US Key actuarial assumptions (weighted average), % 2018 2019 2018 2019 2018 2019 Discount rate Expected annual salary increases Expected annual pension increases Expected annual medical benefit increases Expected annual inflation 2.8 n/a 2.0 n/a 2.4 2.0 n/a 1.9 n/a 2.1 1.8 2.8 1.5 n/a 1.5 1.2 2.8 1.5 n/a 1.5 4.3 n/a 2.0 6.4 3.0 3.2 n/a n/a 5.9 3.0 2019 1,817 2018 6,209 –1,206 –5,227 982 1,314 571 2,868 611 724 5 1,341 14 2019 7,396 –6,184 1,213 1,504 615 3,332 12 14 1,356 2,880 3,346 ASSA ABLOY ANNUAL REPORT 2019 83 NOTES Note 25 cont. Movement in obligations 2019, SEK M Opening balance 1 January 2019 Recognized in the income statement: Current service cost Past service cost Gains and losses arising from settlements Interest expense/income Total recognized in the income statement Recognized in other comprehensive income: Return on plan assets, excluding amounts included above Gain/loss from change in demographic assumptions Gain/loss from change in financial assumptions Experience-based gains/losses Remeasurement of net pension obligations Exchange rate differences Total recognized in other comprehensive income Contributions and payments: Employer contributions Employee contributions Payments Total payments Closing balance 31 December 2019 Movement in obligations 2018, SEK M Opening balance 1 January 2018 Acquisitions and divestments Reclassifications Recognized in the income statement: Current service cost Past service cost Gains and losses arising from settlements Interest expense/income Total recognized in the income statement Recognized in other comprehensive income: Return on plan assets, excluding amounts included above Gain/loss from change in demographic assumptions Gain/loss from change in financial assumptions Experience-based gains/losses Remeasurement of net pension obligations Exchange rate differences Total recognized in other comprehensive income Contributions and payments: Employer contributions Employee contributions Payments Settlements Total payments Closing balance 31 December 2018 Post-employment medical benefits Defined benefit pension plans 571 7,523 Plan assets –5,227 6 – – 26 31 – 24 – – 24 22 45 – 0 –33 –33 615 123 8 –5 222 348 – 210 797 –14 994 358 1,352 – 22 –344 –322 8,901 Post-employment medical benefits Defined benefit pension plans 573 – 64 6 – – 21 28 – –112 – – –112 48 –63 – 0 –30 – –30 571 7,431 120 –64 118 15 –15 197 315 – –163 –125 –8 –296 356 59 – 19 –320 –37 –338 7,523 – – – –161 –161 –655 – – – –655 –306 –961 –89 –22 277 166 –6,184 Plan assets –5,081 –91 – – – – –140 –140 369 – – – 369 –262 107 –296 –19 257 37 –22 –5,227 Total 2,868 129 8 –5 86 218 –655 234 797 –14 362 74 436 –89 0 –101 –189 3,332 Total 2,923 29 – 124 15 –15 79 202 369 –275 –125 –8 –39 142 378 –296 0 –94 – –390 2,868 Plan assets allocation Plan assets Publicly traded shares Government bonds Corporate bonds Inflation-linked bonds Property Cash and cash equivalents Alternative investments Other assets Total 2018 2,244 2019 2,772 651 842 312 345 41 65 829 946 205 427 36 50 727 5,227 919 6,184 Sensitivity analysis of defined benefit obligations and post-employment medical benefits The effect on defined benefit obligations and post-employment medical benefits of a 1.0 percentage change in some actuarial assumptions, change in percent Discount rate Expected annual medical benefit increases +1.0% –15.8% 8.6% –1.0 % 14.7% –7.2% 84 ASSA ABLOY ANNUAL REPORT 2019 Note 26 Other provisions SEK M Opening balance at 1 January 2019 Provisions for the year Acquisitions of subsidiaries Reversal of non-utilized amounts Payments Utilized during the year, without cash flow impact Exchange rate differences Closing balance at 31 December 2019 SEK M Opening balance at 1 January 2018 Provisions for the year Acquisitions of subsidiaries Reversal of non-utilized amounts Payments Utilized during the year, without cash flow impact Reclassifications Exchange rate differences Closing balance at 31 December 2018 Restructuring reserve 1,190 312 – – –726 –29 31 778 Restructuring reserve 944 1,218 – – –793 –209 – 30 1,190 Balance sheet breakdown: Other non-current provisions Other current provisions Total NOTES Group Other 445 400 4 –237 –38 – 0 Total 1,635 711 4 –237 –764 –29 31 Note 30 Contingent liabilities SEK M Guarantees Guarantees on behalf of subsidiaries Total Group Parent company 2018 121 – 121 2019 123 – 123 2018 – 11,522 11,522 2019 – 7,652 7,652 In addition to the guarantees shown in the table above, the Group has a large number of minor bank guarantees for performance of obligations in operating activities. No material liabilities are expected as a result of these guarantees. Group 573 1,351 Maturity profile – guarantees, SEK M 2018 2019 Group Other 1,202 106 7 –14 –53 – –807 2 445 Group 2018 745 891 Total 2,146 1,324 7 –14 –845 –209 –807 32 1,635 2019 722 630 <1 year >1 <2 years >2 <5 years >5 years Total Note 31 Cash flow items SEK M Adjustments for non-cash items Profit on sales of non-current assets Profit/loss on sales of subsidiaries Change in pension provisions Share of earnings in associates Dividend from associates Remeasurement of deferred considerations Other Adjustments for non-cash items 1,635 1,351 Change in working capital The restructuring reserve at year-end relates mainly to the ongoing restruc- turing program launched during the year and the previous year. The restruc- turing reserve is expected to be used over the next two years. The non- current part of the reserve totaled SEK 215 M . For further information on the restructuring programs, see the Report of the Board of Directors. Other provisions mainly relate to legal obligations including future environment-related measures. Note 27 Other current liabilities SEK M VAT and excise duties Employee withholding tax Advances received Social security contributions and other taxes Deferred considerations Other current liabilities Total Group 2018 651 145 1,170 111 1,021 454 3,551 2019 618 159 1,267 128 883 710 3,765 Note 28 Accrued expenses and deferred income SEK M Personnel-related expenses Customer-related expenses Deferred income Accrued interest expenses Other Total Group Parent company 2018 3,227 1,022 553 138 1,457 6,396 2019 3,486 1,170 569 158 1,786 7,170 2018 285 – – 82 52 2019 354 – – 93 55 419 502 Note 29 Assets pledged against liabilities to credit institutions SEK M Real estate mortgages Other mortgages Total Group 2018 97 65 162 2019 35 88 123 Parent company 2018 2019 – – – – – – Inventories increase/decrease (–/+) Trade receivables increase/decrease (–/+) Trade payables increase/decrease (+/–) Other working capital increase/decrease (–/+) Change in working capital Divestments of subsidiaries Purchase prices received, net Cash and cash equivalents in divested subsidiaries Change in consolidated cash and cash equivalents due to divestments Note 32 Reserves SEK M Hedging reserve Net investment hedges Cash flow hedges Exchange rate difference Total Opening balance 1 January 2018 –236 –2 3,170 2,932 Other comprehensive income in associates Cash flow hedges Net investment hedges Exchange rate differences Deferred tax Closing balance 31 December 2018 Opening balance 1 January 2019 Other comprehensive income in associates Net investment hedges Exchange rate differences Deferred tax – – –8 – 1 –243 –243 – –5 – 1 Closing balance 31 December 2019 –247 – 2 – – 0 – – – – – – – 87 – – 87 2 –8 2,090 2,090 –9 –8 5,339 5,096 5,339 5,096 86 – 86 –5 1,556 1,556 –6 –4 6,975 6,728 Of the item hedging of net investment, SEK –53 M (–28) relates to current hedge relationships, while the remainder, SEK –194 M (–215), relates to closed hedge relationships for which hedged objects remain. ASSA ABLOY ANNUAL REPORT 2019 85 69 23 13 16 61 22 22 18 121 123 Group 2018 2019 –265 –11 124 –167 66 –296 92 –458 –983 –340 –439 686 –1,076 406 –11 395 –63 – 132 –147 59 –358 54 –324 572 –229 –443 248 148 84 – 84 NOTES Note 33 Business combinations SEK M Purchase prices 2018 2019 Placard On 27 September 2019 ASSA ABLOY acquired 100 percent of the share capital in Placard, Australia’s largest secure card manufacturer. Cash paid for acquisitions during the year 5,602 3,564 The acquisition of Placard expands the Group’s offering of secure identi- ties, while offering customers a broad range of secure card and digital ID solutions. Placard is headquartered in Melbourne, Australia. Intangible assets in the form of brands and customer relationships have been disclosed in the purchase price allocation. Residual goodwill mainly relates to synergies and other intangible assets that do not meet the criteria for separate reporting. De La Rue’s national identity solutions business On 14 October 2019 ASSA ABLOY acquired the international identity solu- tions business from De La Rue. The acquisition strengthens the Group’s market position through an expanded offering within digital citizen ID solutions. The operation is head- quartered in Basingstoke, UK. On the reporting date the acquisition analysis is preliminary with respect to valuation of intangible assets. Other acquisitions Other noteworthy acquisitions that closed during the year mainly consist of Spence Doors (Australia). Please see the Report of the Board of Directors for further information about this acquisition. 2018 Crossmatch On 21 September 2018 ASSA ABLOY acquired 100 percent of the share capital in the US company Crossmatch Inc., a leader in biometric identity management and secure authentication solutions. The acquisition of Crossmatch strengthens the ability to offer innovative biometric solutions to hundreds of millions of users worldwide and expands HID’s market leadership in secure identity solutions. Crossmatch is head- quartered in Palm Beach Gardens, Florida. Intangible assets in the form of technology, brands and customer rela- tionships have been disclosed in the purchase price allocation. Residual goodwill mainly relates to synergies and other intangible assets that do not meet the criteria for separate reporting. Luxer One On 12 December 2018, ASSA ABLOY acquired 100 percent of the share capital of Luxer Holdings Corporation, a leading provider of advanced package locker solutions in the US. The acquisition further strengthens ASSA ABLOY’s market position in home delivery solutions and provides excellent opportunities for synergies in vertical segments, such as education and commercial properties. The company is headquartered in Sacramento, California. Intangible assets in the form of technology, brands and customer rela- tionships have been disclosed in the purchase price allocation. Residual goodwill mainly relates to synergies and other intangible assets that do not meet the criteria for separate reporting. Other acquisitions Other noteworthy acquisitions during the year included Phoniro (Sweden), Brüken (Mexico), HKC (Ireland) and Planet (Switzerland). Holdbacks and deferred consideration for acquisitions dur- ing the year Adjustment of purchase prices for acquisitions in prior years Total Acquired assets and liabilities at fair value Intangible assets Property, plant and equipment Right-of-use assets Deferred tax assets Other financial assets Inventories Current receivables and investments Cash and cash equivalents Deferred tax liabilities Pension provisions Other non-current liabilities Current liabilities Total Goodwill Cash paid for acquisitions during the year Cash and cash equivalents in acquired subsidiaries Paid deferred considerations for acquisitions in previous years Change in cash and cash equivalents due to acquisitions Net sales from acquisition date EBIT from acquisition date Net income from acquisition date 1,152 –2 6,752 1,428 214 – 221 1 555 643 437 –169 –29 –60 255 –7 3,813 1,296 356 61 95 – 208 681 120 –278 – –225 –1,521 –1,186 1,720 5,032 5,602 –437 339 5,503 1,450 96 76 1,128 2,685 3,564 –120 459 3,903 1,078 117 86 The table above includes fair value adjustments of acquired net assets from acquisitions made in previous years. Acquisition analyses have been prepared for all acquisitions in 2019. The net sales of acquired units for 2019 totaled SEK 2,509 M (3,623) and net income amounted to SEK 230 M (331). Acquisition-related costs for 2019 totaled SEK 169 M (107) and have been reported as other operating expenses in the income statement. See below for an account of some acquisitions completed in 2019 and 2018. No single acquisition is significant in terms of size and separate acquisition details are therefore not provided. 