ASSA ABLOY
Annual Report 2020

Plain-text annual report

Annual Report 2020 A more open world A more open world Experience a safer and more open world ASSA ABLOY is part of people’s everyday life all over the world. Our products and solutions are found in homes, at workplaces and schools, when you shop or travel. Some products are very visible – like keys, locks and doors – while others are embedded in solutions like e-passports and identity solutions. What they all have in common is creating a safer and more open world. Who we are We are the global leader in access solutions. We are 48,000 employees in more than 70 countries around the world. Read more on page 6. How we create value In an ever-changing world, we develop new products and solutions so that people feel safe and secure and experi- ence a more open world. Read more on page 8. How we operate Our strategic objectives are growth through customer relevance, product leadership through innovation, cost- efficiency in everything we do and evolution through people. They lead the way in how we do business every day. Read more on page 14. What we offer We offer products and services related to openings: locks, doors, gates and entrance automation solutions. We are also experts in trusted identities: keys, cards, tags, mobile and biometric identity verification systems. Read more on page 30. Experience a safer and more open world 1 ANNUAL REPORT 2020 | ASSA ABLOYContents Our strategy serves us well Thanks to the strong individual efforts of our employees, through significant cost measures and strong operational execution, we were able to limit the negative sales effects from the pan- demic, protect the profitability and generate strong operational cash flow. Read more on pages 6–7. ASSA ABLOY as an investment We have a global leading position in an industry with many strong fundamen- tal growth drivers. Read more on page 104. Introduction 3 The year in brief 4 Who we are 6 CEO statement 8 How we create value 8 Market and trends 10 Our value creation business model 12 How we operate 13 Strategic overview 14 Strategic activities in 2020 16 Market growth 20 Product leadership 23 Cost-efficiency 26 People 28 What we offer 28 Divisions overview 30 Opening Solutions EMEA 31 Opening Solutions Americas 32 Opening Solutions Asia Pacific 34 Global Technologies 36 Entrance Systems 40 Report of the Board of Directors 41 Report of the Board of Directors 43 Significant risks and risk management 47 Corporate governance 52 Board of Directors 54 Executive Team 57 Internal control – financial reporting 58 Financial statements 58 Financial statements 70 Notes 95 Five years in summary 96 Comments on five years in summary 97 Definitions of key ratios 98 Proposed distribution of earnings 99 Auditor’s report 104 Shareholder information 104 Investment story 105 The ASSA ABLOY share 108 Information for shareholders 109 Financial calendar and contact details The annual accounts and consolidated accounts of the company are included on pages 40–94 and 98 in this document. 2 ASSA ABLOY | ANNUAL REPORT 2020 Strategic activities 2020 We work with a number of business priorities that support our strategic objectives. A combination of short- and long-term actions were implemeted to address the impact from the Covid-19 pandemic. We also launched a new five-year sustainability program and committed to science-based targets. Read more on page 14–15. The year in brief The year in brief In a difficult environment we have executed well and continued to invest in product innovation. We have launched many new products and solutions to support our customers’ demands for touch- free access solutions. Goals and outcomes The financial and sustain- ability 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 past ten years, prior to the pan- demic, we grew by more than 9% annually with an adjusted operating margin of more than 16%. The sustainability targets were set in 2015 and by 2020 we exceeded most targets. New targets have been set for 2025. Read more on page 15 and in the Sustainability report. • Sales decreased by 7% to SEK 87,649 M (94,029) due to the negative effects from the outbreak of the Covid-19 pandemic and exchange rates. Key figures Sales, SEK M of which: Organic growth, % • Twelve acquisitions were completed, contributing to net of which: Acquired growth, net total, % acquired growth of 4 % for the year. of which: Exchange rate effects, % 2019 2020 Change 94,029 87,649 –7% 3 3 6 -8 4 -3 • Operating income was negatively affected by Covid-19, while cash flow was strong. Operating margin excluding items affecting comparability was 13.6 % (15.9). • Investments in product development continued at a fast pace. 25% (27) of sales were generated by products launched during the last three years. Operating income (EBIT), MSEK1 14,920 11,916 –20% Operating margin, %1 Income before tax (EBT), SEK M1 Operating cash flow, SEK M Return on capital employed Dividend, SEK/share2 1 Excluding items affecting comparability. 2 As proposed by the Board of Directors. 15.9 13.6 13,883 11,133 14,442 14,560 17.0 3.85 13.0 3.90 –20% +1% 1% Sales and operating income (EBIT)1 Earnings per share1, 2 Sales, SEK M 100,000 EBIT, MSEK 15,000 SEK 10 80,000 60,000 40,000 20,000 11 12 13 14 15 16 17 18 19 20 Sales Operating income (EBIT) 1 Excluding items affecting comparability. 12,500 10,000 7,500 5,000 8 6 4 2 0 11 12 13 14 15 16 17 18 19 20 1 Earnings per share has been restated due to the 3:1 share split in 2015. 2 Excluding items affecting comparability. Over a business cycle Target 2020 vs. 2015 10% Annual growth through a combination of organic and acquired growth SEK M 100,000 80,000 60,000 40,000 20,000 0 11 12 13 14 15 16 17 18 19 20 16–17% Operating margin1 –55% Injury rate –20% Greenhouse gas intensity, energy % 8 6 4 2 0 –58% 15 16 17 18 19 20 % 10 8 6 4 2 0 –27% 15 16 17 18 19 20 % 20 18 16 14 12 10 11 12 15 1 Excluding items affecting comparability. 16 13 20 19 18 17 14 Due to the effects from the pandemic, total sales declined 7%. The organic growth was –8%, while the completion of agta record contributed to an net acquired growth of 4%. During the last ten years, our average annual growth was more than 9% when excluding the year of the pandemic. The adjusted operating margin was 13.6% in 2020. Covid-19 had a significant negative effect on the profitability, but the margin recovered strongly in the second half of the year. During the last ten years, prior to the pandemic, our operating margin has been more than 16% in most years. The injury rate was down 7% and is down 58% since 2015. We have worked structurally throughout the organization and in particular targeted entities that have had higher incidents. This work has resulted in significant improve- ments. Our greenhouse gas intensity related to the Group’s energy consumption decreased by 5% and is down 27% since 2015, exceeding our target by 7 points. This has been achieved through improvements in efficiency and industrial processes. Read more about our new five-year sustain- ability targets on page 15. 3 ANNUAL REPORT 2020 | ASSA ABLOYWho we are The global leader in access solutions The ASSA ABLOY Group is the global leader in access solutions. 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. Access solutions for every need Our offering covers products and services related to openings; such as locks, doors, gates and entrance automation solutions. We are also experts in trusted identities; with keys, cards, tags, mobile and biometric identity verification systems. Our offerings are delivered both separately and together – as full-service access solutions. Solutions Service Openings Entrance automation Master key systems Identities Access control Authentications Data and analytics A decentralized organization Our local presence enables us to quickly deliver and respond to customer enquiries with the local business units innovating, and optimizing resources and products according to the local conditions and demand. At more centralized production sites, we produce components that can be used in many markets to realize scale advantages. 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 pro- ducts and entrance automation. Read more on page 28–37. Regional divisions Global divisions Opening Solutions EMEA Opening Solutions Americas Opening Solutions Asia Pacific Global Technologies Entrance Systems Strong brands Our brands play an important role in creating trust, loyalty and differentia- tion. We use a combination of master, endorsed and standalone brands to reach all our audiences. ASSA ABLOY is our employer brand and main commercial brand, HID covers secure identities and access management, and Yale covers residential products and services. Group brand and employer brand Master brands 4 ASSA ABLOY | ANNUAL REPORT 2020Global presence •• Country sites and larger locations In total, we have about 900 sites, whereof 101 R&D sites and 109 production facilities. The other sites are distribution centers and offices. ASSA ABLOY has operations in more than 70 countries. Who we are 45% North America Sales 37% Europe Sales 2% South America Sales 11% Asia Sales 1% Africa Sales 4% Oceania Sales Electromechanical on the rise The Group sees fast-growing demand for electrome- chanical products, as well as electronic and digital solutions. Since 2010 these have increased from 25% to 31% of Group sales. Mechanical products continue to grow, but electromechanical products are growing considerably faster. Together we create access 48,000 employees 70 countries 6% of our employees work in R&D 9,000 patents Sales by product group Customer split New construction/Aftermarket n Mechanical locks, lock systems and fittings, 24% n Entrance automation, 29% n Electromechanical and electronic locks, 31% n Security doors and hardware, 16% n Commercial, 75% Commercial, 75% n Residential, 25% Residential, 25% n New constuction, 33% New construction, 33% n Aftermarket, 67% Aftermarket, 67% ANNUAL REPORT 2020 | ASSA ABLOY 5 CEO statement Our strategy served us well in a challenging year We have put a year behind us that due to the outbreak of Covid-19 affected most of our daily lives in one way or the other. For ASSA ABLOY, the pandemic resulted in the most challenging operational situ- ation in our history and impacted our financial performance strongly, particularly in the first half of the year. After implementing significant actions, while continuing our investments in product development, the financial performance improved. Thanks to the strong individual efforts of our employees, through significant cost measures and strong operational execution, we were able to limit the negative sales effects from the pandemic, protect the profitability and generate strong operational cash flows. Due to the outbreak of the Covid-19 pandemic, total sales decreased by 7% to SEK 87,649 M, the organic growth decreased by 8%, net acquired growth was 4% and we had a negative currency effect of 3%. Covid-19 had a significant impact throughout the year and the organic sales decline was the strongest during the second quarter when more than half of the world ´s population was subject to lockdown measures and one third of our production sites were tem- porarily closed. Compared to previous recessions, this crisis has been different for ASSA ABLOY. Initially, the pandemic affected our supply chain out of China and local demand in China. From March onwards global demand was strongly affected. As this crisis was about trust, installers, service technicians and channel partners were in many instances prevented from visting customers due to government restrictions and fear of the virus. When societies gradually opened up, the aftermarket improved and construction sites were restarted. Divisional development Entrance Systems division was least impacted by the lock- downs as our sales to distribution centers and warehouse customers increased due to the rapidly growing global e-commerce trend. Global Technologies was, on the other hand, more negatively affected due to lower travel activities and lower demand in the office segment. Our regional divisions were also significantly impacted by the lockdowns, but the magnitude differed between markets. In APAC, it is encouraging to see that our new strategy for China is making good progress and is translating into an improved financial result. We continued with our successful acquisition strategy and during the year we welcomed 12 businesses into the ASSA ABLOY family. We also finalized the acquisition of agta record, which complements our offering within the Pedestrian business segment in Entrance Systems. Our operating result was SEK 11,916 M corresponding to an operating margin of 13.6%. The margin was lower in the first half of the year, but was close to our target in the latter part of the year. This was achieved by implementing signifi- cant cost measures that reduced our SG&A and conversion costs in a very important way. We also launched our next Manufacturing Footprint Program (MFP8) and booked SEK 1,366 M in additional restructuring costs. This program will improve our operating efficiency, strengthen our competi- tiveness and will reduce the annual costs by approximately SEK 1.0 bn when fully implemented. Operating cash flow was very strong at SEK 14,560 M, thanks to good improvements in working capital. This resul- ted in a cash conversion rate of 131%. Our strategy guided our actions While the pandemic led to an extraordinary situation, our four strategic objectives have guided us through the crisis. Our decentralized organization where decision making is close to the customer, empowered the people in the local organiza- tions to act in a swift and agile manner based on local market conditions. The actions implemented in the first half year were wider and deeper than ever before. We also developed new ways of working in many parts of the Group, respecting social distancing measures and focusing on the health and wellbeing of our employees. I am very proud of this execution. From the beginning of the crisis we introduced short-term work and made temporary and permanent layoffs, that unfortunately impacted more than 20% of our workforce. We further reduced costs by renegotiating consultancy contracts and by lowering travel and other discretionary spending. These cost actions were critical in protecting our profitability. We continued to invest in product innovation, speciali- zed sales and service offerings. For example, a number of touch-free access solutions and products were introduced to the market. We also launched a new scalable commercial digital security ecosystem named Incedo, that connects different access hardware on the same software platform. In the residential market we extended our wide offering with several new digital door locks. In total, 25% of our sales was generated by products launched in the last three years and we introduced more than 400 new products to the market in 2020. This demonstrates that effective innovation is an enabler for our future growth. We further rolled out our Group values and strengthe- ned our common culture. In line with our ambition we also increased the number of internal recruitments and promotions significantly. These initiatives facilitate our continuation as a successful company. Even while working from home, we further increased collaboration across the Group through various digital platforms. This will continue to improve our productivity also post Covid-19 in many parts of our business. Increased sustainability ambition level In 2020 we reached the end of our current five-year sustain- ability program where we set a number of ambitious targets. These have focused on improving employees’ safety, energy, MSEK 600 efficiency savings from manufacturing program MSEK 87,649 total sales MSEK 11,916 operating result 6 ASSA ABLOY | ANNUAL REPORT 2020CEO statement water and materials efficiency, while reducing waste gener- ated. I am pleased to report that we exceeded most of the targets, including the reduction of our injury rate with 58% and our carbon emission intensity from industrial produc- tion by 99% compared to 2015. Sustainability will be vital to economic and industrial de- velopment in the coming decades. Our stakeholders’ expec- tations in relation to sustainability is increasing constantly. To ensure that we maintain our long-term competitiveness, we decided to raise our ambition level. We have set new am- bitious targets for 2025 under a new five-year sustainability program. Additionally, we decided to commit to science- based targets, which demonstrates our willingness to lead the industry also in this field. We will achieve these targets through efficiency investments in our operations and supply chain and this will be enabled by technology improvements. Our efforts in this field will also lead to development of more sustainable products and solutions. Our strategic objectives are well aligned with our higher sustainability ambitions and will guide us on this journey. Our financial targets remain intact ASSA ABLOY is part of an attractive industry with strong positive long-term drivers. Even though Covid-19 impacted our industry to a greater extent than previous downturns, we do not expect that any of the fundamental drivers of our industry will change. On the contrary, our products and solu- tions will be even more relevant as they can continue to help people experience a more open and secure world. With our innovative solutions we enable safe, secure and convenient access to physical and digital places. We therefore reconfirm our long-term financial targets of 10% annual growth over a business cycle with an operating margin of 16–17%. Finally, I would like to thank all our employees who have contributed and ‘together we’ have built a stronger Group. In addition, I would like to thank all our customers, partners and shareholders for their trust and loyalty to ASSA ABLOY. Many will remember 2020 as a challenging year where most of us had to change our way of living. It has not been easy, but our fast response and implemented measures have en- sured that we will come out of this as a stronger Group, well positioned to continue to lead the industry for sustainable access solutions. Stockholm, 5 February 2021. Thank you! Nico Delvaux President and CEO Sustainability will be vital to economic and industrial develop- ment in the coming decades. We decided to commit to science- based targets, which demon- strates our willing- ness to lead the industry also in this field. 7 ANNUAL REPORT 2020 | ASSA ABLOYHow we create value Fundamental needs drive our industry A person’s basic need to be safe and secure is one of humanity’s most fundamental needs and this has been driving our industry for hundreds of years. Convenient and secure access solutions combined with increased focus on energy efficiency in buildings will drive growth in our industry for the foreseeable future. The Covid-19 pandemic caused a slowdown around the world in 2020, but industry trends and megatrends are expected to continue to support long-term growth which we at ASSA ABLOY are well positioned to take part of. Market overview The access solution industry is an ever-evolving industry that today has a global value of above USD 100 billion annually. It has a history of stable growth, driven by the development of more secure, innovative access solutions with increased focus on convenience and ways of improving the sustainabi- lity performance of buildings. 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, particularly 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 frag- mentation of the market our global market share is still low, meaning that we still have significant potential for growth. Growing trends There are a number of favorable trends that are driving an increased demand for access solutions, including meeting the individual’s most basic need for safety and security. The digitalization of the industry is enabling us to offer more convenient solutions and also shift to more service- based solution offerings. Another trend that is becoming increasingly important is energy efficiency and sustainable solutions. Despite the Covid-19 crisis, market studies continue to forecast that a number of favorable megatrends and indu- stry trends will contribute to a continued growing demand for security solutions in the future. Megatrends Urbanization People are moving from rural areas into cities. This creates demand for new buildings and thereby also new access solu- tions. This trend is particularly evident in emerging markets, where an increased need for housing, workplaces and stores drives demand for access solutions. For example, the United Nations projects that the population living in urban areas could increase by another 2.5 billion people by 2050. Rising prosperity and urbanization are leading to greater invest- ments in advanced doors and access solutions in homes, workplaces, and shopping centers. Demand for security To be safe and secure is a basic human need. In a world with a high perception of uncertainty, the demand and need for secure, convenient and efficient access solutions is increasing – both in the residential and non-residential segments. The growth is further supported by the demand for convenient and time-efficient access solutions to places and things, as time is a precious asset. Sustainability As concerns for the environment grows, customers are looking for solutions that save energy and reduce green- house gas emissions. The focus and demand for more green buildings and access systems is therefore increasing. For example, about 50% of all new commercial buildings are now expected to be certified according to ‘green building’ standards. This also requires more transparency regarding the environmental impact of products, production and working conditions. There is also an increasing amount of regulation of standards for more energy-efficient buildings and access solutions. These are long-term drivers that sup- port growth in our industry. Industry trends New technologies The industry is transitioning from mechanical to electrome- chanical products and solutions, providing more convenient solutions for our customers. The proportion of electrome- chanical products that we sell has increased from 25% to 31% over the last five years. The change of the product mix to more electromechanical products will continue and provide many business opportunities, while supporting recurring revenues and software monetization. Local regulations A changing regulatory environment, with local regulations, as well as applications and codes, results in an increasing demand for updated and compliant access solutions. Dif- ferent standards in different countries require adaptation of products, which creates hurdles and complexity while preventing commoditization of these products. The access solu- tion industry is an ever-evolving industry that today has a global value of above USD 100 billion annually. 8 ASSA ABLOY | ANNUAL REPORT 2020Market and trend | How we create value Sustainability and the UN’s Sustainable Development Goals According to the World Green Building Council, buildings and the built environment are responsible for 39% of global energy-related carbon emissions. Door openings are an important source for this. ASSA ABLOY has an important role to play in the efforts to reduce emissions and we are addressing this by developing locks, doors and door opening solutions that help improve efficiency in buildings. We also offer Environmental Product Declarations (EPDs). We are a signatory of the UN Global Compact and we also support the United Nation’s Sustainable Development Goals (SDGs), which are taken into consideration in our strategy work and in our daily operations. Our primary focus is on the following six targets, where we believe that our industry and ASSA ABLOY have the biggest impact: • Clean water and sanitation • Decent work and economic growth • Industry, innovation and infrastructure • Sustainable cities and communities • Responsible consumption and production • Climate action Sustainability will be vital to economic and industrial development in the coming decades. In 2020, we commit- ted to science-based targets to demonstrate our willingness to lead the industry towards a more sustainable future, and to further improve our competitiveness with sustainable products, solutions and operations. During 2015-2020, we have again successfully completed a sustainability program. We have implemented focused projects to improve energy, water and materials efficiency while reducing waste generated. In total, 13 targets were set and we exceeded nine of the targets by year end 2020. Our contribution to the SDGs goes beyond these explicit targets. For example, we support SDG9 (Industry, innovation and infrastructure) by exploring ways to reduce production materials, optimize product components and streamline production and transport methods via the Sustainability Compass in our innovation processes. We support SDG11 (Sustainable cities and communities) by offering sustainable products and services related to access solutions, including offering EPD-rated products that enable our customers to document the performance of their buildings. More details on how we align our work with the goals is provided in the Sustainability Report. Sustainability outcomes 2015–2020 –27% CO2 intensity (target –20%) –30% Energy intensity (target –20%) –50% Water intensity (target –20%) –58% Injury rate (target –55%) 91% Portion of spend in low-cost countries represented by sustainability audited direct material suppliers (target 90%) 9 ANNUAL REPORT 2020 | ASSA ABLOYHow we create value | Our value creation business model We help people feel safe, secure We help people feel safe, secure and experience a more open world and experience a more open world 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. By responsibly using human capital, natural resources and capital, we continuously create sustainable value, not only for our shareholders, but also for other stakeholders. Together we create value! Our resources How we operate We use a multi-brand strategy to leverage on our global and local strengths and to address different market segments, customer seg ments and routes to market. Acquiring relevant businesses in order to continue our growth is a key part of our strategy. We have a decentralized organiza- tion and make decisions close to the customer. Sustainability is part of everything we do and is a driver throughout ASSA ABLOY’s value chain. It is an important element in innovation, sourcing, production, employee development, in applying ASSA ABLOY’s products and solutions, and in the Group’s relationships with external stakeholders. Our strategic objectives The Group’s strategic direction is to lead the trend towards the world’s most innovative and well-designed access solutions. Growth through customer relevance We believe that continued profitable growth starts with understanding our customers. Product leadership through innovation Innovation is an enabler for everything we do and is the most important driver for our organic sales growth. Cost-efficiency in everything we do All activities must lead to improved efficiency where realized savings can be invested in innovation and activities that accelerate our growth. Evolution through people Developing our people, and growing their careers within ASSA ABLOY, is how we secure the Group’s future success and growth. Together we are guided by our core values and beliefs Empowerment We have trust in people Innovation We have the courage to change Integrity We stand up for what’s right 48,000 employees in more than 70 countries around the world. We are truly global, uniquely local 2,800 employed in R&D working with our sus tain able innovations 190 strong brands and diversi- fied product portfolio 9,000 patents 109 efficient production and assembly facilities ~50,000 suppliers for direct mate- rial and indirect services. We have strategic and cost efficient suppliers SEK 59 bn in shareholder equity 10 ASSA ABLOY | ANNUAL REPORT 2020 Our value creation business model | How we create value A more open world Value creation to stake holders in 2020 Shareholders and investors • Dividends and capital Customers • Increased security and competiti- veness for our customers • Sustainable products with environmental product declarations >400 new products launched appreciation SEK 4.3 bn dividend paid Employees • Professional development • Safe and stable workplace • Inclusive workplace with equal opportunities SEK 27.2 bn in salaries and other remuneration Suppliers and partners • Technological development • Stable partner SEK ~42 bn in supplier payments Society • Increased safety and security • Reduced environmental impact • Paid taxes and employment SEK 2.5 bn in income tax Our offering Our aim is to deliver safety, security and convenience. We offer a broad product portfolio with unique, innovative access solutions and trusted identities services. 