2019 KEYper On 31 January 2019 ASSA ABLOY acquired 100 percent of the share capital of KEYper, a leading supplier of electronic and mechanical key management systems in the US with a strong presence in the automotive segment. The acquisition of KEYper complements the products within intelligent key and asset management solutions offered by Traka. KEYper is head- quartered in Harrisburg, North Carolina. Intangible assets in the form of technology and customer relationships have been disclosed in the purchase price allocation. Residual goodwill mainly relates to synergies and other intangible assets that do not meet the criteria for separate reporting. LifeSafety Power On 30 August 2019, ASSA ABLOY acquired 100 percent of the share capital of LifeSafety Power Inc., a leading US supplier of smart integrated access control power solutions for OEMs, integrators and end-users. The acquisition complements the Group´s access control portfolio. LifeSafety Power is headquartered in Libertyville, Illinois. Intangible assets in the form of technology, brands and customer rela- tionships have been disclosed in the purchase price allocation. Residual goodwill mainly relates to synergies and other intangible assets that do not meet the criteria for separate reporting. 86 ASSA ABLOY ANNUAL REPORT 2019 Note 34 Employees Salaries, wages, other remuneration and social security costs SEK M Salaries, wages and other remuneration Social security costs – of which pensions Total Remuneration and other benefits of the Executive Team in 2019, SEK thousands Name Nico Delvaux, President and CEO Other members of the Executive Team (9 positions) Total remuneration and benefits Fixed salary Variable salary 17,363 40,960 58,323 12,750 16,989 29,739 Total remuneration and other benefits of the Executive Team amounted to SEK 111.9 M in 2018. NOTES Group Parent company 2018 2019 2018 2019 19,200 21,109 5,284 771 5,892 824 24,485 27,001 278 132 49 410 295 193 52 488 Stock-related benefits 6,131 7,993 14,125 Other benefits Pension costs 215 3,224 3,438 6,099 11,076 17,175 Fees to Board members in 2019 (including committee work), SEK thousand Board of Directors Remuneration Committee Audit Committee Name and post Total Lars Renström, Chairman 2,350 150 Carl Douglas, Vice Chairman Eva Karlsson, Member Birgitta Klasén, Member Lena Olving, Member Sofia Schörling Högberg, Member Jan Svensson, Member Employee representatives (4) Total 900 685 685 685 685 685 – 6,675 Total fees to Board members amounted to SEK 7.7 M in 2018. – – – – – 75 – 225 – – – 200 – 200 275 – 2,500 900 685 885 685 885 1,035 – 675 7,575 Salaries and remuneration for the Board of Directors and the Parent company’s Executive Team Salaries and other remuneration for the Board of Directors and the Parent company’s Executive Team for 2019 totaled SEK 64 million (57), excluding pension costs and social security costs. Pension costs amounted to SEK 10 M (11). Pension obligations for several senior executives are secured through pledged endowment insurances. Long-term incentive programs At the 2010 Annual General Meeting, it was decided to launch a long-term incentive program (LTI 2010) for senior executives and other key employees in the Group. The purpose was to create the prerequisites for retaining and recruiting competent employees for the Group, providing competitive remuneration and aligning the interests of the shareholders with the interests of the employees concerned. At the 2011 to 2019 Annual General Meetings, it was decided to imple- ment further long-term incentive programs for senior executives and other key employees in the Group. The new long-term incentive programs were named LTI 2011 to LTI 2019. LTI 2011 to LTI 2017 are based on similar terms to LTI 2010. LTI 2018 and LTI 2019 are based on similar principles, but with an extended measurement period of three years for the performance-based condition and removal of matching shares. For each Series B share acquired by the CEO within the framework of LTI 2017, the company has awarded one matching share award and four perfor- mance-based share awards. For each Series B share acquired by other mem- bers of the Executive Team, the company has awarded one matching share award and three performance-based share awards. For other participants, the company has awarded one matching share award and one perfor- mance-based share award. For each Series B share acquired by the CEO within the framework of LTI 2018 and LTI 2019, the company has awarded six performance-based share awards. For each Series B share acquired by other members of the Executive Team, the company has awarded five performance-based share awards. For other participants, the company has awarded four performance-based share awards. In accordance with the terms of the three incentive programs, employees have acquired a total of 371,312 Series B shares in ASSA ABLOY AB, of which 117,758 Series B shares were acquired in 2019 within the framework of LTI 2019. Each matching share award for LTI 2017 entitles the holder to receive one Series B share in the company free of charge three years after allotment, pro- vided that the holder, with certain exceptions, at the time of the release of the interim report for the first quarter 2020 still is employed by the Group and has maintained the shares acquired within the framework of the long- term incentive program. Each performance-based share award for LTI 2017 entitles the holder to receive one Series B share in the company free of charge three years after allotment, provided that the above conditions have been fulfilled. In addition, the maximum level in a range determined by the Board of Directors for the performance of the company’s earnings per share must have been fulfilled during the first year of the program in order to receive full outcome. Each performance-based share award for LTI 2018 and LTI 2019 entitles the holder to receive one Series B share in the company free of charge three years after allotment, provided that the holder, with certain exceptions, at the time of the release of the interim report for the first quarter 2021 (LTI 2018) and first quarter 2022 (LTI 2019) still is employed by the Group and has maintained the shares acquired within the framework of the long-term incentive programs. The number of performance-based share awards that entitle the holder to Series B shares in the company depends on the annual develoment of ASSA ABLOY’s earnings per share based on the target levels, as defined by the Board of Directors, during the measurement period 1 Jan- uary 2018 – 31 December 2020 (LTI 2018) and the measurement period 1 January 2019 – 31 December 2021 (LTI 2019), where each year during the measurement period is compared to the previous year. The outcomes are calculated yearly, whereby one third of the performance-based share awards is measured against the outcome for the first year in the measure- ment period, one third is measured against the outcome for the second year in the measurement period and one third is measured against the outcome for the third year in the measurement period. The outcome for each year is measured linearly. Unless the minimum level in the target level is achieved for the year, none of the relevant performance-based share awards will give the right to any Series B shares. If the maximum level in the target level is achieved, each performance-based share award linked to the relevant year entitles the holder to one Series B share. The performance-based condition was 100 percent fulfilled for LTI 2017. Fulfilment of the performance-based condition for LTI 2018 and LTI 2019, respectively, is intended be presented in the Annual Report for the financial year 2020 and the financial year 2021, respectively. Outstanding performance-based share awards for LTI 2019 total 490,724. The total number of outstanding matching and performance-based share awards for LTI 2017, LTI 2018 and LTI 2019 amounted to 1,035,659 on the reporting date of 31 December 2019. Fair value is based on the share price on the respective allotment date. The present value calculation is based on data from an external party. Fair value is adjusted for participants who do not maintain their holding of shares for the duration of the respective program. In the case of perfor- mance-based shares, the company assesses the probability of the perfor- mance targets being met when calculating the compensation expense. The fair value of ASSA ABLOY’s Series B share on the allotment date for LTI 2019, 24 May 2019, was SEK 194.23. The fair value of ASSA ABLOY’s Series B share on the allotment date for LTI 2018, 25 May 2018, was SEK 191.63. The fair value of ASSA ABLOY’s Series B share on the allotment date for LTI 2017, 26 May 2017, was SEK 192.10. The total cost of the Group’s long-term incentive programs (LTI 2016–LTI 2019) excluding social security costs amounted to SEK 49 million (45) in ASSA ABLOY ANNUAL REPORT 2019 87 NOTES Note 34 cont. 2019. In April 2019 vesting of remaing parts of LTI 2016 took place equiva- lent to 108,193 shares (313,744) at a total market value at the time of vest- ing of SEK 21 M (60) . The payment referred to above for the transferred shares in LT1 2016 was recognized in equity. Notice and severance pay If the CEO is given notice, the company is liable to pay the equivalent of a maximum of 24 months’ base salary and other employment benefits. If one of the other members of the Executive Team is given notice, the company is liable to pay a maximum six months’ base salary and other employment benefits plus an additional twelve months’ base salary. Average number of employees per country, broken down by gender Group 2018 of which women of which men Total 10,339 9,483 2,252 1,851 1,934 1,660 1,655 1,392 1,452 1,182 1,173 1,203 1,050 674 814 870 878 698 650 681 690 584 535 601 453 399 293 315 307 292 190 210 199 2,742 3,970 580 552 603 504 148 419 455 315 329 375 171 195 192 437 347 142 306 191 145 181 133 165 121 33 99 52 89 99 35 85 56 7,597 5,514 1,672 1,299 1,331 1,156 1,508 973 997 867 844 828 879 479 622 433 531 556 344 491 545 402 402 436 332 365 194 264 218 193 155 125 143 913 2019 of which women of which men 3,012 3,565 613 672 585 527 142 450 450 349 338 389 189 249 250 425 322 152 302 212 130 164 150 113 111 36 105 71 80 81 33 78 56 7,902 5,166 1,731 1,362 1,333 1,213 1,547 1,015 1,011 920 870 816 865 704 573 389 440 577 414 491 534 446 430 446 324 337 251 241 191 172 168 121 136 Total 10,914 8,731 2,344 2,034 1,917 1,740 1,690 1,465 1,461 1,269 1,208 1,204 1,054 953 822 814 762 729 716 703 664 609 580 559 435 373 356 311 271 253 201 198 192 1,462 386 1,075 1,393 480 48,353 14,746 33,606 48,992 14,785 34,207 Parent company 2018 of which women of which men 56 56 175 175 Total 231 231 2019 of which women of which men 71 71 198 198 Total 269 269 US China Sweden United Kingdom France Mexico India Brazil Germany Poland Finland Czech Republic Netherlands Australia Canada Malaysia Romania Belgium South Africa South Korea Norway Switzerland Spain Denmark Italy United Arab Emirates New Zealand Hungary Chile Israel Austria Hong Kong Colombia Others Total Sweden Total Gender distribution of Board of Directors and Executive Team 2018 2019 of which women of which men Total of which women of which men Total Board of Directors1 Executive Team – of which Parent com- pany’s Executive Team Total 9 9 4 18 1 Excluding employee representatives. 4 1 1 5 5 8 3 13 7 9 4 16 4 1 1 5 3 8 3 11 Note 35 Financial risk management and financial instruments Financial risk management ASSA ABLOY is exposed to a variety of financial risks due to its international business operations. Financial risk management for ASSA ABLOY’s units has been implemented in accordance with the ASSA ABLOY Group’s financial policy. The principles for financial risk management are described below. Organization and activities ASSA ABLOY’s financial policy, which is determined by the Board of Directors, provides a framework of guidelines and regulations for the manage ment of financial risks and financial activities. ASSA ABLOY’s financial activities are coordinated centrally and the major- ity of financial transactions are conducted by the subsidiary ASSA ABLOY Financial Services AB, which is the Group’s internal bank. External financial transactions are conducted by Treasury. Treasury achieves significant econo- mies of scale when negotiating borrowing agreements, using interest rate derivatives and managing currency flows. Capital structure The objective of the Group’s capital structure is to safeguard its ability to continue as a going concern, and to generate good returns for shareholders and benefits for other stakeholders. Maintaining an optimal capital struc- ture enables the Group to keep capital costs at a low level. The Group can adjust the capital structure based on the requirements that arise by varying the dividend paid to shareholders, returning capital to shareholders, issuing new shares or selling assets to reduce debt. The capital requirement is assessed on the basis of factors such as the net debt/equity ratio. Net debt is defined as interest-bearing liabilities, including negative mar- ket values of derivatives, plus pension provisions and lease obligations, less cash and cash equivalents, and other interest-bearing investments includ- ing positive market values of derivatives. The table ‘Net debt and equity’ shows the position as at December 31. Net debt and equity SEK M Non-current interest-bearing receivables Current interest-bearing investments incl. positive market values of derivatives Cash and cash equivalents Pension provisions Lease liabilities Group 2018 –106 –188 –538 2,880 91 2019 –45 –257 –442 3,346 3,739 Other non-current interest-bearing liabilities 19,398 21,100 Current interest-bearing liabilities incl. negative market values of derivatives Total Equity Net debt/equity ratio 7,710 29,246 51,900 0.56 5,610 33,050 59,154 0.56 Rating Another important variable in the assessment of the Group’s capital struc- ture is the credit rating assigned by credit rating agencies to the Group’s debt. It is essential to maintain a solid credit rating in order to have access to both long-term and short-term financing from the capital markets when needed. ASSA ABLOY maintains both long-term and short-term credit ratings from Standard & Poor’s and a short-term rating from Moody’s. The Group’s credit rating remained unchanged during the year. Agency Standard & Poor’s Moody’s Short-term Outlook Long-term Outlook A2 P2 Stable Stable A – n/a Stable 88 ASSA ABLOY ANNUAL REPORT 2019 NOTES Note 35 cont. Maturity profile – financial instruments1 SEK M2 Long-term bank loans Long-term capital market loans Short-term bank loans Commercial papers and short-term capital market loans Derivatives (outflow) Total by period Cash and cash equivalents incl. interest-bearing receivables Non-current interest-bearing receivables Derivatives (inflow) Deferred considerations Trade receivables Trade payables Lease liabilities Net total Confirmed credit facilities Adjusted maturity profile1 December 31, 2018 December 31, 2019 <1 year >1 <2 years >2 <5 years >5 years <1 year >1 <2 years >2 <5 years >5 years –1,437 –1,844 –2,199 –2,752 –13,656 –21,888 610 13,609 –1,021 14,496 –7,893 –2,087 9,265 7,178 –654 –3,000 –2,738 –6,621 –489 –7,523 –53 –3,707 –152 –68 –9,511 –8,080 108 77 –507 –91 –4,120 –9,265 –13,385 189 –371 110 –9,693 –7,970 –9,693 –7,970 –570 –3,113 –2,409 –15,947 –22,039 609 15,893 –883 15,701 –7,908 –1,183 190 14,925 15,116 –1,444 –1,567 –1,507 –9,357 –329 –8,575 –51 –146 –136 –3,062 –11,010 –9,040 106 66 –451 190 –32 165 –961 –4,302 –1,336 –463 –12,188 –9,338 –12,525 –2,401 –4,302 –24,713 –11,739 1 For maturity structure of guarantees, see Note 30. 2 The amounts in the table are undiscounted and include future known interest payments. The exact amounts are therefore not found in the balance sheet. Financing risk and maturity profile Financing risk is defined as the risk of being unable to meet payment obliga- tions as a result of inadequate liquidity or difficulties in obtaining external financing. ASSA ABLOY manages financing risk at Group level. Treasury is responsible for external borrowings and external investments. ASSA ABLOY strives to have access on every occasion to both short-term and long-term loan facilities. In accordance with financial policy, the available loan facili- ties, including available cash and cash equivalents, should include a reserve (facilities available but not utilized) equivalent to at least 10 percent of the Group’s total annual sales. Interest rate risks in interest-bearing assets Treasury manages interest rate risk in interest-bearing assets. Derivative instruments such as interest rate swaps and FRAs (Forward Rate Agree- ments) may be used to manage interest rate risk. These interest-bearing assets are mostly short-term. The term for the majority of these investments is three months or less, although the share with a longer maturity rose dur- ing the year. The fixed interest term for such short-term investments was 144 days (210) at year-end 2019. A downward change in the yield curve of one percentage point would reduce the Group’s interest income by around SEK 1 M (1) and consolidated equity by SEK 0 M (0). Maturity profile The table ‘Maturity profile’ above shows the maturities for ASSA ABLOY’s financial instruments, including confirmed credit facilities. The maturities are not concentrated to a particular date in the immediate future. An impor- tant component of liquidity planning is the Group’s Multi-Currency Revolv- ing Credit Facility, which was renewed in 2019. This facility now matures in April 2024. During the year ASSA ABLOY also negotiated a new credit facility with the EIB for EUR 230 M. At year-end both of these credit facilities were completely unutilized. Moreover, existing financial assets are also taken into account. The table shows undiscounted cash flows relating to the Group’s financial instruments at the reporting date, and these amounts are there- fore not found in the balance sheet. Cash and cash equivalents and other interest-bearing receivables Current interest-bearing investments totaled SEK 55 M (71) at year-end. In addition, ASSA ABLOY has long-term interest-bearing receivables of SEK 45 M (106) and financial derivatives with a positive market value of SEK 202 M (117) which, in addition to cash and cash equivalents, are included in the definition of net financial debt. Cash and cash equivalents are mainly invested in bank accounts or interest-bearing instruments with high liquidity from issuers with a credit rating of at least A–, according to Standard & Poor’s or similar rating agency. The average term for cash and cash equivalents was 18 days (22) at year-end 2019. The Parent company’s cash and cash equivalents are held in a sub- account to the Group account. SEK M Cash and bank balances Short-term investments with maturity less than 3 months Cash and cash equivalents Short-term investments with maturity more than 3 months Non-current interest-bearing receivables Positive market value of derivatives Total ASSA ABLOY ANNUAL REPORT 2019 Group 2018 456 2019 418 81 538 71 106 117 832 24 442 55 45 202 745 Parent company 2018 2019 0 – 0 – – – 0 0 – 0 – – – 0 Interest-bearing liabilities The Group’s long-term loan financing mainly consists of a GMTN Program of SEK 17,886 M (14,229), of which SEK 15,814 M (12,996) is long-term, Private Placement Program in the US totaling USD 295 M, of which USD 225 M (295) is long-term, and a loan from financial institutions such as the European Investment Bank (EIB) of EUR 37 M (37) and USD 120 M (121), and a loan from the Nordic Investment Bank of EUR 55 M (55). During the year, eleven new issues were made under the GMTN program for a total amount of SEK 4,615 M. Other changes in long-term loans are mainly due to some of the originally long-term loans now having less than 1 year to matu- rity. The size of the loans increased due to currency fluctuations, especially regarding the USD. A total of SEK 4,615 M was raised in new long-term loans, while SEK 2,903 M in originally long-term loans matured during the year. The Group’s short-term loan financing mainly consists of two Commer- cial Paper Programs for a maximum USD 1,000 M (1,000) and SEK 5,000 M (5,000) respectively. At year-end, however, the outstanding balance under the Commercial Paper programs was SEK 0 M (2,752). In addition, substan- tial credit facilities are available, mainly in the form of a Multi-Currency Revolving Credit Facility of EUR 1,200 M (900). During the year, a new financing commitment of EUR 230 million was also received from the EIB, which had not yet been used at year-end. At year-end the average time to maturity for the Group’s interest-bearing liabilities, excluding the pension provision and lease obligations, was 51 months (42). Some of the Group’s main financing agreements contain a customary Change of Control clause. This clause means that lenders have the right in certain circumstances to demand the renegotiation of conditions or to terminate the agreements should control of the company change. 89 NOTES Note 35 cont. External financing/net debt Credit lines/facilities US Private Placement Program US Private Placement Program Multi-Currency RCF Credit facility EIB Bank loan EIB Bank loan EIB Bank loan NIB Global MTN Program Other long-term loans Total long-term loans/facilities Global MTN Program US Private Placement Program Global CP Program Swedish CP Program Other bank loans Overdraft facility Total short-term loans/facilities Total loans/facilities Cash and cash equivalents Amount, SEK M Maturity Carrying amount, SEK M Currency Amount 2018 Amount 2019 Of which Parent company, SEK M Aug 2022 Aug 2024 Apr 2024 Jan 2027 Nov 2021 Apr 20232 Dec 2021 Feb 2021 Jul 2021 Aug 2021 Oct 2021 Feb 2022 Mar 2022 Apr 2022 Jun 2022 Jul 2022 Feb 2023 Mar 2023 Oct 2023 Nov 2023 Nov 2023 Dec 2023 Jan 2024 Apr 2024 May 2024 Jul 2024 Sep 2024 Oct 2024 Feb 2025 Mar 2025 Jun 2025 Jun 2025 Dec 2025 Mar 2026 Nov 2026 Feb 2027 Feb 2027 Jun 2027 Oct 2027 May 2029 Jun 2029 Aug 2029 Oct 2029 Oct 2029 Dec 2029 Mar 2030 Apr 2030 Aug 2034 May 2020 1,415 699 12,525 2,401 191 960 574 24,022 1,447 44,234 2,072 653 9,324 5,000 1,599 2,334 20,982 65,215 USD USD EUR EUR EUR USD EUR USD SEK USD EUR USD EUR USD EUR USD SEK EUR EUR USD USD USD EUR SEK USD USD EUR USD EUR EUR EUR USD USD EUR CHF EUR EUR NOK NOK EUR USD EUR EUR EUR USD EUR EUR EUR 150 75 900 – 37 120 55 50 500 10 15 20 50 10 10 5 – 15 20 25 100 100 – – 20 30 100 – 50 30 50 30 50 – – 30 50 300 200 – – – 28 26 – 30 70 – 150 75 1,200 230 18 103 55 50 499 10 15 20 50 10 10 5 500 15 20 25 100 100 30 550 20 30 100 20 50 30 50 30 50 20 50 30 50 300 200 15 10 10 28 26 100 30 70 100 USD SEK SEK 70 2,243 500 2,071 70 – – 466 499 93 157 186 522 93 104 47 499 157 208 932 932 312 549 186 280 1,040 186 521 313 521 280 466 209 479 313 519 316 211 155 93 104 290 269 920 311 726 1,028 1,389 16,877 1,696 1,696 18,573 1,415 699 – – 191 960 574 466 499 93 157 186 522 93 104 47 499 157 208 244 9471 932 312 549 186 280 1,040 186 521 3501 521 280 4771 209 4791 313 519 3151 2111 155 93 104 3141 269 9161 311 726 1,028 1,447 21,100 2,072 653 – – 1,599 1,136 5,460 26,560 –442 –100 –53 3,346 3,739 33,050 Current and Non-current interest-bearing investments Derivative financial instruments Pension provisions Lease liabilities Net debt 1 The loans are subject to hedge accounting, in whole or in part. 2 The loans are amortizing. In the table the average dates of maturity of the loans have been stated. 