31% 29% 16% 24% Electromechanical products Entrance automation Security doors and hardware Mechanical locks 11 ANNUAL REPORT 2020 | ASSA ABLOY How we operate Truly global, uniquely local ASSA ABLOY is a global business, offering access solutions that are a part of people’s everyday life all over the world. The company was established in 1994 and more than 300 acquisitions have been completed since then. Today we have a global leading position with a diverse and decentralized operation. From a local to global company The lock industry is one of the oldest industries in the world and characterized by local standards and structures that have evolved during hundreds of years by local businesses. The global market for access solutions is still fragmented with no global standards. This also includes the structures for how ‘to go-to-market’. The ASSA ABLOY Group reflects the structure of the mar- ket. Many of the companies in our Group were founded by entrepreneurs over 100 years ago with products developed for local markets. Since ASSA ABLOY was founded in 1994, we have continuously expanded through a combination of organic growth and acquisitions. Our first 10 years were characterized by rapid growth and by acquisitions of strong and leading businesses and brands in many markets. We built the world’s leading Group for locks. In the next phase we evolved into a global leader in door opening solutions by combining the products and offerings we had acquired during our first phase to offer customers total solutions. Today, we are the global leader in access solutions with a wide offering of products, solutions and services related to openings. We are also experts in trusted identities, with keys, cards, tags, and mobile and biometric identity verifica- tion systems included in our offering. Combining decentralized and centralized structures Standards for doors and locks are different between markets. For these products, our operation is structured around local assembly lines. Our local presence enables us to quickly deliver and respond to customer enquiries with the local business units innovating and optimizing resources and products according to the local conditions and demand. At more centralized production sites, we produce components that can be used in many markets to realize scale advantages. During the past years, these have been located in countries with a lower cost profile in Eastern Europe and Asia. By doing this, we combine global scale with uniquely developed local products. Product development takes place in the local markets as well as in a few centralized units that develop shared product platforms. The decentralized structure, combined with local management accountability, enables the business units to respond to market and business developments in a speedy manner. Within our global divisions, we produce more of our pro- ducts in centralized production units. For example, most of HID Global’s RFID tags are produced in two factories and all hotel locks from Global Solutions are produced in one fac- tory. Entrance Systems has a more diverse structure, but is in the process of consolidating more of its production including the integration of agta record, which was acquired in 2020 and is the largest acquisition in eight years. Digitalization provides multiple opportunities Innovation is an enabler in our business and critical for our success. The digitalization of our industry provides us with opportunities to add more customer value. For example, software platforms are used in our products to a greater de- gree, and our global presence provides us with opportunities to realize synergies across the Group. At the same time, digi- talization increases the speed of change in our industry. We need to ensure that we stay alert and agile and in response to this, we are working with our internal culture to increase the collaboration and information sharing between our divisions and business units. We are also investing more in product development. The R&D share of sales has increased during the last two years from 3% to about 4%, corresponding to an increase of SEK 1,009 M. One example of how we realize synergies is the foundation of Smart Residential, which is a cross divisional organization accountable for smart digital door locks sold to the residen- tial market. This organization draws on the scale advantages we realize internally within the regional divisions’, R&D and production resources, including using one single IT platform for the customer interface. The regional divisions then optimize the sales activities in respective regional markets and secure that the products meet local standards and re- gulations. In 2020, we launched a new smart lock, Yale Linus in Europe that is the result of this collaborative approach between our divisions and Smart Residential. Read more about innovation opportunities on page 19. Our strategies and financial targets are based upon this operating environment. Read more about our strategy and how we work on pages 13–27. Innovation is an enabler in our bu- siness and critical for our success. The digitalization of our industry provides us with opportunities to add more custo- mer value. 12 ASSA ABLOY | ANNUAL REPORT 2020Strategic overview | How we operate Strategic overview The Group’s vision is to be the global leader in providing innovative 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 us. Purpose To every day help people feel safe, secure and experience a more open world Vision To be the global leader in provi- ding innovative access solutions that help people feel safe and se- cure so that they can experience a more open world Mission • Building sustainable share- holder value • Providing added value to our customers, partners and end-users • Being a world leading organi- zation where people succeed • Conducting business in an ethical, compliant and sustai- nable way Financial targets Our strategic objectives 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 and beliefs Empowerment We have trust in people Innovation We have the courage to change Integrity We stand up for what’s right 13 ANNUAL REPORT 2020 | ASSA ABLOYHow we operate | Strategic activities Strategic activities in 2020 We work with a number of business priorities that support our strategic objectives. A combination of short- and long-term actions were implemented to address the impact from the Covid-19 pandemic. We also launched a new five-year sustainability program and committed to science-based targets. We work with a number of business priorities to accelerate growth and further strengthen our position as the global leader in providing innovative access solutions. Through continuous investments in product innovation, we grow the core business through upgrades from mechanical to electromechanical products and solutions. This transition also provides opportu- nities to generate more recurring revenue as we grow software licenses, identity management and service agreements. In Global Technologies and Entrance Systems, we focus on driving sales in key verticals and increasing the service penetra- tion. We also work with specific market targets including growing in emerging markets through a combination of organic growth and acquisitions. In China, we are consolidating our operational footprint and prioritizing profitable growth. Across the Group, we continuously work with cost-efficiency in everything we do to reduce the cost of goods sold and we con- tinue to consolidate our manufacturing and optimize logistics, where savings realized can be used for investing in innovation activities that further accelerate our growth. Sales by product group, 2010 Sales by product group, 2020 n Mechanical locks, lock systems and fittings, 42% n Entrance automation, 11% n Electromechanical and electronic locks, 25% n Security doors and hardware, 22% n Mechanical locks, lock systems and fittings, 24% n Entrance automation, 29% n Electromechanical and electronic locks, 31% n Security doors and hardware, 16% 14 ASSA ABLOY | ANNUAL REPORT 2020Strategic activities | How we operate In addition to these business priorities, managing the extra- ordinary situation raised by the outbreak of the Covid-19 pandemic became the highest priority for the year. We also decided to raise our ambition level within sustainability and launched new 2025 targets and committed to science-based targets. This will further strengthen our competitiveness with sustainable products, solutions and operations, demonstra- ting our leadership in the industry and social responsibility. Our Covid-19 response During the first half of the year, a majority of the world’s population was affected by restrictions and lockdowns as a result of the pandemic. Our supply chain and production were firstly interupted, resulting in the closure of about one third of our factories. As a next step, the lockdowns led to unprecedented drops in demand that, in some countries, amounted to more than 90% within a few days. We addressed the situation through a number of actions. Our first priority is always the health and safety of our em- ployees. Throughout the pandemic we implemented vari- ous actions such as working from home, providing personal protection equipment, introducing more shifts to limit the number of people on certain sites, and various local actions in response to local regulations. To protect business continuity, significant actions were implemented by local managers that adapted their respective business entities according to the local market conditions. All production units gradually became opera- tional, thanks to the swift actions implemented to address stringent new regulations. At the same time, our employees continued to support customers using innovative new methods to ensure everyone’s health and safety. The strategic objectives have worked as a guideline while implementing the following actions: • Temporarily reduced working hours; • capacity adjustments in factories to adapt to the lower demand and then a gradual increase of the production capacity; and • continued investments in product development and the launch of new products, in particular touch-free solutions. We reduced our costs significantly. Some actions required difficult decisions resulting in a 5% reduction in the number of employees during the year, but critical product develop- ment and certain sales and specification resources were protected. This will ensure that ASSA ABLOY can further strengthen its position as the global leader in access solu- tions and achieve its long-term financial targets. Increased sustainability ambitions Sustainability is a prioritized strategic activity that we are working with long term. In 2020, we took a decision that will influence our sustainability agenda for many years to come by committing to science-based targets. This will align our ambition level for climate-related emissions with the 1.5°C scenario in the Paris Agreement. We also closed our 2020 sustainability targets and set new targets for 2025. The new targets build on our previous five- year target cycles, which began in 2010. Our new 2025 targets increase the ambitions to do even more across all of the areas. To achieve these targets, sustainability will need to be even more integrated into our functions and everyday processes. By committing to science-based targets, we are demon- strating our commitment to address climate change and maintain our leading commercial competitiveness. The exact targets will be confirmed by the Science Based Targets initia- tive in 2021–2022, but as the targets are aligned to the Paris Agreement, we are already planning to take actions to reduce our absolute greenhouse gas emissions by approximately 50% between 2019 and 2030 and to being net-zero across the entire value chain at least by 2050. The new targets and commitments will further strengthen our competitiveness through stronger incentives to improve our operations. More details about our sustainability performance, how we work with sustainability and our new targets, are availa- ble in the separate Sustainability Report. Targets 2020–2025 –25% absolute carbon footprint –25% energy intensity –25% water intensity –33% injury rate 95% portion of spend in identified risk countries represented by sustainability audited direct material suppliers 15 ANNUAL REPORT 2020 | ASSA ABLOY How we operate | Strategic objectives Strategic objective #1 Growth through customer relevance At the core of our “Growth through customer relevance” strategic objective is the ability to develop an in-depth understanding of the needs of our customers and end-users so we can provide relevant solutions. Processes and tools help us to develop targeted products and solutions that meet customer demands for safety, security, convenience and sustainability. Having a local presence is crucial to maintaining our leadership and continuing to grow. No. 1 global leader in access solutions. x2 15% of sales are in emerging markets, a doubling in the last ten years. 31% the percentage of electromechanical products has increased from 25 % to 31 % of sales in ten years. 16 ASSA ABLOY | ANNUAL REPORT 2020Enhancing the customer experience We aim to offer a customer experience that is best in class in all areas. This includes offering seamless platforms that help customers explore, buy, install and service our products. Tools such as Net Promoter Score (NPS) help us improve our customer relevance by measuring customer experience across different touch points, and it is gradually being deployed to more business areas. This year we started to implement a single IT platform for the customer interface to further improve the customer experience for our smart lock customers. We also put extra focus on the user experience by improving interfaces and website navigation. Dedicated solutions for each segment We continuously monitor evolving market trends and gather insights into our customers and our competitors. These activities help us to identify and prioritize opportuni- ties that will advance our market position. We have segmen- ted our markets into end-user verticals to identify specific needs and create dedicated solutions for each segment. We believe that growth through customer relevance is best ac- hieved by delivering differentiated products and solutions, rather than by taking a one-size-fits-all approach. Institutional and commercial markets currently represent about 75% of our total sales. This includes premises used for education, healthcare, transportation and public and private offices, among others. Healthcare is an example of a growing vertical where we are expanding our presence as a result of the acquisition of FocusCura, a provider of technology solutions for senior care. The residential market accounts for the remaining 25% of our sales and this is an area where we see further growth potential due to the rising smart home trend. The aftermarket represents two thirds of our sales, provi- ding a stable demand through renovations, replacements and upgrades, as well as services. New construction, which constitutes about one third of our business, is more cyclical in nature. We aim to generate more recurring revenues th- rough new software-related offerings and enhanced service packages as the demand for electromechanical, digital and Strategic objectives | How we operate smart solutions rises. Connected products, new features and subscription services will continue to drive revenues in the future. Sales by product group, 2020 Brand consolidation and consistency Consistent brand experiences build trust. At ASSA ABLOY, we use a combination of master, endorsed and standalone brands to reach all our audiences. ASSA ABLOY is our employer and main commercial brand, HID covers secure identities and access management, and residential products and services are led by Yale. Each has a strong and distinct identity. Our customers also know us by a number of well-known brands, strongly or more softly endorsed by one of these master brands. For niche audiences, we maintain some standalone brands, sold mainly through distributors and installers. Design is a tool for us to create strong customer experiences. This year, as part of Yale’s 180th anniversary celebrations, we launched the award-winning Linus lock and focused on making the brand’s consumer experience better than ever. Seamless collaboration supports sales Common processes and a structured approach to master data management support our sales people and our market strategies. Our Customer Relationship Management (CRM) systems enable us to deliver more targeted information to customers. ASSA ABLOY Openings Studio, our own Building Information Modeling (BIM) software, helps architects and other partners in the construction process to seamlessly collaborate with our specification and sales teams to find the most suitable building solutions. We continue to ex- pand Openings Studio’s functionality for example through integrations with leading 3D architectural design tools and the development of a mobile app. Dedicated pricing activities Pricing is a core activity within the Group with a network of dedicated pricing managers across all divisions to help drive n Mechanical locks, lock systems and fittings, 24% n Entrance automation, 29% n Electromechanical and electronic locks, 31% n Security doors and hardware, 16% Sales by region, 2020 n North America, 45% n South America, 2% n Europe, 37% n Asia, 11% n Oceania, 4% n Africa, 1% Legend Legend Legend Legend Legend Legend Creating a push effect through management of sales channels and channel partners ASSA ABLOY Distributor/ wholesaler Integrator/ installer (incl. locksmiths) End customer OEM Sales channels The majority of our sales go th- rough 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. Pull effect driven by specifications, brand loyalty and recurring revenues 17 ANNUAL REPORT 2020 | ASSA ABLOYHow we operate | Strategic objectives price realization and margin improvement. We apply value- based pricing techniques to capture the full value of our products and services, taking into consideration factors such as quality, convenience and service. Activities such as price performance, price optimization and discount management are constantly reviewed and tracked through key perfor- mance indicators in a transparent and compliant way. We proactively manage fluctuations in our cost base and review prices to protect our profitability. E-business covers the entire journey E-business helps us serve our customers in a more persona- lized and convenient way, making it easier for customers to buy from us. The need for an established online presence was clearly exemplified in 2020 as the Covid-19 pandemic drove more customers online, increasing our e-commerce sales. During the year, each of the divisions developed a five-year e-business strategy as we stepped up the pace of digitaliza- tion even further. In 2020 we made significant investments, for example, in a new Group-wide content management system to make it easier for customers to find and navigate our solutions online. We worked on increasing B2C and B2B sales through our own webshops as well as the webshops of our distributors and third parties, by offering online training and enhanced product information. Our e-business platform covers all touchpoints in the customer journey, from digital marketing to after-sales support. Helping customers meet sustainability targets We have the products, solutions and know-how to help customers meet their environmental targets to construct or upgrade to environmentally certified buildings. Our sales teams and specification consultants help customers reduce their environmental footprint by applying a growing portfolio of products with green attributes. Sustainability considerations are a standard part of our product develop- ment process. Many of our products, such as our automatic doors and contactless cards, have been particularly relevant for customers this year in the efforts to reduce the spread of viruses and bacteria. Expansion in emerging markets We continue to expand in emerging markets both through acquisitions and organic growth. Our share of sales in the emerging markets was 15%, reflecting weaker markets caused by the pandemic. During the year we focused particularly on organic growth in our key markets, for example by expanding our Entrance Systems presence in Brazil and China. We traditionally have a strong position in the premium segments and are expanding our offering in the mid-range segment to accelerate growth in emerging markets. We are working with local supply chains to increase our efficiencies and are developing products and solutions specifically targeted to these markets. Breakdown of ASSA ABLOY’s sales 75% Commercial institutional and commercial market 25% Residential private customers and residential market 33% New construction new buildings 67% Aftermarket renovations, remod- eling and additions, replacements and upgrades of existing access solutions, as well as ongoing service Creating a push effect through management of sales channels and channel partners ASSA ABLOY Distributor/ wholesaler Integrator/ installer (incl. locksmiths) End customer OEM Pull effect driven by specifications, brand loyalty and recurring revenues Sales channels The majority of our sales go th- rough 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. 18 ASSA ABLOY | ANNUAL REPORT 2020 Strategic objectives | How we operate Areas of opportunities ASSA ABLOY started its remarkable journey as a traditional Nordic-based lock company and has now evolved into the global leader in access solutions. This is the result of strong growth and innovation, customer focus and efficiency improve- ments. However, the journey has just begun and many growth opportunities remain. Security The demand for safety, security and convenient solu- tions for locks and doors will continue to increase. Secure digital and mobile management of iden- tity and authentication will be broadly used in order to determine who should have access when, where and how. Flexible and mo- dular 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. Connected products Data analysis, enabled from more connected products, will be broadly used as a tool to develop new customer functions. With connected products we are able to offer a higher customer value by improving the customer expe- rience, cost-efficiency, and as a tool to analyze security and energy needs. In the aftermarket, remote service will be used more to improve service access and by cloud-based ‘as a service’ solutions. Digitalization In the future, electromechanical solutions will be mainstream both in the commercial as well as in the residen- tial segments. Connected residential 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 Mechanical locks will remain an important part of our core business and are also the founda- tion for our electromechanical products. Our competence in mechanical locks will continue to be a valid and competitive asset as innovation over the next ten years is expected to cover both the de- velopment of conventional mechanical locks as well as highly complex software platforms for our electromechanical solutions. Trusted identities Using trusted IDs that integrate security, privacy and convenience will be common. The level of security and privacy will be high, and the ID in the future is likely to be the person itself using the access solution (for example through finger -or face recognition). We will have solutions and services to manage the lifecycle of the ID of a person. 