90 ASSA ABLOY ANNUAL REPORT 2019 Note 35 cont. Change in loans SEK M Long-term loans Short-term loans Total Opening balance 1 January 2019 19,398 7,594 26,992 Cash flow from financing activities Long-term loans raised Long-term loans repaid Other changes in cash flow short-term loans Total Changes without cash flow impact Acquisitions of subsidiaries Reclassifications Unrealized exchange rate differences Other changes in non-cash items Total Closing balance 31 December 2019 4,615 – – 4,615 164 –3,461 394 –10 –2,913 21,100 – –2,903 –3,413 –6,316 4,615 –2,903 –3,413 –1,701 632 3,461 67 23 796 – 461 13 4,182 5,460 1,269 26,560 SEK M Long-term loans Short-term loans Total Opening balance 1 January 2018 16,859 6,151 23,010 Cash flow from financing activities Long-term loans raised Long-term loans repaid Other changes in cash flow short-term loans Total Changes without cash flow impact Acquisitions of subsidiaries Reclassifications Unrealized exchange rate differences Other changes in non-cash items Reclassification of finance leases Total Closing balance 31 December 2018 4,483 – – – –2,849 553 4,483 –2,296 4,483 –2,849 553 2,187 23 –2,660 806 –22 –91 –1,944 19,398 933 2,660 155 –9 – 957 – 960 –31 –91 3,739 7,594 1,795 26,992 Interest rate risks in borrowing Changes in interest rates have a direct impact on ASSA ABLOY’s net interest expense. Treasury is responsible for identifying and managing the Group’s interest rate exposure. Treasury analyzes the Group’s interest rate exposure and calculates the impact on income of changes in interest rates on a rolling 12-month basis. The Group strives for a mix of fixed rate and variable rate borrowings in the loan portfolio, and uses interest rate swaps to adjust the fixed interest term. The financial policy stipulates that the average fixed interest term should normally be within the interval of 12 to 36 months. At year-end, the average fixed interest term on gross debt, excluding pension liabilities and lease commitments, was around 34 months (28). An upward change in the yield curve of one percentage point would increase the Group’s interest expense by around SEK 102 M (126) and reduce consoli- dated equity by SEK 75 M (93). Change in lease liabilities SEK M Opening balance Effects of transition to IFRS 16 Acquisitions of subsidiaries New and terminated leases Amortization of lease liabilities Exchange rate differences Reclassification of finance leases Closing balance Balance sheet breakdown: Non-current lease liabilities Current lease liabilities Total Group 2018 – – – – – – 91 91 Group 2018 91 – 91 2019 91 3,711 61 917 –1,159 118 – 3,739 2019 2,588 1,151 3,739 NOTES Currency composition The currency composition of ASSA ABLOY’s borrowing depends on the cur- rency composition of the Group’s assets and other liabilities. Currency swaps are used to achieve the desired currency composition. See the table ‘Net debt by currency’ below. Net debt by currency December 31, 2018 December 31, 2019 SEK M USD EUR CNY GBP AUD CHF NOK CZK KRW PLN SEK Other Total Net debt excl. derivatives Net debt incl. derivatives 10,875 14,150 635 288 135 190 563 27 216 49 1,466 651 29,246 14,442 7,575 1,609 874 336 653 688 592 216 472 416 1,374 29,246 Net debt excl. derivatives 11,843 14,389 606 403 232 922 789 146 335 56 2,283 1,048 33,050 Net debt incl. derivatives 15,603 8,183 1,880 1,688 1,218 977 798 784 614 465 –1,263 2,103 33,050 Currency risk Currency risk affects ASSA ABLOY mainly through translation of capital employed and net debt, translation of the income of foreign subsidiaries, and the impact on income of flows of goods between countries with differ- ent currencies. Transaction exposure Currency risk in the form of transaction exposure, or exports and imports of goods respectively, is relatively limited in the Group, even though it can be significant for individual business units. The main principle is to allow cur- rency fluctuations to have an impact on the business as quickly as possible. As a result of this strategy, current currency flows are not normally hedged. Transaction flows relating to major currencies (import + and export –) Currency, SEK M AUD CAD CNY DKK EUR GBP RON SEK USD Currency exposure 2018 557 944 2019 574 921 –1,825 –1,908 244 2,400 571 –445 –3,518 1,410 236 1,954 615 –387 –2,236 1,375 Translation exposure in income The table below shows the impact on the Group’s income before tax of a 10 percent weakening of the Swedish krona (SEK) in relation to the major cur- rencies, with all other variables constant. Impact on income before tax of a 10 percent weakening of SEK Currency, SEK M 2018 2019 AUD CHF CNY DKK EUR GBP HKD KRW USD 41 33 27 9 191 20 95 33 611 44 37 26 15 227 15 95 19 792 ASSA ABLOY ANNUAL REPORT 2019 91 NOTES Note 35 cont. Translation exposure in the balance sheet The impact of translation of equity is limited by the fact that a large part of financing is in local currency. The capital structure in each country is optimized based on local legisla- tion. Whenever possible, according to local conditions, gearing per currency should generally aim to be the same as for the Group as a whole to limit the impact of fluctuations in individual currencies. Treasury uses currency deriv- atives and loans to achieve appropriate financing and to eliminate undesira- ble currency exposure. The table ‘Net debt by currency’ on page 91 shows the use of forward exchange contracts in relation to financing in major currencies. Forward exchange contracts are used to neutralize the exposure arising between external debt and internal requirements. Financial credit risk Financial risk management exposes ASSA ABLOY to certain counterparty risks. Such exposure may arise from the investment of surplus cash as well as from investment in debt instruments and derivative instruments. ASSA ABLOY’s policy is to minimize the potential credit risk relating to surplus cash by using cash flow from subsidiaries to repay the Group’s loans. This is primarily achieved through cash pools put in place by Treasury. Around 97 percent (96) of the Group’s sales were settled through cash pools in 2019. Smaller amounts may be held in other local banks for shorter time periods depending on how customers choose to pay. The Group can also invest surplus cash in the short term in banks to match borrowing and cash flow. The banks in which surplus cash is deposited have a high credit rating. In light of this and the short terms of the investments the effect of the calculated credit risk is assessed to be negligible. Derivative instruments are allocated between banks based on risk levels defined in the financial policy, in order to limit counterparty risk. Treasury only enters into derivative contracts with banks that have a high credit rat- ing. ISDA agreements (full netting of transactions in case of counterparty default) have been entered into with respect to interest rate and currency derivatives. The table on page 93 shows the impact of this netting. Commercial credit risk The Group’s trade receivables are distributed across a large number of cus- tomers who are spread globally. No single customer accounts for more than 1 percent of the Group’s sales. The concentration of credit risk associated with trade receivables is considered limited, but credit risks have increased in pace with increased activity in emerging markets. The fair value of trade receivables is equivalent to the carrying amount. Credit risks relating to operating activities are managed locally at company level and monitored at division level. For more information see Note 22 and the section “Impair- ment of financial assets” in the information on accounting principles. Commodity risk The Group is exposed to price risks relating to purchases of certain com- modities (primarily metals) used in production. Forward contracts are not used to hedge commodity purchases. Fair value of financial instruments Derivative financial instruments such as forward exchange contracts and forward rate agreements are used to the extent necessary. The use of deriva- tive instruments is limited to reducing exposure to financial risks. The positive and negative fair values in the table ‘Outstanding derivative financial instruments’ on page 93 show the fair values of outstanding instru- ments at year-end, based on available fair values, and are the same as the carrying amounts in the balance sheet. The nominal value is equivalent to the gross value of the contracts. For accounting purposes, financial instruments are classified into meas- urement categories in accordance with IFRS 9. The table ‘Financial instru- ments’ on page 93 provides an overview of financial assets and liabilities, measurement category, and carrying amount and fair value per item. Risk management through hedge accounting During the year the Group used hedge accounting in its financial risk man- agement. Hedges can be divided into cash flow hedges, fair value hedges and net investment hedges. Changes in these hedges can be seen in the table below. For information regarding the effects of net investment hedges in other comprehensive income, see Note 32. Net investment hedges are used to manage currency risk that arise through investments in foreign sub- sidiaries. Fair value hedges are used to manage interest rate risk that arises when the Group takes out loans at a fixed interest rate. Cash flow hedges for interest rate risk in loans with variable interest rates have not been used during the year. Interest rate risk related to the long-term loans are hedged through hedge accounting using interest rate swaps. In cases where the loans are denomi- nated in a currency other than SEK, currency risk is not included in the applied hedge accounting. For risks related to net investments in foreign sub- sidiaries, hedge accounting is only applied to manage currency risk; no other related risks are managed by the hedges that are applied. ASSA ABLOY does not hedge 100% of its long-term loans or its net investments. Instead, the decision on when hedge accounting is appropriate is taken on a case-by-case basis, in accordance with the risk levels described in the financial policy. For fair value hedges the Group uses interest rate swaps with critical terms that are equivalent to the hedged object, such as reference rate, set- tlement days, maturity date and nominal amounts. This approach ensures an economic relationship between the hedging objects and the hedging instruments. Hedging relationship effectiveness is tested through periodic forward-looking evaluation to ensure that an economic relationship still exists. Examples of identified sources of ineffectiveness in the hedging rela- tionship include if a credit risk adjustment in the interest rate swap is not matched by an equivalent adjustment to the loan, or if for some reason dif- ferences in the critical terms between the interest rate swap and the loan should arise. All critical terms matched during the year. For this reason, the economic relationship has been 100% effective. One possible source of future inefficiency is the reforms under discussion for the IBOR markets, where proposed changes include how LIBOR for USD and CHF are deter- mined. Most likely, the methods will be reviewed for the majority of curren- cies, for which reason any outstanding interest rate derivatives may be affected at some point in the future. All outstanding interest rate derivatives have exposure to interest periods after the end of 2022, at which time many of these changes are expected to take effect. Hedging instruments SEK M Fair value 2018 Fair value 2019 Carrying amount of hedged item 2,749 3,532 Nominal amount of hedging instrument 2,749 3,532 Net invest- ments 2018 392 392 Net invest- ments 2019 373 373 Maturity Hedge ratio Total effect of hedging on hedged item Accrued remaining amount for terminated hedges Change in value, hedging instruments since 1 January Change in value, hedge item Ineffectiveness recognized in profit and loss 2020 to 2029 2020 to 2022 2020 to 2029 2020 to 2022 1:1 50 –24 –11 11 0 1:1 –88 –34 38 –38 0 1:1 –28 1:1 –53 –215 –194 –8 8 0 –5 5 0 Changes in the value of fair value hedged items are recognized against long- term loans, changes in value of hedging instruments are recognized against accrued revenue or expenses, respectively; ineffectiveness, if any, is recog- nized against interest income or expenses, respectively. Changes in value of hedge instruments in net investment hedges are recognized in the hedging reserve in equity. 