19 ANNUAL REPORT 2020 | ASSA ABLOYHow we operate | Strategic objectives Strategic objective #2 Product leadership through innovation Over the years, ASSA ABLOY has been recognized among the world’s most innovative companies. Innovation is at the core of everything we do, and we are accelerating our organic growth through a constant flow of new, innovative and sustainable products and solutions that optimize customer value. Our innovation strategy helps us to deliver on our “Product leadership through innovation” strategic objective. By optimizing the three pillars of the innovation strategy – organization, process and product – we can execute our innovation activities efficiently. 25% products launched in the past three years account for 25% of total sales. SEK 4 bn cost for product innovation and research. >500 filed patents during the last three years. 20 ASSA ABLOY | ANNUAL REPORT 2020Organization We have 101 innovation centers globally and they are designed to spearhead the Group’s innovation capabilities. Through these centers we systematically manage knowled- ge and capacity. Here, diverse teams are brought together through common ways of working and collaboration tools that allow us to capture and retain valuable competence and build a more flexible, agile and resilient organization. Structured internal collaboration aligns strategic initia- tives and improves transparency. This in turn helps with the coordination and prioritization of projects to increase efficiency. We strive to leverage the Group’s size to exploit synergies and combine technologies from different business units. Process Accelerating organic sales growth Product management accelerates organic growth by iden- tifying the right things to do in order to optimize customer value. Deep customer insights collected together with our sales and marketing organizations, enable us to leverage platforms and prioritize development, resulting in reduced cost, increased speed and flexibility in the market. Product management excellence requires an integrated and efficient flow from strategies and generation plans into concrete concepts and products. Continuous optimization over the full lifecycle is critical to secure the best offering at all times, while reducing complexity and cost. Efficient execution of innovation While product management identifies the right things to do, excellent innovation processes guide us in doing things right. We are gradually transforming to an iterative way of working and a “fail fast, learn fast” approach that decreases our time to market, improves our ability to respond to change and lowers cost. An agile process for continuous product innovation increases speed and the digitalization of products and services. Our innovation process excellence addresses project execution and the continuous delivery of hardware and software, and add-on development like cus- tomization, quality improvements and value engineering. Structured knowledge management increases speed and accuracy by offering the right information, in the right form, to the right people at the right time. First time right We always strive to meet or exceed customer requirements. This includes both clearly defined requirements as well as unspoken needs. Processes and methodologies for product safety and security safeguard the competitiveness of our products and solutions and maintain our position as the global leader in access solutions. We apply a “first time right” culture in product development to ensure that each product meets the highest requirements for quality, safety and security, as well as design and sustainability. Processes, tools and governance support this culture. Through our processes, we can continuously monitor and take action on deviations to keep quality in check. Breakthrough innovation By exploring new technologies and challenging bounda- ries we disrupt existing markets and value networks. Our breakthrough innovation agenda is supported by a process and governance framework that enables us to navigate the uncertainty that is associated with breakthrough innova- tion. By emphasizing the value of disruptive innovation, pre product innovation will enable the Group to take major Strategic objectives | How we operate Innovation strategy P Generation plans Product quality Product safety & security Process Product management excellence Innovation process excellence Breakthrough innovation Strategic actions Technology & platforms r o d u c t Sustainable products Standard Interfaces & API’s Collaboration Innovation Centers Organizati o n The ASSA ABLOY innovation strategy is structured around three strategic pillars - organization, process and product. For each area we have defined strategic actions which are the core of our strive for product leadership through innovation. Efficient execution of these strategic actions will secure a constant flow of new, enhanced, innovative and sustainable products that optimize customer value. Together they will help us accelerate organic sales growth. leaps and create new market opportunities. In 2020, new products (less than three years old) accounted for 25% of total sales, in line with our target of 25%. Percentage of sales of products launched in past three years Product Clear future visions Generation plans ensure that business objectives are con- nected with innovation and provide direction to product and technology roadmaps. Our generation plans start from a solid understanding of the future external environment and set a clear vision and focus for the future offering. The plans also outline platform, technology and capability needs over time. Generation plans drive increased growth and im- prove the prioritization of strategic innovation investments. Modular platforms and integration We are using modular platforms to reduce complexity, increase speed and maximize the impact of our resources. We are increasing the interoperability between Group com- mon products and software to aid the creation of an ASSA ABLOY product ecosystem where third-party elements can be integrated to provide complete solutions. An ASSA ABLOY product ecosystem could potentially create industry standards allowing us to lead the market. To improve the user experience we are increasing interoperability between our products through internal standardization and reducing complexity through fewer interfaces. % 30 25 20 15 10 5 0 16 17 18 19 20 Investments in research and development SEK M 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 16 17 18 19 20 21 ANNUAL REPORT 2020 | ASSA ABLOY Industry awards for innovations ASSA ABLOY continued to win many design awards in 2020, including both the Pandemic Tech Innovation Award and the Campus Safety Magazine award for our HID Location Services for Workplace Safety. The solution helps prevent workplace exposure to Covid-19 by streamlining and simplifying employee social distancing and contact tracing protocols. We were also awarded with the Iconic Innovation Interior Award for the stylish industrial design of our Aperio® H100 and the Vercy Architectural Hard- ware series. Transitioning to digital solutions A part of the Group’s product portfolio comprises digital solutions, software and data. Software development is moving into the area of cloud services, which are linked to subscription business models and licenses and we antici- pate more subscription-based agreements for upgrades, data and analysis in the coming years. Our digital service organization supports and provides service to customers who use our digital solutions. Through a cross-functional approach that we refer to as “the digital factory,” we create a seamless link between product development, IT opera- tions, service operations and the customer. The situation with Covid-19 has accelerated the market shift towards digital access solutions, increasing demand for such things as digital room keys to access hotel rooms and automatic doors that help limit the spread of bacteria by reducing the need to touch surfaces or handles. We have a number of these products in our portfolio and in addition to launching new products we are adapting ex- isting products to quickly meet today’s extra demanding health and safety requirements. 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 sustainable footprint to minimize the footprint throughout the lifecycle. How we operate | Strategic objectives Sustainable innovation ASSA ABLOY aims to be perceived as the most sustainable company in our industry, by leading the way towards a circular economy and more sustainable products. Sustai- nability is a Group-wide responsibility and all divisions are working actively to develop products and articulate the sustainability value proposition. Sustainable innovation includes our lifecycle assessment-based data to transpa- rently guide customers in their decision-making and help them achieve their sustainability objectives. Environmental Product Declarations and the ASSA ABLOY Sustainability Compass (see illustration) are central to our continuous improvement efforts when developing products. Our aim is for all new product releases to have a sustainability value proposition. Sustainability compass Sustainability Compass Recycle R e c y cled content R e c y cl a b il i t y C o s t w m aterial R a Packagin g Reduc e Management 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 Innovation system We look at innovation as a sys- tem. We believe that efficiency is maximized by embracing the en- tire system. For example, strong product management is neces- sary to run efficient projects. Having a mix of pre product, new product and continuous product innovation will also help us achieve long-term success. ASSA ABLOY’s innovation system is our engine, and all parts need to work separately, but also together. The innovation system sup- ports the dynamics between incremental and disruptive inno- vation, which are both necessary to develop new solutions for our short- and long-term success. 22 Product management Pre product innovation (PPI) New product innovation (NPI) Continuous product innovation (CPI) Customer and market insights Innovation culture and knowledge Innovation Strategy incl. IP and Technology ASSA ABLOY | ANNUAL REPORT 2020 Strategic objectives | How we operate Strategic objective #3 Cost-efficiency in everything we do By focusing on cost-efficiency in everything we do, we will further strengthen our competitiveness and continuously improve our operations. Our new operational excellence structure is the building block for capturing cost-efficiencies, sustainability and quality improvements. Our action plan includes an emphasis on top suppliers, value analysis/value engineering and productivity improvements through our manufacturing footprint programs. 49% share of total purchases in low-cost countries. –13% the number of direct material suppliers has been reduced by 13% over the past three years. 600 MSEK efficiency savings from MFP programs in 2020. ANNUAL REPORT 2020 | ASSA ABLOY 23 How we operate | Strategic objectives Our new operational excellence structure is the building block for capturing cost- efficiencies, sustainability and quality improve- ments. Operational excellence Through our operational excellence structure and as- sessment tool, we can target costs for direct labor, direct material, fixed and variable production costs. The operatio- nal excellence structure applies key performance indicators for alignment across the Group on sustainability, quality, delivery and cost performance. It also includes clearly defined target stages linked to productivity performance. A Group-wide best practices library will follow in 2021. Lean principles are at the core of our operational excel- lence work. Quality is an integral part of these principles and we apply this to every stage of the value chain, from concept and innovation to purchasing, sales and service. Focusing on the needs of customers, empowering our employees and continually improving activities are also elements of opera- tional excellence. Working with these helps us to increase productivity and reduce costs. Logistics and supply chain optimization As part of our operational excellence efforts, we continually work to improve our global logistics to capture cost savings, increase flexibility, improve delivery performance and lower our environmental footprint. We continue to optimize our warehouse locations and improve our operational perfor- mance through cross-divisional collaboration and impro- vement roadmaps. We have a process where we optimize the use of warehouses and consolidate them for example, in Scandinavia, Benelux and the UK. By moving more towards a higher degree of standard materials and components, along with standardized digital processes, we can consolidate more, and often faster, for further efficiencies. Our logistics were impacted in the beginning of the Covid-19 pandemic, but as the situation required, we were able to minimize supply chain risk by, for example, sourcing from Mexico when US suppliers shut down and turning to Eastern Europe when Western Europe was heavily impac- ted. With strict safety protocols in place we were able to keep most of our factories running except when there were country lockdowns. Efficient manufacturing footprint Since 2006, we have been improving cost efficiency by con- solidating and reducing the number of our factories through a series of Manufacturing Footprint Programs (MFP). We are also reducing the amount of offices, warehouses and other sites, to increase efficiency in our organizational structure and enhance performance. Our long-term plan across the divisions is designed to address closures and mergers in the long term. In the shor- ter term we have a three-year plan called MFP8 to close ten production plants and about 30 offices. Our restructuring programs in 2020 amounted to efficiency improvements of SEK 600 M and an employee reduction of more than 2,000. Through the MFP programs we have identified Group sites where we can concentrate our more strategic components and production close to customers, primarily in mature markets. During the year we engaged in more cross-divi- sional collaboration to further increase our efficiencies. For example, we revised our strategy for overall cost-efficiencies in the smart residential area. We also revisited our smart residential supply base in order to leverage suppliers more effectively. Industry 4.0 Our automation council heads up the Group’s efforts to improve manufacturing efficiencies and reduce our labor costs through the strategic deployment of automation and robotics in factories and assembly plants. The operational excellence structure and assessments help us to identify the biggest opportunities for automation. In 2020 we conti- nued to implement robots and automated systems in our operations. Looking ahead, we see opportunities to use data 24 ASSA ABLOY | ANNUAL REPORT 2020Strategic objectives | How we operate Share of total purchases in low-cost countries % 60 50 40 30 20 10 0 16 17 18 19 20 Raw materials, components and finished goods from low-cost countries accounted for 49 % of the Group’s total purchases in 2020. analysis and machine learning to improve cost efficiencies in production, particularly for measuring the effectiveness of our equipment and monitoring maintenance. Professional sourcing key to savings We are guided by the sourcing principles in our Group-wide sourcing policy and practice multi-tendering, benchmarking and group-wide contracts. We apply “should-cost” analysis and e-auctions to ensure the best cost, quality and performance of our supply base. Professional sourcing and strategic partner- ships help us to reduce costs and ensure we are more compe- titive. We also have a majority of our direct material suppliers located in low-cost countries for further cost savings. Due in large part to our frequent acquisitions, we constantly need to review our supply base and streamline our component assortment to leverage volumes. We took initiatives towards the end of the first quarter to reduce our supplier spend through rapid re-pricing and extended pay- ment terms for as long as the Covid-19 pandemic continues to affect business. At the same time, we have also identified and are focusing on the suppliers that represent 45% of total direct material spend to ensure they are both price-competitive and innovative. In the spirit of our “Together we” program, the divisions have been working together on a top supplier program to capture synergies through a more structured approach to sourcing by setting joint targets for the suppliers. We continuously monitor supplier performance to ensure they meet our criteria. Value Analysis and Value Engineering We see great potential to improve our cost efficiency through Value Analysis (VA), a structured process for opti- mizing cost and customer value in existing products – and Value Engineering (VE), which is part of the development process and focuses on new and existing products. Both processes take an in-depth look at a product’s design, components and production methods in order to enhance customer value with improved quality, as we have defined it. At the same time, the processes systematically reduce costs. We have been running a VA/VE program for many years, but this year we adapted a more strategic operational approach to selecting products for further analysis. We have also included VA/VE in our gateway process for every product that we develop to make sure we are designing products at the right cost. We will establish Centers of Excellence next year in order to share VA/VE best practices internally within the Group, applying these practices in a more strategic and cost-effective manner. Reducing our environmental footprint Improving our operational performance is also about improving resource efficiency by reducing the consumption of materials, energy, water, waste, and greenhouse gases in our production processes. Environmental performance is integrated into all of our operational processes and we also conduct sustainability audits among our suppliers. Within operations we have been focusing on four main areas: reducing our factory footprint to reduce carbon dioxide emissions; investing in renewable energy in plants, such as solar energy; sourcing renewable energy where it is available; and practicing kaizen methodology in our daily operations to reduce energy. We reinforce a culture of health and safety throughout the organization and proactively identify risks and implement safety improvements to minimize the risk of injury. Our health and safety culture has a clear impact on operational performance and over the past five years (2015 to 2020) we have been able to reduce the lost time injury rate by 58%. We exceeded most of our sustainability targets which ran from 2015 to 2020 and prepared our new science-based sustainability targets for the coming years. 25 ANNUAL REPORT 2020 | ASSA ABLOYHow we operate | Strategic objectives Strategic objective #4 Evolution through people Creating a culture where our employees thrive and feel committed is crucial for the Group’s future growth and success. We are convinced this is best achieved by empowering employees, helping them develop skills and know-how, encouraging collabora- tion, knowledge sharing, and internal mobility. With the “Evolution through people” strategic objective, we provide added value to all of our stakeholders by being a world-leading organization where people succeed. 31 different nationalities in senior management positions (27 last year). -58% reduced injuries per million hours worked since 2015. 26 ASSA ABLOY | ANNUAL REPORT 2020Strategic objectives | How we operate ABLOY IMD. The IMD program was developed in collabora- tion with the International Institute for Management Development (IMD) in Lausanne, Switzerland. Although most programs were postponed this year, they have now been adapted and will be carried out during 2021. Acting responsibly and ethically A culture of visibility and transparency forms the basis for our ethical and social responsibility practices. We are good corporate citizens, act ethically and with integrity, and always comply with laws and regulations of the countries in which we operate. We actively promote diversity and inclusion and do not tolerate any form of discrimination or harassment in the workplace. Everyone acting on behalf of ASSA ABLOY, must follow the ASSA ABLOY Code of Conduct. This is our framework for daily operations and includes gui- delines on areas such as anti-corruption, human rights and business ethics. Any concerns or suspected violations of the Code of Conduct are managed through our whistleblowing process, as outlined in Our Group Whistleblowing Policy, to ensure that principles are met and the correct process is followed. Together we are safe We have been working systematically for a long time to provide a safe work environment. The health and safety of our employees is always a top priority but the Covid-19 pandemic put extra urgency on the matter. We acted quickly to secure personal protection equipment for employees and align our routines and processes in each market in accordance with shifting local directives. We have zero tolerance for unsafe behaviors and environ- ments and safety training and audits are routine practice. This year we began rolling out new workshops called Together We Are Safe. The objective with these workshops is to progress our safety culture by making safety a more personal and emotional issue for the participants. Among the topics covered are how culture and behaviors contri- bute to risk, the influence of social pressure on safety and the impact our safety habits have on others. Working digitally and flexibly This year we rapidly pivoted our organization into a truly digital workplace, with digital meetings, learning and work practices that became common ways of working almost overnight. With non-essential travel restrictions in place since March, we encouraged employees to work digitally, providing them with the tools to support their choice of communica- tion channel. This year we accelerated the implementation of our global HR system, which went live in January 2021. With this tool in place, we will have even better opportunities to drive pe- ople processes that support our leaders and employees. The system will enable us to connect everything from recruiting to onboarding to performance development, learning and compensation. This will make it easier to follow up on goals and progress to make career moves within the organization. At the same time, we continue our efforts to safeguard the integrity of the data and the user, by following rules and regulations on how to collaborate and store data. Our common culture ASSA ABLOY is a diverse and decentralized Group with locations all around the world. Having a shared vision, Group identity (“Together we” program) and common values (empowerment, innovation and integrity), help unite us to grow and work together in the same direction. This year we put our strategy and “Together we” program into valuable practice, working together within the Group to share best practices as the Covid-19 pandemic spread to different regions. Because we empower our people in our decentrali- zed organization, we were able to adapt quickly to the new situation. We were also able to complete projects more ef- ficiently and rapidly thanks to an increase in cross-divisional efforts, as people collaborated more within new constella- tions through virtual means. Individual employee journeys We believe in an inclusive working environment that encou- rages engagement, innovative thinking and efficiency. We aim to always improve the employee experience and enable a personalized development journey. As the pandemic hit, we catered to the different needs of individuals, who were often faced with sudden workplace disruptions. We focused on improving the workspace both for working at home and on our sites. We also focused on the physical and emotional wellbeing of our employees through initiatives to help them while working remotely. A long career We strive to offer interesting roles and give people the opportunity to grow in their career, develop their skills and move easily between roles, functions and countries within the organization. This helps us to be a competitive employer and attract and retain talent. We aim for longevity when hiring and focus on talent retention, encouraging our own people to apply for internal jobs. We have put a lot of emphasis on using internal resources when it comes to recruitment and developed our own executive search organization in 2020 to recruit across divisions. Internal recruitment is something we highly value as it helps us build consistency with employees who have a deeper understanding of our organization and share the ASSA ABLOY culture. The cultural fit is an important aspect in a complex organization like ours. As part of our talent management we run several graduate and trainee programs within the ASSA ABLOY divisions. In 2020 we had to postpone some of those programs, but were able to run others digitally. Strengthening our leaders This year we introduced Leadership Dimensions, which are guiding principles for our leaders. Leaders are expected to work collaboratively, embrace our culture, develop our people, and lead change and innovation, while delivering an excellent customer experience and results. These princip- les are derived from our strategy and values and we have started implementing them in our global people processes, using them to help with employee development. We offer leadership programs for our managers at both Group and divisional levels. These include two development programs for senior managers: ASSA ABLOY MMT and ASSA This year we put our strategy and “Together we” program into valuable practice, working together within the Group to share best practices as the Covid-19 pandemic spread to different regions. 