92 ASSA ABLOY ANNUAL REPORT 2019 Note 35 cont. Disclosures of offsetting of financial assets and liabilities 2018 NOTES 2019 SEK M Financial assets Financial liabilities Amounts netted in the balance sheet Net amounts in the balance sheet Amount covered by netting agreement but not offset – – 117 116 53 53 Gross amount 117 116 Net amount 64 63 Gross amount 202 150 Amounts netted in the balance sheet Net amounts in the balance sheet Amount covered by netting agreement but not offset – – 202 150 46 46 Net amount 157 104 Netted financial assets and financial liabilities only consist of derivative instruments. Outstanding derivative financial instruments at December 31 Instrument, SEK M Foreign exchange forwards, funding Interest rate swaps1, fair value hedges Total 1 For interest rate swaps, only one leg is included in nominal value. 2 Assets are recognized against accrued revenue and liabilities against accrued expenses. December 31, 2018 December 31, 2019 Positive fair value2 Negative fair value2 Nominal value Positive fair value2 Negative fair value2 Nominal value 49 68 117 –99 –18 –116 8,105 2,749 10,854 108 94 202 –143 –6 –150 10,375 3,532 13,907 Financial instruments: carrying amounts and fair values by measurement category SEK M Financial liabilities at amortized cost Trade receivables Other financial assets at amortized cost Cash and cash equivalents Financial assets at fair value through profit or loss Shares and interests Derivative financial instruments Hedge accounting Held for trading Total financial assets Financial liabilities at amortized cost Trade payables Lease liabilities Long-term loans – hedge accounting Long-term loans – non-hedge accounting Short-term loans – hedge accounting Short-term loans – non-hedge accounting Financial liabilities at fair value through profit or loss Deferred considerations Derivative financial instruments Hedge accounting Held for trading Total financial liabilities 2018 2019 Carrying amount Fair value Carrying amount Fair value 14,496 14,496 15,701 15,701 214 538 8 68 49 214 538 8 68 49 153 442 153 442 6 6 94 108 94 108 15,374 15,374 16,504 16,504 7,893 91 2,790 16,608 – 7,893 91 2,790 16,638 – 7,594 7,594 7,908 3,739 2,933 7,908 3,739 2,933 18,167 18,422 688 4,772 688 4,772 1,899 1,899 1,366 1,366 18 99 18 99 6 143 6 143 36,991 37,021 39,722 39,977 The fair value of long-term borrowing is based on observable data by discounting cash flows to market rate, while the fair value of current receivables and current liabilities is considered to correspond to the carrying amount. Financial instruments: measured at fair value SEK M Financial assets Derivative financial instruments Financial liabilities Derivative financial instruments Deferred considerations 2018 2019 Carrying amounts Quoted prices Observable data Non-observable data Carrying amounts Quoted prices Observable data Non-observable data 117 116 1,899 – – – 117 116 – – – 1,899 202 150 1,366 – – – 202 150 – – – 1,366 Deferred considerations relate to additional payments for acquired companies. The size of a deferred consideration is usually linked to the earnings and sales trend in an acquired company during a specific period of time. Deferred consideration is measured on the day of acquisition based on the best judgment of management regarding future outcomes. Discounting takes place in the case of significant amounts. For derivatives, the present value of future cash flows is calculated based on observable yield curves and exchange rates on the balance sheet date. ASSA ABLOY ANNUAL REPORT 2019 93 FIvE YEARS IN SUMMARY Comments on five years in summary 2015 ASSA ABLOY’s good performance continued during the year despite challenging market conditions and relatively weak underlying growth worldwide. The Group’s growth remained strong during the year, with total sales growth of 7 percent excluding exchange rate effects. The global market showed a divided picture with strong demand in the USA and much of Asia, while growth in Europe was more unevenly distributed. Emerging markets showed a slow- down, particularly China. The focus in recent years on product development, inno- vation and sustainability yielded positive results during the year. ASSA ABLOY has established leadership in the ongoing industry shift from mechanical solutions to electronics, digitization and mobile. Growth remained strong for electro- mechanical products and entrance automation, whose share of sales exceeded 50 percent. Operating income increased by 20 percent compared with 2014, and cash flow remained very strong. Earnings per share after full dilution increased by 20 percent. A total of 16 acquisitions were consolidated during the year, which strengthened the market position in important emerging markets such as Brazil, and complemented the customer offering in key areas for the Group such as entrance automation and secure identity solutions. 2016 The Group’s growth remained strong during the year, with total sales growth of 5 percent excluding exchange rate effects. The mature markets, primarily in Europe and the US, showed robust growth, while the trend in the emerging markets in Asia, Africa, the Middle East and parts of South America was more subdued in general, affected by factors such as the low prices for oil and other commodities. For ASSA ABLOY, the weak demand in these markets was most pronounced in China. A new restructuring program was launched during the year. About fifty production plants and offices are set to close over a three-year period, with an estimated payback period of less than three years. The focus in recent years on product development, inno- vation and sustainability continued at a high level during 2016. The technology shift toward an increased share of electromechanics with more digital and mobile solutions is expected to benefit ASSA ABLOY in the long term, and the proportion of sales of electromechanical products exceeded 50 percent. Operating income for the year, excluding items affecting comparability, increased by 2 percent and cash flow contin- ued to be strong. Earnings per share after full dilution, excluding items affecting comparability, increased 2 percent. A total of 13 acquisitions were consolidated during the year, which strengthened the market position for the Group in key areas such as entrance automation and secure identity solutions. ASSA ABLOY’s car locks operation was sold. 2017 Sales growth continued to be robust during the year. Organic growth was 4 percent, driven by growing demand for elec- tromechanical and digital door opening solutions. For ASSA ABLOY, the mature markets primarily in Europe and the US demonstrated continued robust growth, while the trend in the emerging markets was weaker, especially in China, Brazil and the Middle East. Growth in Asia outside China continued to be robust. Product development continues to focus on areas such as digital and mobile technologies, which are believed to pro- vide substantial potential for robust profitable growth for some time to come. ASSA ABLOY also has a growing selec- tion of products with environmental product declarations as part of its sustainable solutions initiative. Operating income for the year, excluding items affecting comparability, increased by 10 percent compared with 2016, and cash flow remained strong. Earnings per share after full dilution, excluding items affecting comparability, increased 10 percent. A total of 16 acquisitions were consolidated during the year, which strengthened the market position in areas such as smart door locks, physical access management and iden- tity solutions. ASSA ABLOY divested its project operation within HID Global, AdvanIDe, in its entirety. 2018 Growth was strong during the year, with organic growth of 5 percent driven by continued successes for electro- mechanical and digital solutions, as well as strong growth in North and South America. The mature markets continued to demonstrate a favorable trend, with the US and Europe demonstrating strong and robust growth, respectively, during the year. The trend in the emerging markets was weaker, especially in Asia and the Middle East. A new restructuring program was launched during the year. About fifty production plants and offices are set to close over a three-year period, with an estimated payback period of less than three years. Product development continued at a high level with large investments in R&D, as reflected by 27 percent of sales for the year which relate to products that are less than three years old. Operating income for the year, excluding items affecting comparability, increased by 5 percent and cash flow remained strong. Earnings per share after full dilution, excluding items affecting comparability, increased 4 percent. An impairment charge of SEK 6 billion was taken during the year for goodwill, other intangible assets and operating assets. A total of 19 acquisitions were consolidated during the year, which strengthened the market position for HID in secure identity solutions. ASSA ABLOY sold its wood door business within the Americas division during the year. 2019 Organic growth was 3 percent, driven by good growth in the Americas and Global Technologies divisions. Growth was particularly strong in the US on robust demand for smart locks in the private residential market, as well as the com- mercial business segments. Growth in Europe and Asia was generally mixed. The trend for the emerging markets contin- ued to be relatively weak. The product development initiative accelerated during the year with large investments in R&D, as reflected by the 27 percent of sales which relate to products that are less than three years old. Operating income for the year, excluding items affecting comparability, increased by 12 percent and cash flow remained strong. Earnings per share after full dilution, excluding items affecting comparability, increased 14 percent. Acquisition activity continued to be high during the year; at the same time, an agreement was also signed for the acquisition of agta record, the largest acquisition since 2011. 94 ASSA ABLOY ANNUAL REPORT 2019 Five years in summary FIvE YEARS IN SUMMARY Amounts in SEK M unless stated otherwise 2015 2016 2017 2018 2019 Sales and income Sales Organic growth, % Acquisitions and divestments, % Operating income (EBIT) excluding items affecting comparability1 Operating income (EBIT) Income before tax (EBT) Net income Cash flow Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Cash flow Operating cash flow Capital employed and financing Capital employed – of which goodwill – of which other intangible assets and property, plant and equipment – of which right-of-use assets – of which shares and interests in associates Net debt Non-controlling interests 68,099 71,293 76,137 84,048 94,029 4 3 11,079 11,079 10,382 7,693 8,572 –4,412 –4,335 –175 9,952 63,848 42,777 16,649 – 1,910 22,269 4 2 3 11,254 9,657 8,952 6,653 8,575 –4,063 –4,271 240 10,467 70,351 47,544 17,618 – 2,109 23,127 5 4 2 12,341 12,341 11,673 8,635 9,248 –8,661 –861 –274 5 2 12,909 6,096 5,297 2,755 9,225 –6,427 –2,728 70 10,929 11,357 75,932 50,330 19,144 – 2,243 25,275 9 81,146 53,413 19,518 119 2,434 29,246 10 3 3 14,920 14,608 13,571 9,997 12,665 –5,464 –7,301 –100 14,442 92,204 57,662 21,191 3,731 2,595 33,050 11 Shareholders’ equity, excluding non-controlling interest 41,575 47,220 50,648 51,890 59,143 Data per share, SEK Earnings per share before and after dilution 6.93 5.99 7.77 2.48 9.00 Earnings per share before and after dilution and excluding items affecting comparability1 Shareholders’ equity per share after dilution Dividend per share Price of Series B share at year-end Key figures Operating margin (EBIT), % excluding items affecting comparability1 Operating margin (EBIT), % Profit margin (EBT), % Return on capital employed, % Return on capital employed excluding items affecting comparability, % Return on shareholders’ equity, % Equity ratio, % Net debt/equity ratio Interest coverage ratio, times Total number of shares, thousands 6.93 37.43 2.65 7.09 42.51 3.00 7.77 45.60 3.30 8.09 46.71 3.50 178.00 169.10 170.40 158.15 9.22 53.25 3.852 219.00 16.3 16.3 15.2 17.8 17.8 19.8 48.2 0.54 16.7 15.8 13.5 12.6 14.1 16.5 15.0 49.6 0.49 14.1 16.2 16.2 15.3 16.6 16.6 17.6 50.9 0.50 19.1 15.4 7.3 6.3 7.6 16.2 5.4 48.7 0.56 8.0 15.9 15.5 14.4 16.6 17.0 18.0 50.1 0.56 14.9 1,112,576 1,112,576 1,112,576 1,112,576 1,112,576 Number of outstanding shares, thousands 1,110,776 1,110,776 1,110,776 1,110,776 1,110,776 Weighted average number of shares issued, before and after dilution, thousands Average number of employees 1 Excluding items affecting comparability 2016, 2018 and 2019. 