27 ANNUAL REPORT 2020 | ASSA ABLOYWhat we offer Divisions overview Product offering The regional divisions manufacture and sell mechanical and electromechanical locks, digital door locks and smart home access solutions, high-security doors, fire doors and hardware adapted to the local market’s standards and security requirements. Regional divisions Share of sales Share of operating income Sales by product group 21% 18% Share of sales Share of operating income Sales by product group 22% 30% Share of sales Share of operating income Sales by product group 9% 3% n Mechanical locks, lock systems and fittings, 47% n Electromechanical and elec- tronic, 36% n Security doors and hardware, 17% n Mechanical locks, lock systems and fittings, 41% n Electromechanical and elec- tronic, 26% n Security doors and hardware, 33% n Mechanical locks, lock systems and fittings, 49% n Electromechanical and elec- tronic, 23% n Security doors and hardware, 28% Opening Solutions EMEA Page 30 Opening Solutions A mericas Page 31 Opening Solutions Asia Pacific Page 32 28 Door openings and access controlASSA ABLOY | ANNUAL REPORT 2020What we offer Product offering Global Technologies HID Global is a worldwide leader in trusted identity solutions, dedicated to powering the trusted identities of the world’s people, places and things. ASSA ABLOY Global Solutions is leading the development within secure ac- cess solutions for Hospitality, Marine, Education, Senior Care, Key and Asset Management, Construction and Critical Infrastructure. Entrance Systems manufactures and sells products, services and compo- nents for entrance automation. The product range includes automatic swing, sliding and revolving doors, industrial doors, garage doors, high- performance doors, docking solutions, hangar doors, gate automation, high security fencing, gates and components. Global divisions Share of sales Share of operating income Sales by product group 16% 16% Share of sales Share of operating income Sales by product group 32% 33% n Access solutions, 77% n Hotel locks, 16% n Service, 7% n Products, 75% n Service, 25% Global Technologies Page 34–35 Entrance Systems Page 36 29 Identification and access managementEntrance automationANNUAL REPORT 2020 | ASSA ABLOYWhat we offer | Divisions Opening Solutions EMEA New electromechanical products and solutions launched Overview EMEA is organized into 12 market regions with divisional headquarters 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 standards and requirements of local markets. 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 and its endorsed brands. The com- mercial and institutional segments account for around 60% of sales and the residential segment for about 40%. EMEA has about 10,300 employees. The largest market region is Scan- dinavia, followed by the UK and DACH (Germany, Austria and Switzerland). Financial development The first half of the year was strongly impacted by the Covid-19 lockdowns and factory closures. In the second half of the year business activities gradually improved as a result of the eased Covid-19 restrictions. The year ended with an orga- nic sales growth of -8%. Scandinavia and DACH were the most stable regions, while South Europe and France were strongly impacted by the negative effects from Covid-19. Electrome- chanical products and solutions were less affected and in the fourth quarter the launch of the Linus Yale smart lock was well received in the market. Net acquired growth was –1% due to the transfer of the critical infrastructure businesses from EMEA to Global Solutions. Operating income declined and the operating margin was 11.9% (16.1%). Significant cost actions were implemented to mitigate the negative effects Financials in brief 2020 • Sales: SEK 18,982 M (21,144) with –8% organic growth. • Operating income (EBIT): SEK 2,263 M (3,396).1 • Operating margin: 11.9% (16.1).1 Sales, SEK M 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Sales Operating income1, SEK M 4,000 3,500 3,000 2,500 2,000 1,500 1,000 16 17 Operating income1 18 19 20 1 Excluding items affecting comparability. from Covid-19 with headcount reductions of 5%. Cash flow developed strongly, and the conversion rate increased to 130% of EBIT, driven by collection of receivables and lower inventory levels. To further strengthen our competitive ad- vantage, we continued to invest in research and development and the share of new products introduced over the past three years accounted for 26% of sales. Acquisitions One acquisition, Donimet in Poland was completed. Doniment is a leading Polish producer of specialized high security doors. With Doniment we can now address the growing demand for high security commercial doors and complement our security door business in Poland. Comments by Divisional Head Neil Vann Executive Vice President and Head of EMEA division What trends have you seen in the market in 2020? We have seen an acceleration in the uptake of electromecha- nical products and solutions in both the commercial and residential segments. The speed of change is happening quickly, and we are driving this with our existing digital products and with increased investment in new product development. This accelerates our growth potential as we convert our traditional mechanical installed base. We are also seeing online business activity becoming more important due to changes in our distribution landscape and the shift in consumer demand towards e-commerce. Do you expect any long-term effects from Covid-19 on the business? Some operational changes that we implemented have resulted in a new more agile working approach that will have positive long-term effects on the business. The pandemic has also opened up new market opportunities in terms of product develop- ment with innovations around touchless and antimicrobial opening solutions. We have seen a shift from conventional door openings, to openings that reduce touchpoints and manage people flow in buildings. Markets EMEA has a leading position in Europe, the Middle East and Africa for locks, access solutions, high security doors and hardware. The region has unique local standards and regulations creating a diverse environment to operate in. Commercial and institutional custo- mers are the largest end- customer segment and account for about 60% of sales, while the residen- tial segment accounts for about 40%. Products are sold primarily through a number of distribu- tion channels, but also directly to end-users. We have seen an acceleration in the uptake of electromechanical products and solutions in both the commercial and residential segments. 30 ASSA ABLOY | ANNUAL REPORT 2020Divisions | What we offer Opening Solutions Americas Stable margin in challenging environment To mitigate the strong negative effect from Covid-19, we implemented significant cost actions throughout the year and our margin remained stable at 19.4%. Overview Americas comprises 14 business areas and market regions, with divisional headquarters located in New Haven in the US. Opening Solutions in the US, the largest market, is organized by product category, while the other regions are organized in a country structure. The business areas and market regions are responsible for manufacturing and selling mechanical and electrometrical locks, hardware, secure lockers, access con- trol devices and security doors adapted to the standards and requirements of local markets. ASSA ABLOY and Yale are the master brands, with a strong portfolio of endorsed brands. Institutional and commercial customers are the largest end- customer segments and account for 75% of sales, while the residential segment accounts for 25% of sales. The Americas division has about 8,800 employees. Financial development The year started with a good sales development, but the Covid-19 restrictions and lockdowns had a significant effect on sales and operations from the second quarter. Sales gradually improved in the second half of the year but organic sales decreased by 7% for the full year. The recovery was strongest in Latin America, while restrictions in the US had a negative impact for a longer period of the year. Several product launches improved the development, and electromechanical products and solutions had a relatively better performance. Our operating margin remained stable at 19.4% (20.2%) despite Covid-19 and a negative effect from the transfer of Perimeter Security to the Entrance Systems division. To mitigate the strong negative effect from Covid-19 we implemented significant cost actions Financials in brief 2020 • Sales: SEK 19,013 M (23,172) with –7% organic growth. • Operating income (EBIT): SEK 3,698 M (4,673).1 • Operating margin: 19.4% (20.2).1 Sales, SEK M 24,000 22,000 20,000 18,000 16,000 14,000 12,000 Sales Operating income1, SEK M 5,000 4,500 4,000 3,500 3,000 2,500 2,000 16 17 Operating income1 18 19 20 1 Excluding items affecting comparability. throughout the year and decreased our headcount by 2%. Cash flow was strong, and improvements were achieved in collection and inventory levels. Several new products were launched during the year. New products introduced in the past three years accounted for 27% of sales. Acquisitions Two acquisitions were closed, Averics in Canada and Olim- pia Hardware in Costa Rica. Averics develops web-based access control security management solutions. Olimpia Hardware is a leading glass hardware and accessories brand in Latin America and the Caribbean. Olimpia complements our offering in Latin America, and addresses the growing market for openings utilizing glass and aluminium products. Comments by Divisional Head Lucas Boselli Executive Vice President and Head of Americas division What trends have you seen in the market in 2020? Fully automated touchless so- lutions gained traction throug- hout the year as customers focused on creating a safe and healthy access for their visitors and employees. In response to this, we also launched a number of seamless access products. Demand for electro- nic door hardware was strong across the entire division, in both residential and commer- cial markets, highlighting the aspiration of many companies, institutions and consumers to create seamless access control. We have also seen a significant increase in digital e-commerce. Do you expect any long-term effects from Covid-19 on the business? One effect of people spending more time at home was that home upgrades and sales increased – for both electronic and mechanical solutions. I expect the trend with more convenient and digital access solutions to continue. For those that returned to the of- fice, there was an accelerated demand for access control that minimizes touchpoints. Our customers also requested faster response times for product orders as their plan- ning cycles became more time-sensitive. Supporting regional distribution centers, like our new Flaship location in Orlando, Florida, is critical to meet these expectations. Markets Americas has a leading position in the US Canada, Mexico, Central America and South America for locks, access solutions, high secu- rity doors and hardware. Institutional and com- mercial customers are the largest end-customer segments and account for about 75% of sales, while the residential segment accounts for 25%. Sales in South America and Mexico are primarily focused on the residential segment, although several verticals in the commercial area have grown significantly in recent years. 31 ANNUAL REPORT 2020 | ASSA ABLOYWhat we offer | Divisions Opening Solutions Asia Pacific New organization for profitable growth Despite the nega- tive effects on our operations due to the pandemic, our strategy in China is starting to show re- sults with improved profitability. Overview From 2021, the division is organized in two business units: Greater China & South East Asia and Pacific & North East Asia, and the India operations moves to EMEA. The local organization in China is divided by market segment and the other regions in Asia and Pacific are organized according to region or country structure. The business areas and market regions are responsible for manufacturing and selling me- chanical and electrometrical locks, hardware and security doors adapted to the standards and requirements of local markets. ASSA ABLOY is the master brand for products in commercial markets and Yale is the master brand for the residential market and its endorsed brands. The commercial and institutional segments and the residential segment each account for about half of the total sales. The Asia Pa- cific division has about 9,900 employees across the region. The largest market by sales is China, followed by Australia and South Korea. Financial development The start of the year was interrupted by the Covid-19 lockdowns in China, which is our largest market in Asia. Sales gradually improved from the second quarter, but restrictions and lockdowns continued to impact the region. Organic sales declined by 16% with net acquired growth of 1%. Sales decreased overall, but were mostly stable in the Pacific region followed by China. Both South East Asia and India were weak throughout the year. Our business plan for China, implemented at the end of 2018, developed ac- cording to plan, resulting in operational stability combi- ned with margin improvements. The division’s operating Financials in brief 2020 • Sales: SEK 8,841 M (10,689) with –16% organic growth. • Operating income (EBIT): SEK 396 M (879).1 • Operating margin: 4.5% (8.2).1 Operating income1, SEK M Sales, SEK M 12,000 10,000 8,000 6,000 4,000 2,000 1,500 1,250 1,000 750 500 250 0 0 Sales 16 17 Operating income1 18 1 Excluding items affecting comparability. 19 20 income declined and the operating margin was 4.5% (8.2%). Cash flow developed well and improved by 23%, with a strong conversion rate of 192%. Several new products were launched during the year and we saw continued good deve- lopment in the demand for electromechanical products. Acquisitions Following two completed acquisitions in 2019, no acquisi- tion was completed in 2020. However, parts of AM Group was consolidated into our Asia Pacific organization. Asia Pacific continues to actively explore acquisition opportuni- ties and more acquisitions are expected to be announced in the future. Comments by Divisional Head Anders Maltesen Executive Vice President and Head of Asia Pacific division In January 2021, the Asia Pacific organization was divided into two business units: Pacific & North East Asia and Greater China & South East Asia. Anders Malte- sen will leave the Group during the first half 2021 when the new organizational setup is settled. 32 Do you expect any long-term effects from Covid-19 on the business? The Covid-19 pandemic has become a strong driver towards a more digitalized world for access solutions. In light of this, the Asia Pacific organization is also digitalizing both our own structure and business processes faster. I expect the shift towards e-commerce and online adop- tion to continue even when we return to a more normal situation again. What trends have you seen in the market in 2020? The year was impacted by lockdowns, social distancing and other measures that significantly affected our sales, in particular for retail. The ne- gative effects have partly been offset by a higher conversion rate amongst customers and increased online sales. Despite the negative effects on our operations due to the pandemic, our strategy in China is starting to show results with improved profitability. During the year we also opened a new manu- facturing facility in Vietnam for smart locks that will further improve our cost efficiency. Markets APAC has a leading posi- tion in Australia and New Zealand as well as in some Asian countries for locks, access solutions, high security doors and hard- ware. The Pacific region is a mature market with established standards and regulations, while most Asian countries are emerging markets. Urbanization is a driver for growth in Asia and sales for new construction are a majority of the business. Through a combination of organic growth and acquistions we are buil- ding a stronger position in the fast-growing Asian markets. ASSA ABLOY | ANNUAL REPORT 2020Divisions | What we offer PRODUCT OFFERING: DOOR OPENINGS AND ACCESS CONTROL Customer solutions around the world SMARTair at Hippodrome Cote d‘Azur Built in the 1950s, the Hippodrome Côted d’Azur is one of the most important racecourses in France and used for multiple equestrian disciplines. During meetings, it welcomes up to 1,000 horses, 3,000 participants and 11,300 spectators. The key requirement for the customer was to secure an electronic access control system to avoid duplicates of keys and managing lost mechanical keys that compromise security. To solve the problem the racecourse chose the SMARTair Update for Card access control solution. With this solution, security staff encodes user credentials directly for convenient access management and can delete users or lost cards instantly. Managers also plan to trial the SMARTair Openow™ app. With Openow™, administrators can send virtual “keys” directly to a visitor’s smartphone — ideal for racecourse guests arriving late at night. In the long term, SMARTair access control is cheaper than keys to manage. Bernard Arnaud, Supervisor – Accommodations, Hippodrome Côte d’Azur ASSA ABLOY delivers complete opening solutions to airport in Chile The ‘Nuevo Pudahuel’ is an extensive expansion of the Santiago International Airport, the largest and busiest airport in Chile. Developed by the concessions and construction com- pany- VINCI, this expansion features an additional 67 boarding points and state-of-the-art technology. For ASSA ABLOY, the key success factors for this project were a rigorous specification process, product development and implementation, application of ANSI hardware and most importantly, compliance with Chilean certification standards, guaranteeing the quality of the products and solutions offered. Coordinated by the ASSA ABLOY Group brand, ODIS, our fully integrated solutions compri- sed over 1,200 metal doors, (including firewall, acoustic and armored), all equipped with Yale door locks, Sargent closing systems, Yale and Securitron anti-panic bars, Pemko seals and, Medeco’s master key cylinders. The main strength of ODIS was to combine its worldwide technical know-how and experience; essential understanding of the project; door expertise; produc- tion control; and, their personnel’s ability to engage with us on the construction site, bringing that experience to a local level. Arthur Gaufre, Director of Large Projects, VINCI Medical doors for hospital in Jinan, China In the beginning of the Covid-19 pandemic, Jinan Infectious Disease Hospital in Shandong province was appointed as a designated medical institution for receiving and treating local coronavirus patients. To ensure the supply of sufficient medical resources, an urgent expan- sion project was started. ASSA ABLOY was invited to provide the project with 1,900 steel medical doors for wards, diagnosis rooms, passageways and bathrooms. In the urgency to handle a growing number of patients, the customer requested very short lead times for products as well as high quality. With nationwide restrictions to curb the spread of Covid-19, ASSA ABLOY´s Huasheng door plant had to manage challenges with the supply chain, transportation as well as limited ope- ration with staff shortages. To meet the customer requirements for the product significant adjustments were made on the standard doorframes and windows to bolster the durability of the doors and hardware. Throughout the project, ASSA ABLOY demonstrated both professionalism and social responsibility. It is a great company that truly impressed us with their rigorous approach, excellent production capacity, and quality products. Mr Sun, department head at Shandong Public Health Clinic Center 33 ANNUAL REPORT 2020 | ASSA ABLOYWhat we offer | Divisions Global Technologies – HID Global Increased R&D investments will enable future growth Financials in brief 2020 – Global Technologies • Sales: SEK 14,158 M (15,423) with –15% organic growth. • Operating income (EBIT): SEK 2,023 M (2,890).1 • Operating margin: 14.3% (18.7).1 Operating income1, SEK M Sales, SEK M 18,000 15,000 12,000 9,000 6,000 3,000 The evolution of technologies like ultra-wideband (UWB) alongside NFC and Bluetooth will contribute to creating more intuitive and convenient access solutions, while also delivering building management and utilization benefits. Overview HID Global is organized into six business areas with the business unit headquarters located in Austin, Texas in the US. The business areas are responsible for global sales and product development in their product area. HID Global po- wers the trusted identities of the world’s people, places and things. Our trusted identity solutions give people secure and convenient access to physical and digital places and connect things that can be accurately identified, verified and tracked digitally. The products and solutions are sold under the master HID brand or by brands endorsed by HID. Institutional and commercial customers are the main end- customer segments. HID Global has about 4,400 employees worldwide. The largest business area is Physical Access Control Solutions. Financial development After a good start to the year, sales were strongly impacted by the negative business effects from Covid-19. Sales decli- ned in all business areas but the greatest impact was in Citi- zen ID, as a result of low demand for passports in the world. Our largest business area, Physical Access Control Solutions, was negatively impacted by the closure of offices around the world, but sales improved gradually in the second half of the year when offices began to reopen. Efficiency activities continued and significant cost actions were implemented to mitigate the negative effects from Covid-19, along with a headcount reduction of 6%. To strengthen our position in the market, we continued to invest in research and deve- lopment and several new products and solutions were laun- 3,000 2,500 2,000 1,500 1,000 500 0 0 Sales 16 17 Operating income1 18 1 Excluding items affecting comparability. 19 20 ched during the year including solutions for our customers to improve health and safety at workplaces. New products introduced over the past three years was 22% of sales. Acquisitions The acquisition of Access-IS, located in the UK, was comple- ted. Access-IS is a leading provider of electronic RFID, NFC and barcode devices enabling the authentication of travel and identity documents, ticket reading and contactless payments. The acquisition will add complementary growth opportunities in our extended access offering. Comments by HID Global Björn Lidefelt Executive Vice President and Head of Global Technologies business unit HID Global What trends have you seen in the market in 2020? The evolution of technologies like ultra-wideband (UWB) alongside NFC and Bluetooth will contribute to creating more intuitive and convenient access solutions, while also de- livering building management and utilization benefits. Pro- ven Bluetooth technologies and cloud-based IoT platforms drove new innovations such as automated physical- distancing and contact-tracing solutions and other novel location-based applications well beyond the challenges faced before the pandemic. Do you expect any long-term effects from Covid-19 on the business? During the year we continued to launch several new pro- ducts and solutions and have more in the pipeline. Conti- nued evolution in biometrics will enable us to develop even more secure and truly seamless experiences. While there remains a level of unpre- dictability as to when markets will fully recover, we are well positioned continuing our growth strategy and I expect that our innovation efforts will result in a re-acceleration of the growth of access control products and solutions. Markets HID Global has a market presence in all continents, with a global leading market position in access control solu- tions. Every day millions of people worldwide use our products, for billions of things that need to be identified, verified and tracked. We work with governments, universi- ties, hospitals, financial institutions and some of the most innovative companies on the planet. Through a combina- tion of innovative new products and solutions as well as acquistions we have a leading position in trusted identities. 34 ASSA ABLOY | ANNUAL REPORT 2020Divisions | What we offer Global Technologies – Global Solutions Keeping up momentum on our digital offering across verticals Our investments in new, innovative solu- tions continued and further strengthened our product and technology leader- ship. Overview Global Solutions is a global organization comprising seven verticals. The verticals are Hospitality, Marine, Senior Care, Education, Critical Infrastructure, Construction and Key and Asset Management. Each vertical is responsible for its own manufacturing, sales and solution developments. Global Solutions’ products include electronic locks, safes, creden- tials and software service. Its innovative solutions are sold under the ASSA ABLOY master brand and the Traka and Abloy brands. Global Solutions has about 1,900 employees world- wide. The largest vertical is Hospitality, offering advanced electronic locking solutions in combination with a range of tailored services for guest convenience. Financial development Covid-19 caused a strong decline in Global Solutions’ organic sales in the end-customer segment. Sales growth was overall negative for Hospitality and Marine, while other verticals showed signs of recovery at different levels during the latter part of the year. The trend of upgrading hotels to mobile key solutions continued, while the aftermarket was weak due to low occupancy rates in hotels as a result of travel restrictions in 2020. Our investments in new, innovative solutions continued with unchanged ambitions to continue our product and technology leadership. Among the new solutions launched was ABLOY BEAT Bluetooth padlock for critical infrastructure protection, TrakaMEC and video visits for Senior Care. The ratio of new products introduced over the past three years was at a high level, accounting for 27% of the total sales. Acquisitions Three acquisitions were closed, Biosite in the UK, FocusCura in the Netherlands and LongMy in Vietnam. Biosite is the leading solutions provider of biometric access control to the UK construction industry and has formed the Construction vertical within Global Solutions. FocusCura is a strategic tech- nological addition that will reinforce our current offering within Senior Care and will provide complementary growth opportunities. LongMy is a distributor for Hospitality in the fast-growing Vietnamese market and by having our own dist- ributor we will strengthen our presence in South Vietnam. Comments by Global Solutions Christophe Sut Executive Vice President and Head of Global Technolo- gies business unit ASSA ABLOY Global Solutions What trends have you seen in the market in 2020? The transition towards a more digital world has accelerated. Several of our verticals have been part of both driving and benefiting from this transi- tion. Hospitality has seen an increased momentum for our mobile access solutions. This technology has proven critical for our customers on their journeys to meet hotel guest expectations for touchless so- lutions. Our new solutions in the Construction vertical ena- ble more efficiency through digitalization and in Senior Care we have re-prioritized the product roadmap and fast- tracked the launch of video care solutions enabling care providers to deliver safe digital home visits. Do you expect any long-term effects from Covid-19 on the business? The travel industry was negatively impacted for most of the year and we anticipate a mid-term impact before the sector recovers. Meanwhile, we will drive the development of new solutions with enhanced capabilities, and contactless technology to shape the future of the hospitality and marine sectors together with our customers. Other verticals are gaining momentum. For instance, in the Senior Care vertical the Covid-19 pandemic has been a driver to improve efficiency through technology. Markets ASSA ABLOY Global Solu- tions has a presence in all continents, with a leading market position in the hospitality segment for access solutions. Our systems and products are installed in hotel rooms and cruise ships worldwide. Through a combination of ac- quisitions and innovative solutions utilizing Group technology, we continue to increase our footprint in verticals like senior care facilities, education, construction sites, key and asset management and critical infrastructure. 