2 Dividend proposed by the Board of Directors. 1,110,776 1,110,776 1,110,776 1,110,776 1,110,776 45,994 46,928 47,426 48,353 48,992 Return on capital employed1 Operating margin (EBIT)1 Average number of employees % 20 15 10 5 0 15 16 17 18 19 % 20 15 10 5 0 15 16 17 18 19 Number 50,000 40,000 30,000 20,000 10,000 0 1 Excluding items affecting compara- bility 2016, 2018 and 2019. ASSA ABLOY ANNUAL REPORT 2019 15 16 17 18 19 95 DEFINITIONS Definitions of key ratios Organic growth Change in sales for comparable units after adjustments for acquisitions and exchange rate effects. Capital employed Total assets less interest-bearing assets and non-interest- bearing liabilities including deferred tax liability. Operating margin (EBITDA) Operating income before depreciation and amortization as a percentage of sales. Equity ratio Shareholders’ equity as a percentage of total assets. Operating margin (EBITA) Operating income before amortization of intangible assets recognized in business combinations, as a percentage of sales. Operating margin (EBIT) Operating income as a percentage of sales. Profit margin (EBT) Income before tax as a percentage of sales. Interest coverage ratio Income before tax plus net interest divided by net interest. Return on shareholders’ equity Net income attributable to Parent company’s shareholders as a percentage of average parent company’s shareholders equity. Return on capital employed Income before tax plus net interest as a percentage of average capital employed, excluding restructuring reserves. Operating cash flow Cash flow from operating activities excluding restructuring payments and tax paid on income minus net capital expend- iture and amortization of lease liabilities. See the table on operating cash flow for detailed information. Net capital expenditure Investments in, less sales of, intangible assets and property, plant and equipment. Earnings per share after tax and before dilution Net income excluding non-controlling interests divided by weighted average number of outstanding shares before dilution. Earnings per share after tax and dilution Net income excluding non-controlling interests divided by weighted average number of outstanding shares after any potential dilution. Depreciation and amortization Depreciation and amortization of intangible assets, property, plant and equipment and right-of-use assets. Shareholders’ equity per share after dilution Equity excluding non-controlling interests in relation to number of outstanding shares after any potential dilution. Net debt Interest-bearing liabilities less interest-bearing assets. See the table on net debt for detailed information. 96 ASSA ABLOY ANNUAL REPORT 2019 Proposed distribution of earnings PROPOSED DISTRIBUTION OF EARNINGS The following earnings are at the disposal of the general meeting of shareholders: Share premium reserve: SEK 787 M Retained earnings brought forward: SEK 9,192 M Net income for the year: SEK 5,134 M TOTAL: SEK 15,113 M The Board of Directors and the President and CEO propose that a dividend of SEK 3.85 per share, a total of SEK 4,276 M, be distributed to shareholders and that the remainder, SEK 10,837 M, be carried forward to the new financial year. The dividend amount is calculated on the number of outstanding shares as per 6 February 2020. No dividend is payable on ASSA ABLOY AB’s holding of treasury shares, the exact number of which is determined on the record date for payment of dividend. ASSA ABLOY AB held 1,800,000 treasury shares as at 6 February 2020. Monday, 4 May 2020 has been proposed as the record date for dividends. If the Annual General Meeting approves this proposal, dividends are expected to be distributed by Euroclear Sweden AB on Thursday, 7 May 2020. The Board of Directors and the President and CEO declare that the consolidated accounts have been prepared in accordance with International Financial Reporting Standards, IFRS, as adopted by the EU and give a true and fair view of the Group’s finan- cial position and results. The Parent company’s annual accounts have been prepared in accordance with generally accepted accounting principles in Sweden and give a true and fair view of the Parent company’s financial position and results. The Report of the Board of Directors for the Group and the Parent company gives a true and fair view of the development of the Group’s and the Parent company’s business operations, financial position and results, and describes material risks and uncertainties to which the Parent company and the other companies in the Group are exposed. Stockholm, 6 February 2020 Lars Renström Chairman Carl Douglas Vice Chairman Nico Delvaux President and CEO Lena Olving Board member Eva Karlsson Board member Sofia Schörling Högberg Board member Birgitta Klasén Board member Jan Svensson Board member Rune Hjälm Board member Employee representative Mats Persson Board member Employee representative Our audit report was issued on 6 February 2020 PricewaterhouseCoopers AB Bo Karlsson Authorized Public Accountant Auditor in charge Linda Corneliusson Authorized Public Accountant ASSA ABLOY ANNUAL REPORT 2019 97 AUDITOR’S REPORT Auditor’s report To the general meeting of the shareholders of ASSA ABLOY AB (publ), corporate identity number 556059-3575 Report on the annual accounts and consolidated accounts Opinions We have audited the annual accounts and consolidated accounts of ASSA ABLOY AB (publ) for the year 2019 except for the corporate governance statement on pages 46–55. The annual accounts and consolidated accounts of the com- pany are included on pages 39–93 and 97 in this document. In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of parent com- pany as of 31 December 2019 and its financial performance and cash flow for the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the group as of 31 December 2019 and their financial perfor- mance and cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. Our opin- ions do not cover the corporate governance statement on pages 46–55. The statutory administration report is consist- ent with the other parts of the annual accounts and consoli- dated accounts. We therefore recommend that the general meeting of shareholders adopts the income statement and statement of comprehensive income and balance sheet for the parent company and the group. Our opinions in this report on the annual accounts and consolidated accounts are consistent with the content of the additional report that has been submitted to the parent company’s Board of Directors in accordance with the Audit Regulation (537/2014) Article 11. Basis for Opinions We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those stand- ards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for account- ants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements. Our audit approach Audit scope We designed our audit by determining materiality and assessing the risks of material misstatement in the consoli- dated financial statements. In particular, we considered where management made subjective judgements; for exam- ple, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal con- trols, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform suf- ficient work to enable us to provide an opinion on the con- solidated financial statements as a whole, taking into account the structure of the Group, the accounting pro- cesses and controls, and the industry in which the group operates. The ASSA ABLOY group is comprised of a large number of companies. None of these companies have, individually, been deemed to be of major significance in the audit of the group. For the group audit, we have selected the parent com- pany and the treasury company and some 80 companies spread across the group’s five divisions, which are audited according to a group-wide audit program. The audit pro- gram includes the assessment of the design and operating effectiveness of selected controls in processes significant to the financial reporting and also includes audit procedures in This includes that, based on the best of our knowledge and belief, no prohibited services referred to in the Audit Regulation (537/2014) Article 5.1 have been provided to the audited company or, where applicable, its parent company or its controlled companies within the EU. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. the form of test of details supplemented with analytical pro- cedures applied to the group’s significant income statement and balance sheet items. The majority of the subsidiaries in the group are also subject to statutory audits according to local requirements. During 2019, we visited the audit teams in China and the US to participate, on site, in the audit, and to take part in the meetings with representatives from ASSA ABLOY’s local companies and ASSA ABLOY’s head office. We selected the operations in China and the US per our profes- sional judgement of various factors including external sales volume. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assur- ance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggre- gate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consol- idated financial statements. Based on our professional judgement, we determined cer- tain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstate- ments, both individually and in aggregate on the financial statements as a whole. 98 ASSA ABLOY ANNUAL REPORT 2019 AUDITOR’S REPORT Key audit matters Key audit matters of the audit are those matters that, in our professional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the Key audit matter Goodwill and other intangible assets with indefinite useful lives Goodwill and other intangible assets with indefinite useful lives are described in the annual report in Note 14 and in the accounting principles in Note 1. ASSA ABLOY is an acquisition-intensive company that has an established and structured acquisition process. During the 2019 financial year, a total of 13 acquisitions were consolidated. ASSA ABLOY’s goodwill of SEK 57 billion and its Intangible assets with indefinite useful lives of SEK 6 billion are allocated to the Group’s five cash-generating units which are equivalent to the Group’s five divisions. ASSA ABLOY’s annual test of goodwill and other intan- gible assets with indefinite useful lives can be traced to observable market data and to the company’s own busi- ness plans and forecasts on future development. In our audit, we have focused on the valuation of good- will and intangible assets with indefinite useful lives as these items involve a large degree of judgement on behalf of management in assessing future cash flows and discount rates. Through test of details we have examined whether ASSA ABLOY’s impairment test is based on the divisions’ financial budgets approved by management. We have compared fore- casts to the actual business performance for the current year and also assessed the terminal growth rate that the company has used to forecast cash flows beyond the first three-year period. In conjunction with this, we have compared manage- ment’s assumptions regarding the sustainable growth rate and the operating margin against actual growth and the actual