35 ANNUAL REPORT 2020 | ASSA ABLOYWhat we offer | Divisions Entrance Systems Solid performance and completion of agta record acquisition The strongest seg- ment for us has been our offering to the distribution and logistics vertical, driven by the trend of consumers buying more online which accelerated due to the Covid-19 pandemic. Overview Entrance Systems is a global organization with four business segments: Pedestrian, Industrial, Residential and Perime- ter Security. The divisional headquarters are located in Switzerland. The business segments are responsible for sales, manufacturing and product development in their specific product areas. Entrance Systems manufactures and sells en- trance automation products, services and perimeter security. The route to the market is both direct and indirect, with the master brand ASSA ABLOY and the brand record in the direct channel, and a number of brands in the indirect channel. The commercial and institutional segments account for around 80% of sales and the residential segment for about 20%. En- trance Systems has about 12,900 employees worldwide. The largest business segment is Industrial followed by Pedestrian. Financial development Sales growth was stable with an organic growth of –2% and a strong growth through acquisitions of 15%. Development was stable in the Residential segment and in the Industrial segment, which was supported by strong growth in logistics and warehouses. Perimeter had good growth, while the Pe- destrian segment had a negative development due to Covid- 19’s negative impact on the retail segment. The operating margin was improved to 14.4% (14.3) and operating income increased with 12% to SEK 4,083 M. We continued to invest in growing the service organization and despite negative effects from lockdowns in important markets, sales development was stable. Investments in IoT resulted in the launch of two software solutions for connected doors, Insight and 4SIGHT Financials in brief 2020 • Sales: SEK 28,323 M (25,553) with –2% organic growth. • Operating income (EBIT): SEK 4,083 M (3,652).1 • Operating margin: 14.4% (14.3).1 Sales, SEK M Operating income1, SEK M 30,000 26,000 22,000 18,000 14,000 10,000 6,000 2,000 Sales 16 17 Operating income1 18 19 20 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 1 Excluding items affecting comparability. Connect. Cash flow increased strongly by 36%, driven by the improved earnings and working capital improvements, and the cash conversion was 122%. Our share of new products introduced over the past three years was 23% of total sales. Acquisitions Four acquisitions were closed: agta record in Switzerland, AM Group in Australia, Doorway and Letherneck in the US. The acquisition of agta record, a Swiss pedestrian door company is the largest acquisition for ASSA ABLOY since 2011. AM Group in Australia is a leading company making roller shut- ters and security doors. We completed the divestment of Cedes in Switzerland at the end of the year. Comments by Divisional Head Christopher Norbye Executive Vice President and Head of Entrance Systems division What trends have you seen in the market in 2020? The strongest segment for us has been our offering to the distribution and logistics verticals, driven by the trend of consumers buying more online which accelerated due to the Covid-19 pandemic. Also, due to Covid-19, there is a trend of increased hygiene practices, and controlling the flow of people. This is particularly relevant in the healthcare industry resulting in higher demand for our touchless solutions. Do you expect any long-term effects from Covid-19 on the business? We see some customer seg- ments having an acute aware- ness of the need for increased hygiene and social distancing that drives a demand for upgrading manual doors to automated doors. This trend is positive for us also long-term and it has driven us to develop new products with touchless activators for pedestrian doors, and FlowControl solu- tions to regulate the number of customers in, for example a retail store. We also expect that e-business will continue to grow and create opportu- nities for our distribution and logistics vertical. Markets Entrance Systems is a glo- bal leader in automated entrance solutions. The product portfolio inclu- des automatic, industrial and commercial, high performance, residential garage and hangar doors. It also includes loading dock equipment, perime- ter security, maintenance and service. The entrance solutions are sold both directly to end-users as well as through a number of distribution channels. About 20% of sales are in the residential sector and 80% in the com- mercial and institutional segments. 36 ASSA ABLOY | ANNUAL REPORT 2020Divisions | What we offer PRODUCT OFFERING: IDENTIFICATION AND ACCESS MANAGEMENT, ENTRANCE AUTOMATION Solutions for unique customer needs Solutions for United States Cold Storage United States Cold Storage is a premier provider of public refrigerated warehousing and related logistics services throughout the US. The company offers more than 355 million cubic feet of temperature-controlled warehouse and distribution space in 42 facilities located in 13 states. As the third largest refrigerated warehousing logistics provider in North America, United States Cold Storage selected our product 4SIGHT™ Connect to provide gate access solutions and automate dock equipment operations. In addition, 4SIGHT™ Connect enables United States Cold Storage to gather data intelligence for its diverse customer base with requirements ranging from primary storage to fully integrated third-party logistics. The 4SIGHT™ Connect solution was also selected based on the relationships and expertise demonstrated by the ASSA ABLOY team. United States Cold Storage is a data-driven company. We performed our due diligence and interviewed several providers on the best way to harness data to improve our business. We felt that ASSA ABLOY would be a partner as our business evolves, and we have the confidence that they will support their product as we reach our goals together. Mike Adkins, Engineering Manager, United States Cold Storage. E-visits boost senior care in Bollnäs municipality Bollnäs municipality in Sweden has the ambition to create best-in-class senior care and to achieve the target they are convinced that technology and digital tools are necessary. One of the challenges was nighttime checkups, which are very time and resource consuming creating stress for the staff, as well as inconvenience to patients or service users being woken up at night. With e-visits from ASSA ABLOY Global Solutions Senior Care, a digital monitoring by camera, it is now possible to plan the nightly visits to when they are truly needed. In addition, the service users feel safe and secure that the staff is available when needed. Together with ASSA ABLOY’s digital lock, it is also possible to issue access into the service user’s home in a safe and secure way. The most important advantage is a continued user experience with good safety and the possibility to feel more self-sufficient, at the same time as the e-visits also mean that our staff no longer has to disturb and wake up those receiving care. Ingela Hedblom, Business Developer within the Social Administration, Bollnäs municipality A one card ecosystem for Connecticut university The University of Connecticut (UConn) is a public research university with more than 32,000 students, 9,000 faculty staff and five campus areas across the state. Securing a campus is a top priority and a challenge for UConn administrators. Students need to access spaces such as dormitories, labs and research facilities. Previously, the university’s card solution utilized proximity and magstripe technologies. However, this card solution could easily be cloned. UConn was seeking a solution capable of increasing security and a phased, university-wide transition to an updated one-card ecosystem. UConn selected HID Global’s Seos credential technology to re-card the entire university. To manage credential issuance, they selected the HID FARGO Connect paired with the HPD5600 printer. The University of Connecticut already had numerous HID card readers installed for door access. We needed a card that would capitalize on all the components of these existing readers, but also be compatible with other readers on the University campuses. In conjunction with this, we also needed printers capable of seamlessly printing and capturing all three credentials on the one card. HID was the only company able to meet all these requirements. Stephanie Kernozicky, Director of UConn’s One Card Office 37 ANNUAL REPORT 2020 | ASSA ABLOYWhat we offer | Divisions ASSA ABLOY in your daily life Securing buildings from the perimeter … Enterprise 5 Hotel/retail Multi-family building 6 2 3 4 1 We are part of people’s everyday life all over the world! We provide access solutions from the perimeter to the core of buildings. 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. 1 Bollards and other safety devices protect pedestrians from motor vehicles. The various models can be permanently installed, portable or retractable, and they can be integrated in security and alarm systems. security system about who is at a certain place to ensure that no unauthorized individuals, temporary contractors, etc., have access to the wrong part of the building. At the same time, the staff can keep track of security personnel to see where they are located in the building. Multi-family building 6 Complete solutions for multi-famility buildings, ranging from mechanical locks to sophisticated, customized access control systems. Digital door locks can easily be opened with a code or a smart phone app. The app enables controlling the lock remotely to let in visitors, and receiving notifications when children come home. In the future, online locks make it possible to safely and securely open the door for service and deliveries directly into the home. Enterprise 7 Mobile keys, physical access control systems including readers and controllers to manage access in the building. Hotel/retail 9 With Mobile Access for hotels guests can use a smart phone to directly book a room. Secure Seos technology then sends a digital key directly to the guest’s mobile phone, enabling the guest to go directly to the room and unlock the door. The solution is connected to the hotel’s booking and security systems, and the key will be deleted at check-out. 10 Total door opening solutions for retail premises. 11 Revolving doors create spacious and welcoming entrances with room for luggage carts or wheel- chairs. Revolving doors are ideal when climate control is a priority. Advanced sensor technology ensures functionality in the door’s features, while conveniently controlling safe traffic flows and providing superior separation of indoor and outdoor climates. Side doors are added for increased accessibility and rapid evacuation. 12 Complete solutions for hotel rooms, including door solution, safes and energy management 8 Security-rated doors and frames. Electromechanical locks and other hardware work together with systems. physical access control systems, including readers and controllers to manage access. 13 Garage doors, bars and gates are secure and easy to connect to the buildings access control system. 2 High-security fences and gates protect against unauthorized entry. The doors can be integrated with security systems, sensors and surveillance cameras. 3 ASSA ABLOY has a complete offering for service, maintenance and modernization of automatic entrances and docks. 4 Automatic sliding doors are particularly suitable for entrances and indoor areas with large pedestrian flows. Automatic sliding doors allow you to enter a building without manually open doors – and conveniently pass through even if you are pushing a shopping or carrying suitcases. 5 Inside the building, mechanical and electromechani- cal key systems, software and solutions for access control. System to integrate access control systems for e.g. authorization, logistics, personnel, etc. Solutions for secure issuance and management of identities for access to various systems with Specific security requirements, such as staff ID cards. Positioning solutions inform the building 38 ASSA ABLOY | ANNUAL REPORT 2020… to shell … Enterprise Divisions | What we offer 4 7 … to core … Enterprise Door closers 8 Power supplies Hinges Key pads, push buttons, key switches, touch bars Electric strikes Mechanical & electro- mechanical locks & keys Magnetic locks Panic bars Air louvers Steel doors & frames Floor closers Wireless locks Cabinet locks … to shell and core. Hotel/retail 9 12 10 11 13 39 ANNUAL REPORT 2020 | ASSA ABLOYReport of the Board of Directors and Financial statements Contents Report of the Board of Directors Notes Significant risks and risk management Corporate governance Board of Directors Executive Team Internal control – financial reporting 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 43 47 52 54 57 58 59 59 60 61 62 63 64 65 66 67 67 68 69 69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Significant accounting and valuation principles Sales Auditors’ fees Other operating income and expenses Share of earnings in associates Accounting of leases for the Parent company Expenses by nature Depreciation and amortization Exchange differences in the income statement Financial income Financial expenses Tax on income Earnings per share Intangible assets Property, plant and equipment Right-of-use assets Shares in subsidiaries Investments in associates 19 Deferred tax 20 Other financial assets 21 22 23 24 25 Inventories Trade receivables Parent company’s equity Share capital, number of shares and dividend per share Post-employment employee benefits 26 Other provisions 27 Other current liabilities 27 29 30 31 32 33 34 35 Accrued expenses and deferred income Assets pledged against liabilities to credit institutions Contingent liabilities Cash flow items Reserves Business combinations Employees Financial risk management and financial instruments Five years in summary Comments on five years in summary Definitions of key ratios Proposed distribution of earnings Auditor’s report 70 75 76 76 76 76 77 77 77 77 77 77 77 78 80 80 81 81 82 82 82 82 82 83 83 85 85 85 85 85 85 86 86 87 89 95 96 97 98 99 40 ASSA ABLOY | ANNUAL REPORT 2020 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 1 January through 31 December 2020, including the nature and focus of the business. ASSA ABLOY is the global leader in access solutions, dedi- cated to satisfying end-user needs for security, safety and convenience. Significant events Sales and income Business operations were negatively impacted during the year by the global Covid-19 pandemic, especially during the spring of 2020 in conjunction with the lockdowns in many countries around the world. Sales declined by 7 percent for the full year and amounted to SEK 87,649 M (94,029). The decrease in sales consisted of organic growth of –8 percent (3) and net acquired and divested growth of 4 percent (3). The exchange rate impact on sales was –3 percent (6). Operating income (EBIT) excluding items affecting comparability decreased by 20 percent to SEK 11,916 M (14,920), equivalent to an operating margin of 13.6 percent (15.9). Items affecting comparability relate to revalua- tion to fair value of previous shareholdings in agta record (shareholding in associates) in 2020 of SEK 1,909 M, as well as costs for the restructuring program totaling SEK 1,366 M before taxes in 2020 and SEK 312 M expensed in 2019. Net financial items were SEK –782 M (–1,037). Income be- fore tax excluding items affecting comparability totaled SEK 11,133 M (13,883), a decrease of 20 percent. Tax on income excluding items affecting comparability was 24.8 percent (26.2). Earnings per share after full dilution, excluding items affecting comparability, decreased by 18 percent to SEK 7.54 (9.22). Operating cash flow was maintained at a continued high level, totaling SEK 14,560 M (14,442), an increase of one percent compared with the previous year. Restructuring A new restructuring program was launched at year-end 2020 as part of ASSA ABLOY’s continual cost-saving and streamlining initiative. Plans are in place to close ten factories and about thirty offices over a two-year period, supplemented by external outsourcing of certain aspects of production, as well as continued automation. The total cost of the program, which is estimated at SEK 1,366 M before tax, was fully expensed in 2020. The payback period is expected to be about two years. Activities related to the previous programs also continued with effective cost-cut- ting measures during the year. In 2020, 2,135 employees left the Group in conjunction with changes in the production and office organization. Three 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 747 M (726) for the year. At year-end 2020, the remain- ing provisions for restructuring measures amounted to SEK 1,224 M (778). Organization A new organizational structure was implemented begin- ning in 2021 in the Asia Pacific division aimed at facilitating improved opportunities for long-term robust sales growth. Two new business units are being organized within the divi- sion: Opening Solutions Greater China and South East Asia and Opening Solutions Pacific and North East Asia. Begin- ning in 2021, operations in India, which was previously part of the Asia Pacific division, are being moved to the EMEA division with the aim of creating new growth opportunities. Operations were transferred between divisions in 2020, mainly relating to the Perimeter Security business unit, which was moved from the Americas division to the Entrance Systems division. Sales on an annual basis for the operations that were transferred to Entrance Systems from Americas during the year totaled about SEK 2,400 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 In August 2020 ASSA ABLOY completed the acquisition of 54 percent of shares in agta record, a well-established manufacturer and service organization for entrance automation. The acquisition was conditional on regulatory approval, which was obtained only after certain operations within both ASSA ABLOY and agta record had first been divested. An official offer for the remaining shares was then completed, with closing on September 30, 2020. At the end of 2020, ASSA ABLOY owned 99.7 percent of the votes and share capital in the group company. The purchase price for the shares acquired during the year was just over SEK 6 bil- lion. As part of the transaction, ASSA ABLOY’s previous holdings in agta record of 39 percent, a shareholding in an associated company, were revalued at market value through profit or loss. The operating income, which did not affect cash flow, amounted to SEK 1,909 M. In February 2020 ASSA ABLOY completed the acquisition of AM Group, an Australian manufacturer of industrial doors within entrance automation. The company, which special- izes in innovative entrance automation, is a good comple- ment to ASSA ABLOY’s geographic coverage in Australia. The company is headquartered in Sydney, Australia. The agree- ment was signed at the end of 2019 and was completed after regulatory approval was obtained. 41 ANNUAL REPORT 2020 | ASSA ABLOYReport of the Board of Directors In February 2020, ASSA ABLOY acquired Biosite, a leading provider of Biometric access control for construction site in the UK. The acquisition strengthens the offering in access control solutions and offers additional growth opportuni- ties. The operation has its headquarters in Solihull, UK. In August 2020, ASSA ABLOY acquired FocusCura, a lead- ing provider of technical solutions for senior care in the Dutch market. The acquisition strengthens ASSA ABLOY’s offering in the healthcare and long-term care market. The operation has its headquarters in Driebergen-Rijsenburg, Netherlands. In August 2020, ASSA ABLOY acquired Access-IS, a leading provider of RFID, NFC and barcode devices enabling the au- thentication of travel and identity documents, ticket reading and contactless payments. The acquisition strengthens the offering in expanded access technologies and allows growth in several attractive markets for HID Global. The operation has its headquarters in Reading, UK. In October 2020, ASSA ABLOY acquired Olimpia Hard- ware, a leading glass hardware and accessories brand in Latin America and the Caribbean. The acquisition comple- ments the business in Latin America, further supporting the growing trend of openings utilizing glass and aluminum products. The operation has its headquarters in Costa Rica. The total purchase price of the 12 businesses acquired during the year, including adjustments for acquisitions from previous years, was SEK 12,134 M. The acquisition price includes SEK 3,752 M related to fair value measurement of previously owned shareholding in associated companies, which does not affect cash flow. The preliminary acquisi- tion analyses indicate that goodwill and other intangible assets with an indefinite useful life amount to SEK 8,325 M. Estimated deferred considerations relating to acquisitions for the year totaled SEK 318 M. Additional acquisitions of non-controlling interests occurred during the year for SEK 16 M (19). Disposals In August 2020 the sale of certain operations from agta record and ASSA ABLOY to the Italian FAAC Group was com- pleted, as part of the commitments to address the competi- tion concerns of the EU Commission in connection with the acquisition of agta record. The divested business, which had a turnover in 2019 of approximately EUR 1,000 M, mainly included the agta record operations in the Netherlands, Austria, Hungary and Slovenia, as well as the ASSA ABLOY automatic pedestrian door business in France and the UK. The divestiture gave rise to a non-recurring operating income of just over SEK 230 M. In November 2020 ASSA ABLOY sold its Swiss sensor tech- nology business CEDES to capiton AG. CEDES is a leading sensor technology company in the elevator and door indus- try. Sales in 2019 totaled about SEK 525 M. The divestiture, which resulted in a small capital gain, will have a neutral effect on ASSA ABLOY’s operating margin going forward. At the end of 2020, ASSA ABLOY sold its Italian residen- tial door business in Gardesa. The company’s sales in 2020 totaled about SEK 100 M. The transaction will have a positive effect on ASSA ABLOY’s operating margin going forward. In its entirety, the divestment gives rise to a capital loss and related divestment costs of approximately SEK 185 M. Research and development ASSA ABLOY’s expenditure on research and development during the year totaled SEK 3,902 M (3,566), equivalent to 4.5 percent (3.8) of sales. The pace of innovation remained high during the year thanks to the continued commitment to invest in research and development. The number of employees in research and development at year-end was 2,800, which is un- changed compared with the beginning of 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 systematically and purposefully to reduce their environmen- tal 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 2020 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. 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, including with respect to continuous reconciliation of balance sheets. Measures to ad- dress internal control compliance issues were implemented during the year following a revision of the internal control framework that has been in effect for some time. 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 proposes that the Annual General Meeting 2021 should approve a dividend of SEK 3.90 (3.85) per share, representing an increase of 1 percent. In order to facilitate a more efficient cash management, the dividend is proposed to be paid in two equal installments, the first with the record date 30 April 2021 and the second with the record date 23 November 2021. If the proposal is adopted by the Annual General Meeting, the first installment is esti- mated to be paid on 5 May 2021 and the second installment on 26 November 2021. The proposal for profit distribution can be found in its entirety on page 98 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 posi- tion 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. 42 ASSA ABLOY | ANNUAL REPORT 2020Significant risks and risk management | 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 geographical spread, involving exposure to various forms of strategic, operational and financial risks. Strategic risks refer to changes in the business environment with potentially significant effects on ASSA ABLOY’s operations and business objectives. Operational risks comprise risks directly attribut- able 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 division level. Review process Strategic risks, such as competitors, brand positioning and so on, are regularly reviewed at ASSA ABLOY AB’s board meetings. The Group’s operational risk management is continuously monitored by the Executive Team through divi- sional reporting and divisional board meetings. For further information on monitoring and management of operational risks, see page 46. 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, financial cash management, currency risk and other financial risk management. 43 ANNUAL REPORT 2020 | ASSA ABLOYReport of the Board of Directors | Significant risks and risk management 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, brand positioning and coun- try-specific risks. In 2020, it was also clarified that worldwide health risks posed by pandemics (Covid-19) can significantly impact societies and global demand around the world. ASSA ABLOY has therefore dedicated great effort to protect the health of its employees during the year. The business has also been negatively impacted. While it is difficult to predict the continued impact of the pandemic on business in 2021 due to the uncertainty in market conditions, the health and safety of ASSA ABLOY employees continues to be our high- est priority. 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 propor- tion of sales in Asia and in central and eastern Europe has increased in recent years. Consequently, the Group has increased exposure to the emerging markets, which may en- tail 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. ASSA ABLOY’s risks Strategic risks Operational risks Financial risks Changes in the business environment with potentially significant effects on operations and business objectives. Risks directly attributable to business operations with a potential impact on financial position and performance. Financial risks with a potential impact on financial position and performance. • Country-specific risks • Customer behavior • Competitors • Brand positioning • Reputational risk • Pandemics and other global health risks • Legal and 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 • Risks relating to IT • Financing risk • Currency risk • Interest rate risk • Credit risk • Risks associated with pension obligations 44 ASSA ABLOY | ANNUAL REPORT 2020Significant risks and risk management | 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 29,755 M (33,050) at year-end 2020. 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 cer- tain counterparty risks. Such exposure may arise, for exam- ple, as a result of the placement of surplus cash, borrowings and derivative financial instruments. Counterparty limits are set for each financial counterparty and are continuously monitored. Pension obligations At year-end 2020, ASSA ABLOY had obligations for pen- sions and other post-employment benefits of SEK 9,549 M (9,530). The Group manages pension assets valued at SEK 6,035 M (6,184). Provisions in the balance sheet for defined benefit and defined contribution plans and post- employment medical benefits totaled SEK 3,514 M (3,346). Changes in the value of assets and liabilities from year to year are due partly to the development of equity and inter- est 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 comprehensive income. The assumptions made include discount rates and anticipated inflation and salary increases. Operational risks Operational risks comprise risks directly attributable to business 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. This category also includes risks relating to compliance with laws and regulations, as well as to information technology (IT), internal control and financial reporting. See page 46 for a more detailed descrip- tion of the management of these risks. 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. Ac- counting 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 fluctua- tions. These fluctuations affect Group earnings when the income statements 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 exposure, 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 currency flows in 2020. As a result, currency 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 Swed- ish 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. 45 ANNUAL REPORT 2020 | ASSA ABLOY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 Tax risks Acquisition of new businesses At year-end 2020, there are considered to be no outstanding legal disputes that may lead to significant costs for the Group. The Group continuously monitors anticipated and implemented changes in legislation in the coun- tries in which it operates. Ongoing and potential disputes 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. Prioritized environmental activities and other information on sustainable development are reported in the Group’s Sustainability Report. Ongoing and potential tax cases are regularly reported to the Group’s central tax function. At year-end 2020, there are considered to be no ongoing tax cases with a significant impact on the Group’s earnings. 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. During the year, acquisition activity continued to be high at ASSA ABLOY, with acquisitions of several businesses, of which the acquisition of agta record was the largest in the last decade. The Group’s acquisitions in 2020 are reported in greater detail in the Report of the Board of Directors and in Note 33, Business combinations. Restructuring measures The restructuring programs mainly entail some production units changing direction principally to final assembly, while certain units will be closed. 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 moni- tored on a regular basis. Price fluctuations and availability of raw materials Credit losses Risks relating to internal control Risks relating to internal control A new restructuring program was launched at the end of 2020 involving the closure of about ten factories and about thirty offices. The program was fully expensed in 2020. The scope, costs and savings of the restructuring programs are pre- sented in more detail in the Report of the Board of Directors. For further information about procurement of materials, see Note 7, Expenses by nature. Raw materials are purchased and handled primar- ily at division and business unit level. Regional committees coordinate these activities with the help of senior coordinators for selected material components. Trade receivables are spread across a large number of customers in many markets. No individual customer in the Group accounts for more than one percent of sales. Commercial credit risks are managed locally at company level and monitored at division level. 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 credit risk has been assessed to have increased in 2020, given the global Covid-19 pandemic and its impact on global demand. A Group-wide insurance program is in place, mainly relating to property, business interruption and liability 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 transparent, with a clear allocation of responsibili- ties. A well-established Controller organization at both division and Group level monitors financial reporting quality. Instructions on the allocation of responsibilities, authorization and procedures for orders, sourcing, etc., are laid out in an internal control guide with rules and regulations that were updated during the year. Compliance is evaluated annually for all operating companies. An annual internal audit of financial reporting is performed for selected Group companies on a rotating basis. 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 control 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 relating to financial reporting can be found in the Report of the Board of Directors, section on Corporate governance. See also the section ‘Basis of prepara- tion’ in Note 1. Risks relating to Information and data security Preventive measures are in place to protect business-critical information from unauthorized individuals and organizations. IT security is a prioritized area at ASSA ABLOY through constant efforts to maintain and strengthen the level of security for the Group’s business information. 46 ASSA ABLOY | ANNUAL REPORT 2020Corporate governance | 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 Swedish Companies Act, the Annual Accounts Act, Nas- daq Stockholm’s Rule Book for Issuers and the Swedish Corporate Governance 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 2020 ASSA ABLOY has one deviation to explain. The Nomination Committee deviates from Rule 2.4 of the Code Corporate governance structure in that the Vice Chairman of the Board of Directors, Carl Douglas (Investment AB Latour), is also the Chairman of the Nomination 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 operations should gen- erate 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. 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-Corruption Policy At year-end 2020, ASSA ABLOY had 43,734 share- 1 Shareholders holders (29,784). 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 percent of the share capital and 10.9 percent of the votes). Foreign shareholders accounted for 66.8 percent (69.5) of the share capital and 45.6 percent (47.5) of the votes. The ten largest shareholders accounted for 34.9 percent (36.5) of the share capital and 55.5 percent (56.7) of the votes. For further information on shareholders, see page 106. ASSA ABLOY’s Articles of Association contains a pre-emp- tion 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 com- panies that includes an agreement on right of first refusal if any party disposes of Series A shares. The Board of Direc- tors of ASSA ABLOY is not aware of any other shareholders’ agreements or other agreements between shareholders in ASSA ABLOY. 47 ANNUAL REPORT 2020 | ASSA ABLOYReport of the Board of Directors | Corporate governance Share capital and voting rights ASSA ABLOY’s share capital at the end of 2020 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 company’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 Annual General Meeting 2020 author- ized 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 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 2020. Share and dividend policy ASSA ABLOY’s Series B share is listed on the Nasdaq Stock- holm Large Cap. At the end of 2020, ASSA ABLOY’s market capitalization amounted to SEK 225,297 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 Gen- eral 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. Mat- ters considered at the Annual General Meeting include: dividend; adoption of the income statement and balance sheet; discharge of the members of the Board of Direc- tors and the CEO from liability; election of members of the Board of Directors, Chairman of the Board of Directors and auditor; 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 audi- tor or shareholders holding at least 10 percent of the shares so request. Annual General Meeting 2020 The Annual General Meeting was held in April 2020 in Stock- holm, and shareholders representing 52.3 percent of the share capital and 67.5 percent of the votes participated. In light of the Covid-19 pandemic and pursuant to temporary legislation, shareholders were able to exercise their voting rights at the Annual General Meeting through advance vot- ing (postal voting). The Annual General Meeting’s resolutions included the following. • Dividend of SEK 2.00 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, and Joakim Weidemanis was elected as new member of the Board. Further, Lars Renström was re-elected as Chairman of the Board of Directors, and Carl Douglas was re-elected as Vice Chairman. • The audit firm Ernst & Young AB was appointed as the company’s new auditor. • Remuneration of the Board of Directors. • Guidelines for remuneration to 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 2020). • Formal changes of the Articles of Association. For more information about the Annual General Meeting, in- cluding the minutes, see ASSA ABLOY’s website assaabloy.com. Extraordinary General Meeting 2020 Due to the uncertainty about the market situation caused by the Covid-19 pandemic, the Annual General Meeting in April 2020 decided on a dividend of SEK 2.00 per share in accordance with a revised dividend proposal by the Board. The Board’s original proposal was a dividend of SEK 3.85 per share. The Extraordinary General Meeting on 24 November 2020 resolved, in accordance with the Board’s proposal, on a second dividend of SEK 1.85 per share. At the General Meeting shareholders representing 53.8 percent of the share capital and 68.5 percent of the votes participated. In light of the Covid-19 pandemic, the General Meeting was carried out solely through advance voting (postal voting) pursuant to temporary legislation. For more information about the General Meeting, including the minutes, see ASSA ABLOY’s website assaabloy.com. Annual General Meeting 2021 ASSA ABLOY’s next Annual General Meeting will be held on 28 April 2021. 48 ASSA ABLOY | ANNUAL REPORT 2020Corporate governance | Report of the Board of Directors According to the instructions for the Nomination 3 Nomination Committee Committee adopted at the Annual General Meeting 2018, the Nomination Committee shall be composed of repre- sentatives 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 Annual General Meeting 2021 comprises Carl Douglas (Investment AB Latour), Mikael Ekdahl (Melker Schörling AB), Marianne Nils- son (Swedbank Robur fonder), Liselott Ledin (Alecta) and Yvonne Sörberg (Handelsbanken Fonder). Carl Douglas is Chairman of the Nomination Committee. Should the owner- ship structure 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 divi- sion between the Chairman, 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 instruc- tions 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 Annual General Meeting 2021, the Nomi- nation 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 Nomina- tion 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 Nomina- tion Committee can do so by e-mailing: nominationcommittee@assaabloy.com. The Nomination Committee’s proposals for the Annual General Meeting 2021 are published, at the latest, in con- junction with the formal notification of the Annual General Meeting, which is expected to be issued around 24 March 2021. In accordance with the Swedish Companies Act, 4 Board of Directors the Board of Directors is responsible for the organization and administration of the Group and for ensuring satisfac- tory control of bookkeeping, asset management and other financial circumstances. The Board of Directors decides on the Group’s overall objectives, strategies, significant policies, acquisitions and divestments as well as investments of ma- jor importance. Acquisitions and divestments with a value (on a debt-free basis) exceeding SEK 200 M are decided by the Board of Directors. The threshold amount presumes that the matter relates to acquisitions or divestments in accord- ance with the strategy agreed by the Board of Directors. The Board of Directors approves documents such as the Annual Report and Interim Reports, proposes a dividend to the An- nual 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, • identifying how sustainability issues impact risks to, and business opportunities for, 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 follow- ing-up 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 control, 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 struc- ture, ensuring that the Board receives satisfactory informa- tion 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 publica- tion 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 49 ANNUAL REPORT 2020 | ASSA ABLOYReport of the Board of Directors | Corporate governance 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 An- nual 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 eight elected members and two employee representatives since the Annual General Meeting 2020. 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 opera- tions, stage of development and other circumstances, shall be appropriate, characterized by versatility and breadth regarding qualifications, experience and background of the elected members, and strive to achieve gender equality. In 2020 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 Annual General Meeting 2020, the composition of the Board of Directors is such that 50 percent are women and 50 percent are men, which is in line with the Swedish Corporate Governance Board’s aspiration for each gender to represent 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. 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 the effects of Covid-19, as well as a new sustainability program and Science-Based Tar- gets climate initiative. In addition, the Board has addressed a number of acquisitions, including agta record, Biosite and Access ID, as well as the divestment of certain operations in conjunction with the acquisition of agta record to the Italian FAAC Group and the divestment of the Swiss sensor technology business CEDES to capiton AG. During the year, the Board of Directors also conducted in-depth reviews of the Group’s operations in the Americas division and visited the Entrance Systems division’s operations in Fehraltorf, Switzerland. The Board of Directors’ work is summarized in the timeline on pages 50–51. An evaluation of the Board of Directors’ work is con- ducted 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 2020 the Remuneration Committee comprised The Remuneration Committee has the task of drawing up guidelines for remuneration to senior executives, which the Board of Directors proposes to the Annual General Meeting for resolution. The Board of Directors shall prepare a proposal for new guidelines at least every fourth year. For information about ASSA ABLOY’s guidelines for remunera- tion to senior executives that were adopted at the Annual General Meeting 2020, see Note 34. The Remuneration Committee also prepares, monitors and Board of Directors’ work in 2020 The Board of Directors held nine meetings during the year. At the ordinary board meetings the CEO reported on the evaluates matters regarding salaries, bonus, pension, sever- ance pay and incentive programs for the CEO and other senior executives. The Committee has no decision-making powers. Summary of Board of Directors’ work and committee meetings in 2020 Ordinary board meeting Year-end results Proposal dividend Annual Report 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 Proposal revised dividend 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. 50 ASSA ABLOY | ANNUAL REPORT 2020 Corporate governance | Report of the Board of Directors The Committee held one meeting in 2020. Its work in- cluded preparing a proposal of guidelines for remuneration to senior executives, preparing a proposal for remunera- tion of 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 In 2020 the Audit Committee comprised Jan Svensson (Chairman), Birgitta Klasén and Sofia Schörling Högberg. 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 evaluating the audit assignment and obtaining the re- sults of the Swedish Inspectorate of Auditors’ quality control of the auditor, 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 proposal for the appointment of external audi- tor. Furthermore, the Audit Committee shall review and monitor the impartiality and independence of the auditor, paying particular attention to whether the auditor provides the company with services other than auditing services. The Audit Committee establishes guidelines for procurement of services other than audit services from the company’s audi- tor, but otherwise, the Committee has no decision-making powers. The Committee held four meetings in 2020. The com- pany’s external auditor and representatives from senior management also participated at these meetings. More important matters dealt with by the Audit Committee during the year included the effects of Covid-19, internal control, financial statements and valuation matters, tax matters, insurance and risk management matters and legal risk areas. Audit 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. Remuneration of the Board of Directors The General Meeting passes a resolution on the remunera- tion to be paid to board members. The Annual General Meeting 2020 resolved that board fees would remain unchanged compared with 2019 and amount to total SEK 7,360,000 (excluding remuneration for committee work) to be allocated between the members as follows: SEK 2,350,000 to the Chairman, 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 Chairman 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 2020, see Note 34. Attendance 2020, Board of Directors and Committees Board members Lars Renström Carl Douglas Eva Karlsson Birgitta Klasén Lena Olving Sofia Schörling Högberg Jan Svensson Joakim Weidemanis Rune Hjälm Mats Persson Board of Directors Audit Committee Remuneration Committee 1/1 1/1 4/4 4/4 4/4 9/9 9/9 9/9 9/9 9/9 9/9 9/9 6/6 9/9 9/9 The maximum number of meetings varies due to appointment in 2020. Ordinary board meeting Interim Report Q2 Acquisitions Ordinary board meeting Strategy Ordinary board meeting and visit to operations Visit Entrance Systems Ordinary board meeting Interim Report Q3 Proposal second dividend Notice Extraordinary General Meeting Ordinary board meeting Presentation Americas Acquisitions Sustainability program July August September October November December Audit Committee meeting Audit Committee meeting 51 ANNUAL REPORT 2020 | ASSA ABLOYReport of the Board of Directors | Corporate governance Board of Directors Board members elected by the Annual General Meeting 2020 Lars Renström Carl Douglas Eva Karlsson Birgitta Klasén Lena Olving Sofia Schörling Högberg Jan Svensson Joakim Weidemanis 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. CEO and Vice President Product Supply Arcam EBM since 2020. President and CEO of Armatec AB 2014-2019. CEO of SKF Sverige AB and Global Manufacturing 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 Valcon A/S and Ratos AB. Shareholdings (including through companies and related natural parties): 500 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 Senior Vice President of 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 2013–2019. COO and Deputy CEO of Saab AB 2008–2013. Various positions within Volvo Car Corporation 1980–1991 and 1995–2008 of which seven years in the Executive Management Team. CEO of Samhall Högland AB 1991–1994. Other appointments: Chairman of the Royal Swedish Opera, ScandiNova Systems AB and Academic Work. Board member of Investment AB Latour, Munters Group AB, NXP Semicon- ductor N.V. and Stena Metall AB. Fellow of the Royal Swedish Academy of Engineering Sciences (IVA) and board member of IVA’s Busi- ness Executives Council (IVA:s Näringslivsråd). Shareholdings (including through companies and related natural parties): 600 Series B shares. Sofia Schörling Högberg Board member since 2017. Born 1978. BSc (Bachelor of Science) in Business Admin- istration. Other appointments: Board member of Mel- ker 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 as well as 418,800 Series B shares through Edeby- Ripsa Skogsförvaltning AB. Jan Svensson Board member since 2012. Born 1956. Degree in Mechanical Engineering and Master of Science in Business and Economics. President and CEO of Investment AB Latour 2003–2019. Previously CEO of AB Sigfrid Sten- berg 1986–2002. Other appointments: Chairman of AB Fager- hult and Tomra Systems ASA. Board member of Loomis AB, Nobia AB, BillerudKorsnäs AB, Stena Metall AB, Herenco Holding AB and Climeon AB. Shareholdings (including through companies and related natural parties): 10,000 Series B shares. Joakim Weidemanis Board member since 2020. Born 1969. Master of Science in Business and Economics. Executive Vice President and Corporate Officer of Danaher Corporation since 2017. Previously various management positions within Danaher 2011–2017. Head of Product Inspection and Corporate Officer of Mettler Toledo 2005–2011. Previously various operat- ing and corporate development roles within ABB 1995–2005. Other appointments: – Shareholdings (including through compa- nies and related natural parties): – Appointments and shareholdings as at 31 December 2020 unless stated otherwise. 52 ASSA ABLOY | ANNUAL REPORT 2020Board of Directors | Report of the Board of Directors Board members appointed by employee organizations 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 re- quirements for independ- ence in accordance with the Swedish Corporate Governance Code. Independence of the Board of Directors Name Lars Renström Carl Douglas Eva Karlsson Birgitta Klasén Lena Olving Sofia Schörling Högberg Jan Svensson Joakim Weidemanis Position Chairman Vice Chairman Board member Board member Board member Board member Board member Board member The Board of Directors’ composition and shareholdings Independent of the company and its management Independent of the company’s major shareholders Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes Yes No No No Yes 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 Board member Joakim Weidemanis Board member Elected 2008 2004 2015 2008 2018 2017 2012 2020 Rune Hjälm Mats Persson Board member, employee representative 2017 Board member, employee representative 1994 Bjarne Johansson Deputy, employee representative Nadja Wikström Deputy, employee representative 2015 2017 1 Shareholdings through companies and related natural parties. Born 1951 1965 1966 1949 1956 1978 1956 1969 1964 1955 1966 1959 Remuneration Committee Chairman – – – – – Member – – – – – Appointments and shareholdings as at 31 December 2020 unless stated otherwise. Audit Committee Series A shares1 Series B shares1 – – – Member – Member Chairman – – – – – – 41,595,729 – – – 15,930,240 – – – – – – 30,000 63,900,000 500 21,000 600 18,446,792 10,000 – – – – – 53 ANNUAL REPORT 2020 | ASSA ABLOYReport of the Board of Directors | Executive Team Executive Team Nico Delvaux Erik Pieder Lucas Boselli Maria Romberg Ewerth Mogens Jensen 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): 59,623 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: 2,913 Series B shares. Lucas Boselli Executive Vice President and Head of Ameri- cas 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 posi- tions in Ingersoll Rand 2000–2010. Shareholdings: 29,930 Series B shares. 