operating margin during recent years. Our assessment of the discount rates applied in manage- ment’s calculations reflects the specific and general risks found in the cash generating units. We have reconciled the data in the calculations and checked it against external. In this part of the audit, we have utilized PwC’s valuation specialists. We have evaluated the company’s sensitivity analysis of the valuation to changes in significant parameters, which, individu- ally or on a collective basis, could imply the existence of an impairment requirement. Key audit matter How our audit addressed the Key audit matter Provisions – restructuring program The restructuring program is described in the Report of the Board of Directors in the annual report and in Note 26. We have examined the company’s process for identifying restructuring projects and the estimated costs of these pro- jects. Restructuring programs were launched during the pre- vious financial years and the closing provision balance amounts to SEK 778 million as of 31 December 2019. In our audit we have focused on the recognition in the proper period and the valuation of the restructuring pro- visions as they require judgement and are dependent on management estimates. Our audit measures include an evaluation of whether the restructuring programs comply, in all significant aspects, with the Group’s accounting principles for reporting provisions. We have assessed whether a present obligation exists, and we have assessed the valuation of that obligation representing future expenditures. We have challenged management’s assumptions that are the basis for the restructuring provisions with the aim of assessing the reasonability of the provisions. Based on risk and material- ity, we have reconciled the parameters in the calculations against supporting documentation. This includes, amongst other things, the examination of minutes, agreements, calcula- tions and communication with employees. We have evaluated management’s assessments of remaining cash flows by reviewing their quarterly project updates. ASSA ABLOY ANNUAL REPORT 2019 99 AUDITOR’S REPORT Other Information than the annual accounts and consolidated accounts This document also contains other information than the annual accounts and consolidated accounts and is found in sections Report on Operations, ASSA ABLOY’s Divisions, ASSA ABLOY in the future, Shareholder Information and the sections Comments on five years in summary, Five years in summary and Definitions of key ratios. The Board of Direc- tors and the Managing Director are responsible for this other information. In connection with our audit of the annual accounts and consolidated accounts, our responsibility is to read the infor- mation identified above and consider whether the informa- tion is materially inconsistent with the annual accounts and consolidated accounts. In this procedure we also take into account our knowledge otherwise obtained in the audit and assess whether the information otherwise appears to be materially misstated. Our opinion on the annual accounts and consolidated accounts does not cover this other information and we do not express any form of assurance conclusion regarding this other information. If we, based on the work performed concerning this infor- mation, conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Board of Directors and the Managing Director The Board of Directors and Managing Director are responsi- ble for the preparation of the annual accounts and consoli- dated accounts and that they give a fair presentation in accordance with the Annual Accounts Act and, concerning the consolidated accounts, in accordance with IFRS as adopted by the EU. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of annual accounts and consolidated accounts that are free from material misstatement, whether due to fraud or error. In preparing the annual accounts and consolidated accounts, The Board of Directors and the Managing Director are responsible for the assessment of the company’s and the group’s ability to continue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of accounting is however not applied if the Board of Direc- tors and the Managing Director intends to liquidate the company, to cease operations, or have no realistic alternative but to do so. Auditor’s responsibility Our objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing stand- ards in Sweden will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggre- gate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual accounts and consolidated accounts. A further description of our responsibility for the audit of the annual accounts and consolidated accounts is available on Revisorsinspektionen’s website: www.revisorsinspek- tionen.se/revisornsansvar. This description is part of the auditor´s report. Report on other legal and regulatory requirements Opinions In addition to our audit of the annual accounts and consoli- dated accounts, we have also audited the administration of the Board of Directors and the Managing Director of ASSA ABLOY AB (publ) for the year 2019 and the proposed appro- priations of the company’s profit or loss. We recommend to the general meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Managing Director be dis- charged from liability for the financial year. Basis for Opinions We conducted the audit in accordance with generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional eth- ics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these require- ments. We believe that the audit evidence we have obtained is suffi- cient and appropriate to provide a basis for our opinions. 100 ASSA ABLOY ANNUAL REPORT 2019 AUDITOR’S REPORT Responsibilities of the Board of Directors and the Managing Director The Board of Directors is responsible for the proposal for appropriations of the company’s profit or loss. At the pro- posal of a dividend, this includes an assessment of whether the dividend is justifiable considering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’ equity, consolidation requirements, liquidity and position in general. the company’s and the group’s financial situation and ensur- ing that the company´s organization is designed so that the accounting, management of assets and the company’s finan- cial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing adminis- tration according to the Board of Directors’ guidelines and instructions and among other matters take measures that are necessary to fulfill the company’s accounting in accord- ance with law and handle the management of assets in a reassuring manner. The Board of Directors is responsible for the company’s organization and the administration of the company’s affairs. This includes among other things continuous assessment of Auditor’s responsibility Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect: • has undertaken any action or been guilty of any omission which can give rise to liability to the company, or • in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. Our objective concerning the audit of the proposed appro- priations of the company’s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s profit or loss are not in accordance with the Companies Act. A further description of our responsibility for the audit of the administration is available on Revisorsinspektionen’s website: www.revisorsinspektionen.se/revisornsansvar. This description is part of the auditor’s report. The auditor’s examination of the corporate governance statement The Board of Directors is responsible for that the corporate governance statement on pages 46–55 has been prepared in accordance with the Annual Accounts Act. Our examination of the corporate governance statement is conducted in accordance with FAR’s auditing standard RevU 16 The auditor’s examination of the corporate govern- ance statement. This means that our examination of the cor- porate governance statement is different and substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that the examina- tion has provided us with sufficient basis for our opinions. A corporate governance statement has been prepared. Disclosures in accordance with chapter 6 section 6 the sec- ond paragraph points 2–6 of the Annual Accounts Act and chapter 7 section 31 the second paragraph the same law are consistent with the other parts of the annual accounts and consolidated accounts and are in accordance with the Annual Accounts Act. PricewaterhouseCoopers AB, 113 97 Stockholm, was appointed auditor of ASSA ABLOY AB (publ) by the general meeting of the shareholders on the 25 April 2019 and has been the company’s auditor since 1994. Stockholm 6 February 2020 PricewaterhouseCoopers AB Bo Karlsson Authorized Public Accountant Auditor in charge Linda Corneliusson Authorized Public Accountant ASSA ABLOY ANNUAL REPORT 2019 101 SHAREHOLDER INFORMATION The ASSA ABLOY share Share price trend After a volatile 2018, with sharp declines during the fourth quarter, shares bounced back during the first half of 2019, posting robust gains. The OMX Stockholm index increased by 16.9 percent during the first six months and ASSA ABLOY Series B outperformed this with gains of 32.7 percent. For the full year 2019, the OMX Stockholm Index increased by 29.6 percent and ASSA ABLOY Series B again outperformed the overall index with gains of 38.5 percent. The highest closing price for ASSA ABLOY Series B during the year was SEK 231.40 recorded on 4 November and the lowest of SEK 154.45 was recorded on 3 January. At year-end, market capitalization amounted to SEK 243,654 M (175,954), calculated on both Series A and Series B shares. Listing and trading1 ASSA ABLOY’s Series B share has been listed on Nasdaq Stockholm, Large Cap since 8 November 1994 under the code ASSA-B.ST. Total turnover of the Series B share on all markets amounted to 1.611 million shares (1.588) in 2019, equivalent to a turnover rate of 153 percent (151). Turnover of the Series B share on Nasdaq Stockholm amounted to 468 million shares (578), equivalent to a turnover rate of 44 percent (55). Turnover velocity on Nasdaq Stockholm declined slightly during 2019, with an average turnover velocity of 62 percent (67) but was on a par with 2017 (average velocity 63 per- cent). Though lower than ten years ago, average turnover velocity on Nasdaq Stockholm has held relatively steady over the past five years. Even among the most frequently traded shares the trend is the same, the average turnover rate was 63 percent (70) on the Large Cap list in 2019. The implementation of the EU’s Markets in Financial Instruments Directive (MiFID) in late 2007 changed the structure of equity trading in Europe and trading now takes place on both regulated markets and other trading plat- forms. Thus, trading became more fragmented with an increasing proportion of trading in shares in Swedish com panies on markets other than Nasdaq Stockholm. However, a series of mergers and acquisitions over the past couple of years has concentrated trading venues to fewer and bigger places. In 2019 the ASSA ABLOY share was traded on more than 15 different markets, with trading on Nasdaq Stockholm accounting for 44 percent of share turnover, compared with 65 percent in 2009. The diagram below shows the trend and distribution of trading in ASSA ABLOY’s Series B share on various markets over the past five years. Share price trend and turnover 2010–20191 Dividend per share 2010–2019 SEK 300 250 200 150 100 50 0 No. of shares traded, thousands 600,000 500,000 400,000 300,000 200,000 100,000 0 SEK 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ASSA ABLOY B ASSA ABLOY B, total return OMX Stockholm No. of shares traded, thousands (incl. after hours) Source: Nasdaq, Fidessa and Bloomberg SIX Return Index 10 11 12 13 14 15 16 17 18 19 2019 proposed dividend Share price and turnover 2019 SEK 240 220 200 180 160 140 120 No. of shares traded, thousands 300,000 250,000 200,000 150,000 100,000 50,000 0 J F M A M J J A S O N D Markets for the share1 No. of shares traded, millions 2,000 1,500 1,000 500 0 15 16 17 18 19 ASSA ABLOY B OMX Stockholm No. of shares traded, thousands (incl. after hours) Source: Nasdaq, Fidessa and Bloomberg Cboe (APA, BXE, CXE) Stockholm London Turquoise Boat Others Source: Fidessa 1 Comparatives have been recalculated for all historical periods prior to 2015 reflecting the stock split (3:1) in 2015. 