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 Hu- man 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: 13,010 Series B shares. Mogens Jensen Executive Vice President and Head of business segment Residential within Entrance Systems division since 2020. Born 1958. Master of Science in Mechanical Engineering and MBA. Previous positions: Various positions in the ASSA ABLOY Group, including Executive Vice President and Head of Entrance Systems divi- sion 2018–2020, 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. Previ- ously various Managing Director positions. Shareholdings: 27,300 Series B shares. Changes in the Executive Team Martin Poxton has been appointed Executive Vice President and Head of the business unit ASSA ABLOY Open- ing Solutions Greater China and South East Asia within Asia Pacific division with effect from 1 January 2021. Simon Ellis has been appointed Ex- ecutive Vice President and Head of the business unit ASSA ABLOY Opening Solutions Pacific and North East Asia within Asia Pacific division with effect from 1 January 2021. The Head of Asia Pacific division, Anders Maltesen, will leave ASSA ABLOY during the first half of 2021. Nico Delvaux, President and CEO, will take over as the Head of the Asia Pacific division. Martin Poxton Martin Poxton Executive Vice President and Head of Asia Pacific business unit ASSA ABLOY Opening Solutions Greater China and South East Asia since 2021. Born 1972. HND in Mechanical and Manufacturing Engineering. Previous positions: Vice President Operations ASSA ABLOY Opening Solutions Asia Pacific 2017-2020, Operations Director Adient China, 2013–2017, Business Unit General Manager and Launch Director Johnsons Controls China 2008-2012. Various po- sitions in Faurecia China 2004-2008. Previously various positions in Keiper, Johnsons Controls and Flowform B’ham UK, 1992-2004. Shareholdings: – Appointments and shareholdings as at 31 December 2020 unless stated otherwise. 54 ASSA ABLOY | ANNUAL REPORT 2020Executive Team | Report of the Board of Directors Björn Lidefelt Anders Maltesen Christopher Norbye Christophe Sut Neil Vann 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 positions within ASSA ABLOY, Yale and Chubb 1987–2001. Shareholdings: 16,256 Series B shares. 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 Com- mercial Officer 2017–2020, and General Man- ager ASSA ABLOY China (security products) 2013–2016. Shareholdings: 6,538 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 Management Accounting. Previous positions: Regional General Manager and President, Asia Pacific, GE Energy, Power Services 2015–2017, Managing Direc- tor, Asia Pacific, Alstom Thermal Services 2014–2015, Vice President, East Asia, Alstom Thermal Services 2011–2014, General Man- ager, board member, Tianjin Alstom Hydro Co. Ltd 2003–2011. Previously various positions within Alstom. Shareholdings: 12,970 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 de- velopment 2005–2008, Andersen Consulting 2001–2004, American Express 1999–2001. Shareholdings: 5,371 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: 4,888 Series B shares. Simon Ellis Executive Vice President and Head of Asia Pacific business unit ASSA ABLOY Opening Solutions Pacific and North East Asia since 2021. Born 1974. MBA. Previous positions: Various positions in the ASSA ABLOY Group, including President of Opening Solutions Pacific Region and Japan 2016–2020 and President of Opening Solutions New Zealand 2013- 2016, General Manager Security Merchants Australia 2010–2013. Previously various positions in the ASSA ABLOY Group 1997–2010. Shareholdings: 3,039 Series B shares. Simon Ellis Appointments and shareholdings as at 31 December 2020 unless stated otherwise. 55 ANNUAL REPORT 2020 | ASSA ABLOYReport of the Board of Directors | Corporate governance business partners. The Codes, which are based on a set of internationally 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. 9 Auditor At the Annual General Meeting 2020, Ernst & Young AB (EY) was elected as new external auditor up to the end of the Annual General Meeting 2021. Authorized public accountant Hamish Mabon is the auditor in charge. Hamish Mabon is born 1965 and holds other significant audit as- signments for Skanska AB, Essity AB and SEB. He has been a member of FAR, the institute for the accountancy profession in Sweden, since 1992 and is a FAR Certified Financial Institu- tion Auditor. He holds no shares in ASSA ABLOY AB. EY 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 at- tends the 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 appli- cable rules in each country. 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 2019, Note 3. CEO and Executive Team 7 Organization The Executive Team consists of the CEO, the Heads of the Group’s divisions, as well as the business units HID Global and Global Solutions, the Head of the business segment Residential within the Entrance Systems division, the Chief Financial Officer and the Chief Human Resources Officer. As of 1 January 2021, the Heads of the business units ASSA ABLOY Opening Solutions Greater China and South East Asia as well as ASSA ABLOY Opening Solutions Pacific and North East Asia are also part of the Executive Team. For a presenta- tion of the CEO and the other members of the Executive Team, see pages 54–55. 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 opera- tions, 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 em- ployees and a separate ASSA ABLOY Code of Conduct for 56 ASSA ABLOY | ANNUAL REPORT 2020Internal control – financial reporting | Report of the Board of Directors Internal control – financial reporting Information and communication Reporting and accounting manuals as well as other finan- cial reporting guidelines are available to all employees concerned 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’ established operating structure. The Group also has estab- lished procedures for external communication of financial information, 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 im- portant 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 busi- ness planning process and regular forecasts. The Group-wide internal control guidelines are reviewed during the year through self-assessment regarding internal control and continuous follow-up of internal audit reports. ASSA ABLOY’s internal control process for financial report- ing is designed to provide reasonable assurance of reliable financial 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, an annual financial evaluation plan etc. Regular meet- ings 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 through a self-assessment regarding internal controls. These Group- wide guidelines have a relatively broad scope and concern business-critical processes. A major focus has been on auditing the reconciliation between various accounts and consolidated reporting in recent years. The entire Group uses a financial reporting system with pre-defined report templates. Risk assessment Risk assessment is built in to the processes in question and a variety of methods are used to assess and limit risk, as well as to ensure that risks are managed in compliance with established policies and guidelines. A number of previously established documents govern the procedures to be used for accounting, finalizing accounts, financial reporting and review. Risk assessment includes identifying and evaluating the risk of material errors in accounting and financial report- ing at Group, division and local levels. The specific material risks that ASSA ABLOY has identified associated with finan- cial reporting are errors in business-critical processes such as sales, purchases, financial statements, inventories, facili- ties management, taxes, legal issues, occupational injuries and the risk of fraud, loss or embezzlement of assets. 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 estab- lished and carries out annual financial evaluations in accord- ance with the plan annually adopted by the Audit Commit- tee. The results of the financial evaluations are submitted to the Audit Committee and the auditors. Each division has employed full-time internal auditors who audit the companies and monitor internal control. 57 ANNUAL REPORT 2020 | ASSA ABLOYConsolidated financial statements Sales and income • Net sales decreased by a total of 7 percent to SEK 87,649 M (94,029). Organic growth was –8 percent (3), while growth from acquisitions and divestments amounted to 4 percent (3). • Operating income (EBIT) excluding items affecting comparability decreased by 20 percent to SEK 11,916 M (14,920), equivalent to an operating margin of 13.6 percent (15.9). • Earnings per share after full dilution and excluding items affecting comparability decreased by 18 percent to SEK 7.54 (9.22). Sales The Group’s sales for 2020 amounted to SEK 87,649 M (94,029), cor- responding to a change in sales of –7 percent (12). Organic growth was –8 percent (3), while the net contribution from acquisitions and divestments was 4 percent (3). The exchange rate impact on sales was –3 percent (6). Change in sales % Organic growth Acquisitions and disposals Exchange rate effects Total 2019 2020 3 3 6 12 –8 4 –3 –7 Sales by product group Mechanical locks, lock systems and fittings accounted for 24 percent (25) of total sales. Electromechanical and electronic locks accounted for 31 percent (31) of sales and entrance automation increased to 29 percent (27). Security doors and hardware accounted for 16 percent (17) of sales. Cost structure Total wage costs, including social security expenses and pension expenses, amounted to SEK 27,170 M (27,001), equivalent to 31 per- cent (29) of sales. The average number of employees was 48,471 (48,992). The Group’s material costs amounted to SEK 30,830 M (33,885), equivalent to 35 percent (36) of sales and other purchasing costs totaled SEK 15,087 M (15,345), equivalent to 17 percent (16) of sales. Depreciation and amortization of non-current assets amounted to SEK 3,776 M (3,387), equivalent to 4 percent (4) of sales. Sales by product group, 2020 Mechanical locks, lock systems and fittings, 24% (25) Entrance automation, 29% (27) Electromechanical and electronic locks, 31% (31) Security doors and hardware, 16% (17) Operating income Operating income (EBIT) for 2020 amounted to SEK 12,458 M (14,608). Operating income (EBIT) excluding items affecting compa- rability decreased by 20 percent to SEK 11,916 M (14,920) because of weak global demand related to the Covid-19 pandemic. The negative impact on earnings was offset in part by cost-saving measures and staff cuts. The equivalent operating margin was 13.6 percent (15.9). Items affecting comparability The Group launched a new restructuring program in 2020 with a total estimated cost before taxes of SEK 1,366 M (312), which was expensed in its entirety in 2020. The restructuring program involves the expected closure of ten plants and about thirty offices over a two- year period. In conjunction with the acquisition of agta record, the previous shareholding in the associate company was remeasured at fair value through profit or loss. The operating income, which did not affect cash flow, amounted to SEK 1,909 M, with no effect on taxes. Income before tax Income before tax totaled SEK 11,676 M (13,571). The exchange rate effect before taxes amounted to SEK –510 M (627). Net financial items totaled SEK –782 M (–1,037), mainly because of lower net inter- est. The profit margin was 13.3 percent (14.8). The Parent company’s operating income for 2020 totaled SEK 868 M (1,523), impacted by lower intragroup operating income compared with the previous year. Tax on income The Group’s tax expense totaled SEK 2,504 M (3,574), equivalent to an effective tax rate excluding items affecting comparability of 24.8 percent (26.2). Remeasurement of shareholdings in associated com- pany to fair value through profit or loss had no effect on taxes and thereby reduced the effective tax rate by 4.2 percentage points. The most recent restructuring program, launched in 2020, increased the effective tax rate for 2020 with the equivalent of 0.8 percentage points. The reported effective tax rate overall amounted to 21.4 per- cent (26.3). Earnings per share Earnings per share before and after full dilution and excluding items affecting comparability amounted to SEK 7.54 (9.22), a decrease of 18 percent. Sales and operating income Earnings per share before and after dilution MSEK 15,000 12,000 9,000 6,000 3,000 0 Sales Omsättning Operating income1 Rörelseresultat1 1 Excluding items affecting comparability. SEK 10 8 6 4 2 0 16 17 18 19 20 Earnings per share before and after dilution1 16 17 18 19 20 1 Excluding items affecting comparability. MSEK 100,000 80,000 60,000 40,000 20,000 0 58 ASSA ABLOY | ANNUAL REPORT 2020Consolidated income statement Consolidated financial statements Note 2 3 4 5 7–9, 25, 34 10 9, 11, 25 12 13 13 Note 25 SEK M Sales Cost of goods sold Gross income Selling expenses Administrative expenses Research and development costs Other operating income and expenses 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 Consolidated statement of comprehensive income 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 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 differences reclassified to profit or loss 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 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 2020 87,649 –53,336 34,313 –14,743 –4,882 –3,902 1,415 257 12,458 10 –792 11,676 –2,504 9,172 9,171 1 8.26 7.54 2020 9,172 –319 56 –262 –70 0 –3 –318 –4,560 16 –4,935 3,975 3,975 0 59 ANNUAL REPORT 2020 | ASSA ABLOY Consolidated financial statements Comments by division ASSA ABLOY is organized into five divisions. EMEA (Europe, Middle East and Africa), Americas (North and South America) and Asia Pacific (Asia and Oceania) manu- facture and sell mechanical and electromechanical locks, security doors and hardware in their respective geograph- ical markets. Global Technologies 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 automa- tion products and service. EMEA Sales totaled SEK 18,982 M (21,144), with organic growth of -8 per- cent (2). Growth from acquisitions, divestments and internal seg- ment transfers was 1 percent, net (0). Operating income excluding items affecting comparability amounted to SEK 2,263 M (3,396), with an operating margin (EBIT) of 11.9 percent (16.1). Return on capital employed was 12.2 percent (18.4). Operating cash flow before non- cash items and interest paid was SEK 2,939 M (3,515). Demand was negatively affected by the Covid-19 pandemic, but a recovery gradually took place during the year. Scandinavia and Ger- many demonstrated a more stable trend, while demand in Southern Europe and France was softer. Sales of electromechanical locks con- tinued to increase their share of sales. Major investments in innova- tion and new products have taken place at the same time, in parallel with continued streamlining measures in the business. Americas Sales totaled SEK 19,013 M (23,172), with organic growth of –7 per- cent (7). Growth from acquisitions, divestments and internal seg- ment transfers was –9 percent, net (2). Operating income excluding items affecting comparability amounted to SEK 3,698 M (4,673), with an operating margin (EBIT) of 19.4 percent (20.2). Return on capital employed was 21.6 percent (23.6). Operating cash flow before non- cash items and interest paid was SEK 4,837 M (5,263). Demand was negatively affected by the pandemic, but a recovery gradually took place during the year, mainly in Latin America. New product launches and relatively improved trend for electromechani- cal products contributed to the recovery. Profitability was main- tained at a good level thanks to cost-saving and streamlining meas- ures, at the same time that cash flow continued to be strong. Asia Pacific Sales totaled SEK 8,841 M (10,689), with organic growth of –16 per- cent (–1). Growth from acquisitions, divestments and internal seg- ment transfers was -1 percent, net (5). Operating income excluding items affecting comparability amounted to SEK 396 M (879), with an operating margin (EBIT) of 4.5 percent (8.2). Return on capital employed was 4.4 percent (10.3). Operating cash flow before non- cash items and interest paid was SEK 762 M (622). The pandemic caused a weak sales trend for Asia Pacific, primarily for India, Southeast Asia and South Korea. Demand was more stable in Pacific and gradually recovered in China. Implementation of a new business strategy and organization in China contributed to a more stable trend and improved profitability. The division’s operating mar- gin excluding items affecting comparability declined, but the effect was offset in part by continued streamlining initiatives and staff cuts. Global Technologies Sales totaled SEK 14,158 M (15,423), with organic growth of -15 per- cent (5). Growth from acquisitions, divestments and internal seg- ment transfers was 10 percent, net (16). Operating income excluding items affecting comparability amounted to SEK 2,023 M (2,890), with an operating margin (EBIT) of 14.3 percent (18.7). Return on capital employed was 9.3 percent (14.0). Operating cash flow before non- cash items and interest paid was SEK 2,509 M (3,183). The division was negatively impacted by the pandemic in all busi- ness units. Investments in R&D continued in during the year, at the same time that several acquisitions strengthened the market position in all areas. Implemented streamlining and cost-saving measures effectively maintained profitability and cash flow at a high level. Entrance Systems Sales totaled SEK 28,323 M (25,553), with organic growth of –2 per- cent (2). Growth from acquisitions, divestments and internal seg- ment transfers was 15 percent, net (1). Operating income excluding items affecting comparability amounted to SEK 4,083 M (3,652), with an operating margin (EBIT) of 14.4 percent (14.3). Return on capital employed was 14.8 percent (16.2). Operating cash flow before non- cash items and interest paid was SEK 4,974 M (3,655). Demand was relatively stable in the Residential and Industrial busi- ness segments. Perimeter Security showed growth, while the Covid- 19 pandemic had a more negative impact on Pedestrian. Several acquisitions were carried out during the year, including agta record. The division’s operating margin was strengthened somewhat com- pared with the previous year and cash flow was further improved. Other The costs of Group-wide functions, such as the Executive Team, accounting and finance, supply management and Group-wide prod- uct development, totaled SEK 547 M (570). Elimination of sales between the Group’s segments is included in “Other”. External sales, 2020 Operating income, 20201, 2 EMEA, 21% (22) Americas, 22% (25) Asia Pacific, 9% (10) Global Technologies, 16% (16) Entrance Systems, 32% (27) EMEA, 18% (22) Americas, 30% (30) Asia Pacific, 3% (6) Global Technologies, 16% (19) Entrance Systems, 33% (23) 1 “Other” is not included in the calculation. See section Comments by division for what is included in “Other”. 2 Excluding items affecting comparability. Average number of employees, 2020 EMEA, 21% (24) Americas, 18% (19) Asia Pacific, 21% (23) Global Technologies, 13% (11) Entrance Systems, 27% (23) 60 ASSA ABLOY | ANNUAL REPORT 2020Reporting by division Consolidated financial statements SEK M Sales, external Sales, internal Sales Organic growth Acquisitions and divestments Exchange rate effects Share of earnings in associates Operating income (EBIT) excluding items affecting comparability1 Operating margin (EBIT) excluding items affecting comparability1 Restructuring costs Revaluation of associate shareholding 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 2019 2020 2019 2020 20,707 18,563 23,082 18,907 438 418 90 107 2019 9,477 1,213 2020 2019 2020 2019 2020 2019 2020 2019 2020 7,916 15,321 14,054 25,442 28,210 – – 94,029 87,649 926 102 105 110 113 –1 9532 –1,6682 – – 21,144 18,982 23,172 19,013 10,689 8,841 15,423 14,158 25,553 28,323 –1,953 –1,668 94,029 87,649 2% 0% 3% – –8% –1% –1% – 7% 2% 8% – –7% –9% –2% – –1% –16% 5% 3% 17 1% –2% 9 5% 16% 8% 5 –15% 10% –3% 2% 1% 5% 9 124 –2% 15% –2% 239 – – – – – – – – 3% 3% 6% 147 –8% 4% –3% 257 3,396 2,263 4,673 3,698 879 396 2,890 2,023 3,652 4,083 –570 –547 14,920 11,916 16.1% –185 – 3,211 15.2% 11.9% –448 – 1,815 9.6% 20.2% 19.4% 8.2% – – –51 – 4,673 20.2% 3,647 19.2% –6 – 873 8.2% 4.5% –303 – 93 1.1% 18.7% –4 – 2,885 18.7% 14.3% –195 – 1,828 12.9% 14.3% –116 – 3,535 13.8% 14.4% –220 1,909 5,772 20.4% – – – – 15.9% 13.6% –150 –312 –1,366 – – 1,909 –570 –697 14,608 12,458 – – 15.5% –1,037 14.2% –782 –3,574 –2,504 9,997 9,172 18,659 16,849 19,678 13,201 11,121 10,475 14,105 10,444 9,053 4,168 8,191 22,329 21,044 23,024 30,231 –539 –883 92,204 88,634 3,884 15,459 14,881 12,809 18,660 – – 57,662 58,344 – of which other intangible assets and property, plant and equipment 4,092 3,485 4,423 2,713 2,469 2,375 5,632 5,100 – of which right-of-use assets 990 998 499 387 – of which investments in associates 1 1 – – Return on capital employed excluding items affecting comparability1 Operating income (EBIT) Restructuring costs Revaluation of associate shareholding Depreciation and amortization Net capital expenditure Amortization of lease liabilities Change in working capital 18.4% 3,211 185 – 813 –454 –295 53 12.2% 1815 448 – 925 –407 –318 476 23.6% 4,673 – – 569 –348 –149 517 21.6% 3,647 51 – 471 –267 –132 1067 Operating cash flow by division 3,515 2,939 5,263 4,837 260 637 10.3% 873 6 – 381 –220 –100 –319 622 264 589 4.4% 93 303 – 355 –192 –108 311 762 Non-cash items Interest paid and received Operating cash flow 463 457 4,451 1,499 8,362 1,390 124 19 99 21,191 22,134 17 3,731 3,513 23 28 1,935 20 14.0% 2,885 4 – 793 –366 –129 –5 9.3% 1,828 195 – 917 –430 –144 144 16.2% 3,535 116 14.8% 5,772 220 – –1,909 794 –276 –477 –38 1,078 –330 –559 702 3,183 2,509 3,655 4,974 – – – – 2,595 637 17.0% 13.0% –570 –697 14,608 12,458 – – 36 3 –9 –61 –602 –324 –869 150 – 30 –47 –14 –94 312 1,366 – –1,909 3,387 3,776 –1,662 –1,674 –1,159 –1,275 148 2,606 –673 15,635 15,349 –95 –694 –324 –869 –95 –694 14,442 14,560 Average number of employees 11,373 10,281 9,360 8,787 11,016 9,892 5,594 6,374 11,313 12,883 336 254 48,992 48,471 1 Items affecting comparability relate to restructuring costs as well as revaluation of previously owned associate shareholding. 2 Of which eliminations SEK –1,668 M (–1,953). The segments have been determined on the basis of reporting to the CEO, who monitors the overall performance and makes decisions on resource allocation. The different segments generate their revenue from the manufac- ture and the sale of mechanical, electromechanical and electronic locks, lock systems and fittings, and security doors and hardware. The breakdown of sales is based on customer sales in the respec- tive country. Sales between segments are carried out at arm’s length. For further information on sales, see Note 2. 61 ANNUAL REPORT 2020 | ASSA ABLOYConsolidated financial statements Financial position • Capital employed amounted to SEK 88,634 M (92,204). • The return on capital employed excluding items affect- ing comparability was 13.0 percent (17.0). • The net debt/equity ratio was 0.51 (0.56). SEK M Capital employed – of which goodwill Net debt Equity – of which non-controlling interests 2019 92,204 57,662 33,050 59,154 11 2020 88,634 58,344 29,755 58,879 9 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 88,634 M (92,204). The return on capital employed excluding items affecting comparability was 13.0 percent (17.0). Intangible assets amounted to SEK 72,452 M (70,355). The increase is mainly due to the effects of completed acquisitions. Dur- ing the year, goodwill and other intangible assets with an indefinite useful life have arisen to a preliminary value of SEK 8,325 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 8,026 M (8,498). Capital expenditure on property, plant and equipment and intangible assets, less sales of property, plant and equipment and intangible assets, totaled SEK 1,674 M (1,662). Total depreciation and amortiza- tion amounted to SEK 3,776 M (3,387). Trade receivables amounted to SEK 13,665 M (15,701) and inven- tories totaled SEK 10,079 M (11,276) on the reporting date. The aver- age collection period for trade receivables was 55 days (52). Material throughput time was 94 days (90). The Group is making systematic efforts to increase capital efficiency. Net debt Net debt amounted to SEK 29,755 M (33,050), of which pension commitments and other post-employment benefits accounted for SEK 3,514 M (3,346). Net debt decreased during the year because of the strong operat- ing cash flow in combination with exchange rate effects. External financing The Group’s long-term loan financing mainly consists of a GMTN Pro- gram of SEK 16,189 M (17,886), of which SEK 15,047 M (15,814) is long-term, Private Placement Program in the US totaling USD 225 M, of which USD 225M (225) is long-term, and loans from financial insti- tutions such as the European Investment Bank (EIB) of EUR 18 M (37) and USD 366 M (120), and loans from the Nordic Investment Bank of EUR 190 M (55). During the year, three new issues were made under the GMTN program for a total amount of SEK 1,570 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 decreased because of currency fluctuations, in particular regarding the USD. A total of SEK 5,806 M was raised in new long-term loans, while SEK 3,252 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 out- standing balance under the Commercial Paper programs was SEK 0 M (0). In addition, substantial credit facilities are available, mainly in the form of a Multi-Currency Revolving Credit Facility of EUR 1,200 M (1,200). The interest coverage ratio, defined as income before tax exclud- ing items affecting comparability plus net interest, divided by net interest, was 16.0 (15.2). Fixed interest terms decreased somewhat during the year, with an average term of 32 months (34) at year-end. Cash and cash equivalents amounted to SEK 2,756 M (442) and are invested in banks with high credit ratings. Some of the Group’s main financing agreements contain a cus- tomary 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. Equity Consolidated equity totaled SEK 58,879 M (59,154) at year-end. The return on equity was 15.5 percent (18.0). The equity ratio was 50.1 percent (50.1). The debt/equity ratio, defined as net debt divided by equity, was 0.51 (0.56). Net debt Capital employed and return on capital employed Net debt Net debt/equity ratio MSEK 40,000 30,000 20,000 10,000 0 0.8 0.6 0.4 0.2 0.0 16 17 18 19 20 MSEK 100,000 80,000 60,000 40,000 20,000 0 16 17 18 19 20 % 25 20 15 10 5 0 Capital employed Return on capital employed1 1 Excluding items affecting comparability. 