102 ASSA ABLOY ANNUAL REPORT 2019 SHAREHOLDER INFORMATION Data per share SEK/share1 Earnings after tax and dilution Dividend Dividend yield, % 4 Dividend, % 5 Share price at year-end Highest share price Lowest share price Equity Number of shares, millions6 2010 3.63 1.33 2.1 37.0 63.17 66.40 42.20 19.55 2011 4,102 1.50 2.6 36.6 57.53 64.97 44.50 21.85 2012 4.66 1.70 2.1 36.8 80.97 81.60 57.23 23.29 2013 4,952 1.90 1.7 38.4 2014 2015 5.79 2.17 1.6 37.4 6.93 2.65 1.5 38.2 2016 7.092 3.00 1.8 42.3 2017 7.77 3.30 1.9 42.5 2018 8.092 3.50 2.2 43.3 2019 9.222 3.853 1.8 41.8 113.27 138.27 178.00 169.10 170.40 158.15 219.00 114.07 139.17 189.00 190.10 197.10 193.90 231.40 79.33 25.94 105.63 135.00 148.40 163.80 155.85 154.45 32.50 37.43 42.51 45.60 46.71 53.25 1,118.2 1,113.6 1,112.6 1,112.6 1,112.6 1,112.6 1,112.6 1,112.6 1,112.6 1,112.6 1 Adjustments made for new issues and stock split (3:1) in 2015 for all historical periods prior to 2015. 4 Dividend as percentage of share price at year-end. 5 Dividend as percentage of earnings per share after tax and dilution, excluding 2 Excluding items affecting comparability 2011, 2013, 2016, 2018 and 2019. 3 Dividend proposed by the Board of Directors. items affecting comparability. 6 After full dilution. Ownership structure The number of shareholders at the end of 2019 was 29,784 (31,143) and the ten largest shareholders accounted for 36.5 percent (36.9) of the share capital and 56.7 percent (56.9) of the votes. Shareholders with more than 50,000 shares, a total of 490 shareholders, accounted for 98 percent (97) of the share capital and 98 percent (98) of the votes. Investors outside Sweden owned 69.5 percent (70.5) of the share capital and accounted for 47.5 percent (48.1) of the votes, and were mainly in the US and the UK. ASSA ABLOY’s ten largest shareholders Based on the share register at 31 December 2019. Shareholders Investment AB Latour Melker Schörling AB Fidelity Investments BlackRock Government of Singapore Norges Bank Capital Group Vanguard Swedbank Robur Funds Alecta Pension Insurance  Other shareholders Total number Series A shares Series B shares Total number of shares Share capital1, % Votes1, % 41,595,729 15,930,240 63,900,000 18,027,992 47,500,087 37,810,120 34,794,412 32,582,298 32,462,001 31,413,490 26,946,864 23,895,000 705,718,101 57,525,969 1,055,050,365 105,495,729 33,958,232 47,500,087 37,810,120 34,794,412 32,582,298 32,462,001 31,413,490 26,946,864 23,895,000 9.5 3.1 4.3 3.4 3.1 2.9 2.9 2.8 2.4 2.1 705,718,101 1,112,576,334 63.5 100.0 29.4 10.9 2.9 2.3 2.1 2.0 2.0 1.9 1.7 1.5 43.3 100.0 1 Based on the number of outstanding shares and votes of 1,110,776,334 and 1,628,510,055 respectively, excluding shares held by ASSA ABLOY. Source: Modular Finance AB and Euroclear Sweden AB. Ownership structure (share capital) Ownership structure (votes) Latour, 9.5% Legend Fidelity Investments, 4.3% Legend Melker Schörling AB, 3.1% Legend BlackRock, 3.4% Legend Government of Singapore, 3.1% Latour, 29.4% Legend Legend Melker Schörling AB, 10.9% Fidelity Investments, 2.9% Legend BlackRock, 2.3% Legend Government of Singapore, 2.1% Legend Norges Bank, 2.9% Legend Capital Group, 2.9% vanguard, 2.8% Swedbank Robur Funds, 2.4% Alecta Pension Insurance, 2.1% Other shareholders, 63.5% Legend Norges Bank, 2.0% Legend Capital Group, 2.0% vanguard, 1.9% Swedbank Robur Funds, 1.7% Alecta Pension Insurance, 1.5% Other shareholders, 43.3% ASSA ABLOY ANNUAL REPORT 2019 103 SHAREHOLDER INFORMATION Share capital and voting rights The share capital amounted to SEK 370,858,778 at year-end 2019, distributed among a total of 1,112,576,334 shares, comprising 57,525,969 Series A shares and 1,055,050,365 Series B shares. All shares have a par value of around SEK 0.33 and give shareholders equal rights to the company’s assets and earnings. The total number of votes amounted to 1,630,310,055. Each Series A share carries ten votes and each Series B share one vote. Repurchase of own shares Since 2010, the Board of Directors has requested and received a mandate from the Annual General Meeting to repurchase and transfer ASSA ABLOY Series B shares. The aim has been, among other things, to secure the company’s undertakings in connection with its long-term incentive programs (LTI). The 2019 Annual General Meeting authorized the Board of Directors to acquire, during the period until the next Annual General Meeting, a maximum number of Series B shares so that after each repurchase ASSA ABLOY holds a maximum 10 percent of the total number of shares in the company. ASSA ABLOY holds a total of 1,800,000 (1,800,000) Series B shares after repurchase. These shares account for around 0.2 percent (0.2) of the share capital and each share has a par value of around SEK 0.33. The purchase consideration amounted to SEK 103 M. No shares were repurchased in 2019. Dividend and dividend policy The objective of the dividend policy is that, in the long term, the dividend should be equivalent to 33–50 percent of income after standard tax, but always taking into account ASSA ABLOY’s long-term financing requirements. The Board of Directors and the President and CEO propose that the dividend to shareholders be raised by 10 percent to SEK 3.85 per share (3.50) for the 2019 financial year, equivalent to a dividend yield on the Series B share of 1.8 percent (2.2). In 2019 the total return on the ASSA ABLOY share, defined as market price movement plus reinvested dividends, was 40.8 percent, compared with the reinvested SIX Return Index in Stockholm, which was up 35.0 percent. Over the ten-year period 2010–2019, the total return on ASSA ABLOY’s Series B share was 474 percent, compared with the reinvested SIX Return Index in Stockholm which increased 223 percent. Changes in share capital Year 1989 1994 1994 1994 1996 1996 1997 1998 1999 1999 1999 1999 1999 2000 2000 2000 2001 2002 2002 2010 2011 2012 2015 Transaction Split 100:1 Bonus issue Non-cash issue New share issue Conversion of Series C shares into Series A shares New share issue Converted debentures Converted debentures before split Bonus issue Split 4:1 New share issue Converted debentures after split and new share issues Converted debentures New share issue Non-cash issue Converted debentures New share issue Converted debentures Converted debentures Converted debentures Converted debentures Split 3:1 Series A shares Series C shares 20,000 1,428,550 1,714,260 1,746,005 2,095,206 3,809,466 4,190,412 4,190,412 4,190,412 16,761,648 18,437,812 18,437,812 18,437,812 19,175,323 19,175,323 19,175,323 19,175,323 19,175,323 19,175,323 19,175,323 19,175,323 57,525,969 Series B shares Share capital, SEK1 2,000,000 50,417,555 60,501,066 60,501,066 66,541,706 66,885,571 67,179,562 268,718,248 295,564,487 295,970,830 301,598,383 313,512,880 333,277,912 334,576,089 344,576,089 346,742,711 347,001,871 349,075,055 351,683,455 1,055,050,365 2,000,000 2,000,000 53,592,110 64,310,532 64,310,532 70,732,118 71,075,983 71,369,974 285,479,896 314,002,299 314,408,642 320,036,195 332,688,203 352,453,235 353,751,412 363,751,412 365,918,034 366,177,194 368,250,378 370,858,778 370,858,778 1 SEK 1 per share before split in 2015 – number of shares at the end of the period and around SEK 0.33 per share after split in 2015. Number of shares at the end of the period 1,112,576,334 (including repurchase of own shares). 104 ASSA ABLOY ANNUAL REPORT 2019 Information for shareholders SHAREHOLDER INFORMATION Annual General Meeting The Annual General Meeting of ASSA ABLOY AB will be held on Wednesday 29 April, 2020, 3.30 p.m. at Moderna Museet (Museum of Modern Art), Skepps holmen, in Stockholm, Sweden. Shareholders who wish to attend the Annual General Meeting must: • Be recorded in the share register kept by Euroclear Sweden AB on Thursday 23 April 2020. • Notify ASSA ABLOY AB of their intent to attend no later than Thursday 23 April 2020. Notice of attendance • Website • Telephone +46 (0)8 506 485 14 • Address assaabloy.com ASSA ABLOY AB, “Annual General Meeting 2020”, c/o Euroclear Sweden AB Box 191, 101 23 Stockholm, Sweden The notice of attendance should state: • Name • Personal or corporate identification number • Address and telephone number (daytime) • Any assistants attending If participation is by proxy, the proxy should be submitted in connection with the notice of attendance and the proxy must be presented in original at the latest at the Annual General Meeting. Proxy forms are available on ASSA ABLOY’s website assaabloy.com. Nominee registered shares Shareholders whose shares are nominee registered must, in addition to giving notice of attendance, request that their shares be temporarily registered in their own name in the share register (so-called voting right registration) in order to have the right to attend the Annual General Meeting. In order for such registration to be effected by Thursday 23 April 2020, shareholders should contact their bank or nomi- nee well in advance of this date. Nomination Committee The Nomination Committee has the task of preparing, on behalf of the shareholders, proposals regarding the election of Chairman of the General Meeting, members of the Board of Directors, Chairman of the Board, Vice Chairman of the Board, auditor, fees for the board members including divi- sion between the Chairman, the Vice Chairman, and the other board members, as well as fees for committee work, fees to the company’s auditor and any changes of the instructions for the Nomination Committee. The Nomination Committee prior to the 2020 Annual General Meeting comprises Carl Douglas (Investment AB Latour), Mikael Ekdahl (Melker Schörling AB), Shireesh Vasupalli (GIC Pte Ltd), Marianne Nilsson (Swedbank Robur funds) and Liselott Ledin (Alecta). Carl Douglas is Chairman of the Nomination Committee. Dividend Monday 4 May 2020 has been proposed as the record date for dividends. If the Annual General Meeting approves the proposal, dividend is expected to be distributed by Euroclear Sweden AB on Thursday 7 May 2020. Further information Hedvig Wennerholm Telephone +46 (0)8 506 485 51 hedvig.wennerholm@assaabloy.com assaabloy.com Reports can be ordered from ASSA ABLOY AB • Website • Telephone +46 (0)8 506 485 00 info@assaabloy.com • Email ASSA ABLOY AB • Mail Box 70340 SE-107 23 Stockholm Financial reporting First quarter: 29 April 2020 Second quarter: 17 July 2020 Third quarter: 21 October 2020 Fourth quarter and Year-end report: February 2021 Annual Report 2020: March 2021 Production: ASSA ABLOY in cooperation with Hallvarsson & Halvarsson. Photo: Felix Gerlach, Magnus Glans, Korey Howell, Billy Lindberg, Getty Images and ASSA ABLOY’s image bank, etc. Printing: Göteborgstryckeriet in March 2020. ASSA ABLOY ANNUAL REPORT 2019 105 The ASSA ABLOY Group is the global leader in access solutions. Every day we help people feel safe, secure and experience a more open world. ASSA ABLOY AB Box 70340 SE-107 23 Stockholm Sweden visiting address: Klarabergsviadukten 90 Tel +46 (0)8 506 485 00 Fax +46 (0)8 506 485 85 Reg. No. 556059-3575 assaabloy.com ASSA ABLOY in your daily life Maintaining a safe and controlled flow of goods at the loading bay is critical for many different businesses. We provide a complete range of docking bay solutions to many types of buildings like logistics centers, manufacturing facilities and warehouses. From docking control systems, doors and levelers, to lights, loadhouses and restraint systems, our solu- tions help mitigate risks and potential hazards. With the right equipment, as well as regular maintenance, risk assessments and training, we do everything we can to help our customers establish a strong safety culture that makes loading bays around the world safer for everyone. 

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