62 ASSA ABLOY | ANNUAL REPORT 2020Consolidated balance sheet Consolidated financial statements 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 Note 2019 2020 14 15 16 18 20 19 21 22 35 35 35 24 32 35 35 19 25 26 35 35 35 26 27 28 70,355 8,498 3,731 2,595 104 1,205 86,487 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 72,452 8,026 3,513 637 212 1,338 86,178 10,079 13,665 1,060 1,542 1,675 426 46 2,756 31,250 117,428 371 9,675 1,794 47,030 58,870 9 58,879 21,100 22,381 2,588 2,368 3,346 722 1,002 2,477 2,868 3,514 616 828 31,127 32,683 5,460 1,151 150 7,908 1,536 630 3,765 7,170 3,514 1,085 172 7,027 1,341 1,159 3,880 7,687 27,769 118,050 25,865 117,428 63 ANNUAL REPORT 2020 | ASSA ABLOY Consolidated financial statements Cash flow • Operating cash flow remained strong and amounted to SEK 14,560 M (14,442). Relationship between cash flow from operating activities and operating cash flow • Cash flow from acquisitions and divestments of subsidi- aries totaled SEK –5,068 M (–3,819). Operating cash flow SEK M Operating income (EBIT) Restructuring costs Revaluation of previously owned shares in associates Depreciation and amortization Net capital expenditure Change in working capital Amortization of lease liabilities Interest paid and received Non-cash items Operating cash flow Operating cash flow/Income before tax 1 Excluding items affecting comparability. 2019 14,608 312 – 3,387 –1,662 148 –1,159 –869 –324 14,442 1,041 2020 12,458 1,366 –1,909 3,776 –1,674 2,606 –1,275 –694 –95 14,560 1,311 SEK M Cash flow from operating activities Restructuring payments Net capital expenditure Amortization of lease liabilities Reversal of tax paid Operating cash flow 2019 12,665 726 –1,662 –1,159 3,872 2020 13,658 747 –1,674 –1,275 3,104 14,442 14,560 Investments in subsidiaries Cash flow from investments in subsidiaries totaled SEK–6,238 M (–3,903), while divestments of subsidiaries generated a positive cash flow of SEK 1,170 M (84). The cash flow effect from acquisitions and divestments was therefore SEK -5,068 M (–3,819). Acquired cash and cash equivalents totaled SEK 2,239 M (120). Change in net debt Net debt was mainly affected by the strong positive operating cash flow, the dividend to shareholders, acquisitions and exchange rate differences. The Group’s operating cash flow amounted to SEK 14,560 M (14,442), equivalent to 131 percent (104) of income before tax excluding items affecting comparability. Net capital expenditure Net capital expenditure on intangible assets and property, plant and equipment totaled SEK 1,674 M (1,662), equivalent to 68 percent (76) of depreciation and amortization on intangible assets and prop- erty, plant and equipment. 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 obligations Change in lease liabilities Exchange rate differences, etc. Net debt at 31 December Change in working capital SEK M Inventories Trade receivables Trade payables Other working capital Change in working capital 2019 572 –229 –443 248 148 2020 687 1,331 –370 958 2,606 The material throughput time was 94 days (90) at year-end. Capital tied up in working capital decreased during the year, which had an impact on cash flow of SEK 2,606 M (148) overall. 2019 29,246 3,711 2020 33,050 – –14,442 –14,560 726 3,872 4,764 3,888 362 –242 1,165 33,050 747 3,104 5,504 4,277 319 –106 –2,580 29,755 Income before tax and operating cash flow Capital expenditure MSEK 15,000 12,000 9,000 6,000 3,000 0 16 17 18 19 20 Income before tax1 Operating cash flow 1 Excluding items affecting comparability. MSEK 4,000 3,000 2,000 1,000 0 % 4 3 2 1 0 16 17 18 19 20 Net capital expenditure Depreciation and amorti- zation Net capital expenditure % of sales 64 ASSA ABLOY | ANNUAL REPORT 2020Consolidated statement of cash flows Consolidated financial statements SEK M OPERATING ACTIVITIES Operating income Depreciation and amortization Revaluation of previously owned associate shareholding 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 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 Note 2019 2020 8 31 31 14, 15 14, 15 33 31 35 35 35 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 12,458 3,776 –1,909 1,366 –747 –95 14,850 –699 5 –3,104 11,052 2,606 13,658 –1,806 133 –6,238 1,170 – 0 –5,464 –6,741 –3,888 4,615 –2,903 –1,159 –19 –21 –3,926 –7,301 –100 538 –100 4 442 –4,277 5,806 –3,252 –1,275 –16 –22 –1,522 –4,558 2,359 442 2,359 –45 2,756 65 ANNUAL REPORT 2020 | ASSA ABLOY Consolidated financial statements Changes in consolidated equity SEK M 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 Closing balance 31 December 2019 Parent company’s shareholders Other contributed capital Reserves Retained earnings Non- controlling interests Share capital 371 371 9,675 5,096 9,675 5,096 1,631 1,631 36,748 –234 36,514 9,993 –281 9,713 –3,888 27 –3,861 5 –3,856 42,369 371 9,675 6,728 Opening balance 1 January 2020 371 9,675 6,728 42,369 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 Closing balance 31 December 2020 –4,934 –4,934 371 9,675 1,794 9,171 –262 8,909 –4,276 28 –4,249 1 –4,248 47,030 Total 51,900 –234 51,666 9,997 1,351 11,348 –3,888 27 –3,861 1 –3,860 59,154 59,154 9,172 –5,197 3,975 –4,277 28 –4,249 0 –4,249 58,879 10 – 10 4 1 5 – – – –4 –4 11 11 1 –1 0 –1 – –1 –1 –2 9 Equity per share after dilution and return on equity after tax Dividend and earnings per share Equity per share after dilution, SEK Return on equity after tax, % SEK 60 50 40 30 20 10 0 16 17 18 19 20 % 30 25 20 15 10 5 0 SEK 10 8 6 4 2 0 Dividend per share Earnings per share after dilution1 16 17 18 19 20 1 Excluding items affecting comparability. 66 ASSA ABLOY | ANNUAL REPORT 2020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 2019 –2,188 –1,480 19 5,172 1,523 4,910 –1,471 4,962 851 –233 –446 5,134 2020 –2,279 –1,441 8 4,580 868 5,197 –703 5,363 663 –214 –259 5,552 Statement of comprehensive income – Parent company SEK M Net income Other comprehensive income Total comprehensive income 2019 5,134 – 5,134 2020 5,552 – 5,552 67 ANNUAL REPORT 2020 | ASSA ABLOY Parent company financial statements 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 Total non-current liabilities Current liabilities Short-term loans Trade payables Current liabilities to subsidiaries Other current liabilities Accrued expenses and deferred income Total current liabilities TOTAL EQUITY AND LIABILITIES Note 2019 2020 14 15 17 20 35 23 24 35 35 28 3,108 20 34,541 1,774 39,443 2,498 50 35,821 592 38,961 19,475 20,534 224 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 59,165 514 21 0 21,069 60,030 371 275 8,905 184 787 15,664 26,186 1,125 15,677 15,677 1,594 154 14,862 7 425 17,042 60,030 68 ASSA ABLOY | ANNUAL REPORT 2020 Parent company financial statements Cash flow statement – Parent company 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 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 Note 2019 2020 8 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 0 868 745 1,613 –258 3,704 –505 4,553 801 5,355 –164 –1,472 –1,636 –4,276 3,058 –2,500 –3,718 0 0 0 0 Change in equity – Parent company SEK M Restricted equity Non-restricted equity Share capital Reval- uation reserve Statutory reserve Fund for development expenses Share premium reserve Retained earnings Total Opening balance 1 January 2019 371 275 8,905 219 787 13,053 23,610 Net income Total comprehensive income Dividend Stock purchase plans Total transactions with shareholders Closing balance 31 December 2019 Opening balance 1 January 2020 Net income Total comprehensive income Dividend Stock purchase plans Reclassifications Total transactions with shareholders Closing balance 31 December 2020 371 275 8,905 –35 –35 184 371 371 275 275 8,905 8,905 219 219 787 787 5,134 5,134 5,134 5,134 –3,888 –3,888 27 –3,861 14,326 27 –3,861 24,883 14,326 24,883 5,552 5,552 5,552 5,552 –4,276 –4,276 28 35 28 0 787 –4,213 15,664 –4,249 26,186 69 ANNUAL REPORT 2020 | ASSA ABLOY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 2020 and have been applied to all years presented, 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 41–98. 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 pre- pared 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 corresponding 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 assessments when applying the Group’s accounting principles. Estimates and assessments may affect the income state- ment and balance sheet as well as the supplementary information provided in the finan- cial 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 provi- sions and deferred considerations, 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 reasonable expectations about the future. The Group considers that estimates and assessments relating to impairment testing of goodwill and other intangible assets with indefinite useful life are of material impor- tance 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 calculating 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 assump- tions and the effects of reasonable changes in them are described in Note 14. The actuarial assumptions made when calculating post-employment employee ben- efits also have material importance for the consolidated financial statements. For infor- mation on these actuarial assumptions, see Note 25. New and revised standards applied by the Group No new or amended standards with material impact on the Group’s financial reports were applied for the first time in 2020. New and revised IFRS not yet effective No 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, variable 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 state- ments 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 subsidiaries was eliminated against their equity at the acquisition date. In this context, equity in subsidiaries is determined on the basis of the fair value of assets, liabilities and contingent liabilities at the acquisition date. Consequently, only that part of the equity in subsidiaries that has arisen after the acquisition date is included in consolidated equity. The Group deter- mines on an individual basis for each acquisition whether a non-controlling interest in the acquired company shall be recognized at fair value or at the interest’s proportional share of the acquired company’s net assets. Any negative difference, negative goodwill, is recognized as revenue immediately after determination. 70 Deferred considerations are classified as financial liabilities and revalued through profit or loss in operating income. Significant deferred considerations are discounted to present value. Acquisition-related transaction costs are expensed as incurred. Intra-Group transactions and balance sheet items, and unrealized profits on transac- tions between Group companies are eliminated in the consolidated financial state- ments. 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. Non-controlling interests’ share in subsidiaries’ equity is recognized sepa- rately in consolidated equity. Transactions with non-controlling interests are recog- nized 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 associates are recognized at cost, and the carrying amount is adjusted for the share of associates’ earnings after the acqui- sition date. Dividends from associates are recognized as a reduction in the carrying amount of the holdings. The share of associates’ earnings is recognized in the consoli- dated 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 respon- sible for allocation of resources and assessing performance of the operating segments. The divisions form the operational structure for internal control and reporting and also constitute the Group’s segments 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 Technologies and Entrance Systems consist of products sold worldwide. Foreign currency translation Functional currency corresponds to local currency in each country where Group com- panies 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 settlement of such transactions are normally recognized in the income statement, as are those arising from translation of monetary balance sheet items in foreign currencies at the year-end rate. Exceptions are transac- tions relating to qualifying cash flow hedges, which are recognized in other comprehen- sive 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 dif- ferences arising from the translation 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 presentation currency (SEK). Country Currency 2019 2020 2019 2020 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 2.57 0.20 6.56 2.39 7.10 9.50 2.50 0.13 6.35 1.81 6.84 9.78 2.54 0.16 6.51 2.30 7.13 9.58 2.23 0.10 6.27 1.57 6.40 9.27 0,013 0,012 0,012 0,012 1.37 0.41 1.42 10.57 12.02 1.20 0,032 2.64 1.33 0.40 1.41 10.49 11.82 1.18 0,030 2.67 1.33 0.41 1.40 10.44 12.23 1.20 0,032 2.69 1.25 0.38 1.35 10.05 11.08 1.06 0,028 2.55 ASSA ABLOY | ANNUAL REPORT 2020Note 1 continued 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 2019 0,134 0,092 0.0081 0.4872 2.27 1.07 6.22 2.46 2.23 0.30 1.67 9.43 0.65 2020 0,124 0,087 0.0078 0.4317 2.19 0.98 5.99 2.36 2.17 0.29 1.33 9.18 0.57 2019 0,131 0,092 0.0081 0.4954 2.27 1.06 6.26 2.45 2.18 0.31 1.57 9.32 0.67 2020 0,112 0,075 0.0075 0.4124 2.03 0.95 5.88 2.21 2.06 0.27 1.12 8.19 0.56 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 perfor- mance obligation by transferring a promised good or service 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 reve- nue can be recognized: Identify contracts with customers, identify performance obliga- tions, determine the transaction price, allocate the transaction price to each of the sep- arate 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 ser- vice to the customer. A promised good or service is distinct if both of the following crite- ria 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 consideration prom- ised 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 incremental 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 obligation 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 observable, 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 obligations 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 customer 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: a) the customer simultaneously receives and consumes the benefits provided 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 com- pleted 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. Notes 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 customer 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 completion 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 col- lection period for trade receivables in 2020 was 55 days. Intra-Group sales Transactions between Group companies are carried out at arm’s length and thus at mar- ket prices. Intra-Group sales are eliminated from the consolidated 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 bene- fits 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 annually 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, construction 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 confidently 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 comprehen- sive 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 forward or other future tax allowances are recognized to the extent that it is probable that the allowance can be offset against taxable income in future taxation. Deferred tax liabilities for temporary differences relating to investments 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 con- sidered 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 rec- ognized 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 identifiable net assets at the 71 ANNUAL REPORT 2020 | ASSA ABLOYNotes Note 1 continued acquisition date, and is recognized at cost less accumulated impairment losses. Good- will is allocated to cash generating units and is tested annually to identify any impair- ment 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 intangible assets consist chiefly of various types of intellectual property rights, such as brands, technology and customer relationships. Identifiable acquisition-related intellectual property rights are initially recognized at fair value at the acquisition date and subsequently at cost less accumu- lated amortization 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 carry- ing 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 capitalized 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 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 operating 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 recog- nizes a right-of-use asset and a lease liability corresponding 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 present value, the Group’s incremental borrowing rate by cur- rency is used. 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 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. In the statement of cash flows the lease payments are split between interest paid in cash flow from operating activities and amortization of lease liabilities in financing activ- ities. In operating cash flow, the Group has chosen to include amortization of lease lia- bilities as an operating component from 1 January 2019. The Group’s operating cash flow is therefore comparable with periods prior to 2019. 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 identifiable cash flows, so-called cash gen- erating 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. 72 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 companies. 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 invest- ments, derivatives and other financial assets. Under IFRS 9, the Group classifies financial assets in the categories financial assets at amortized cost, financial assets at fair value through profit or loss, or financial assets at fair value through other comprehensive income. Financial assets 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 prin- cipal 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 com- prehensive income. As of the reporting date the Group has no financial assets in this cat- egory. 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 com- prises 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 number 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, finan- cial liabilities are recognized either at amortized cost or at fair value through profit or loss, depending on the classification of the financial liability. ASSA ABLOY | ANNUAL REPORT 2020Notes Note 1 continued 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 con- tinuous 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 cal- culated when the loan was raised. Accordingly, surplus values and negative surplus val- ues 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 liabili- ties 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. 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. Transaction 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 market for an investment, the Group applies various measurement tech- niques 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 finan- cial liability is derecognized from the balance sheet when the obligation is fulfilled, can- celled or expires, see above. Financial assets and liabilities are offset against each other and the net amount is rec- ognized in the balance sheet when there is a legal right of set-off and there is an inten- tion 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 transaction 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 derivative 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 meas- ured 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 receiv- ables. Other derivatives are classified as current interest-bearing liabilities and invest- ments 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 recognized 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 accounting, and accumulated gains or losses relating to the hedge are recog- nized in equity, these gains/losses remain in equity and are taken to income, while the forecast transaction is finally recognized in the income statement. When a forecast transaction is no longer expected to occur, the accumulated gain or loss recognized in equity is immediately transferred to Other comprehensive income in the income state- ment. When a forecast transaction is no longer expected to occur, the gain or loss recog- nized 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 recognized 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 recognized 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 result- ing 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 prin- cipally 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. Com- prehensive 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 pension plans. Calculations relating to the Group’s defined benefit plans are performed by independent actuaries and are based on a num- ber 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 benefit 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 dif- ference 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 Annual General Meeting 2010. 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 recognized 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 pro- gram 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. 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 participants are compen- sated for this. The employees pay a price equivalent to the share price on the investment date. The vesting terms are not stock market 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 statement. Personnel costs for shares relating to the performance-based program are calculated on each accounting date based on an assessment of the probability of the performance targets being achieved. The costs are calculated 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 73 ANNUAL REPORT 2020 | ASSA ABLOYNotes Note 1 continued 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 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 appropriations 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 Par- ent company applies the alternative rule in RFR 2, reporting these guarantees as a con- tingent liability. 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 recog- nized 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 General Meeting has approved the divi- dend. Parent company The Group’s Parent company, ASSA ABLOY AB, is responsible for Group management and provides Group-wide functions. The Parent company’s revenue consists of intra- Group franchise and royalty revenues. The significant balance sheet items consist of shares in subsidiaries, intra-Group receivables and liabilities, and external borrowing. The Parent company has prepared 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 Standards (IFRS) adopted by the EU in so far as this is possible within the framework 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 operating 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, with the exception of large product development projects, which have been capitalized. Intangible assets Intangible assets comprise patented technology and other intangible assets. They are amortized over 5–10 years. Property, plant and equipment Property, plant and equipment owned by the Parent company are recognized 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 entails 5–10 years for equipment and 3–5 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 1 and are covered by taking out insurance with an insurance company. 74 ASSA ABLOY | ANNUAL REPORT 2020Sales by product group SEK M Mechanical locks, lock systems and fittings 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 Sweden China France United Kingdom Germany Australia Canada Netherlands Finland Norway Belgium Denmark Mexico South Korea Switzerland Spain Poland Italy Brazil New Zealand Austria Ireland South Africa Czech Republic India Notes NOTE 2 Sales Disaggregation of revenue from contracts with customers EMEA Americas Asia Pacific Global Technologies Entrance Systems Other Group 2019 10,232 6,727 3,678 508 2020 9,012 6,335 3,131 504 2019 8,734 5,339 8,985 114 2020 7,892 4,860 6,224 38 2019 5,035 2,492 3,143 18 2020 4,357 2019 186 2020 291 1,916 15,089 13,844 8 747 2019 –710 7 738 –1,018 2019 2020 2,497 70 147 – 24 – – 2,364 24,798 25,214 –104 –121 2020 –638 –800 –101 –129 2019 2020 23,486 20,921 29,376 26,892 15,849 14,139 25,318 25,697 21,144 18,982 23,172 19,013 10,689 8,841 15,423 14,158 25,553 28,323 –1,953 –1,668 94,029 87,649 EMEA Americas Asia Pacific Global Technologies Entrance Systems Other Group 2019 2020 2019 2020 18,435 16,881 43 64 593 102 827 1,053 134 426 21,358 17,354 64 665 835 111 1,629 1,436 26 110 7 40 109 10 2019 552 1,082 52 15 6,633 2,355 2020 506 797 43 15 5,155 2,326 2019 3,863 7,657 562 410 2020 2019 2020 3,759 11,937 12,126 6,795 11,650 14,160 424 386 83 54 60 56 2,471 2,070 1,333 1,126 459 724 495 794 2019 –733 –850 –37 –24 –177 –132 2020 –751 –593 –41 –23 –146 –113 2019 2020 34,097 32,584 41,490 38,939 2,392 1,308 11,422 3,319 1,986 1,139 9,149 3,852 21,144 18,982 23,172 19,013 10,689 8,841 15,423 14,158 25,553 28,323 –1,953 –1,668 94,029 87,649 Group 2019 2020 SEK M 36,972 34,659 Saudi Arabia United Arab Emirates Chile Japan Hong Kong Israel Singapore Hungary Estonia Portugal Turkey Romania Thailand Colombia Russia Malta Philippines Kenya Indonesia Malaysia Guatemala Croatia Slovakia 4,739 4,919 4,087 4,135 3,678 2,625 2,882 2,279 2,045 1,776 1,597 1,450 1,636 1,616 971 1,294 1,056 986 1,018 672 673 530 612 494 711 4,767 4,077 4,046 3,843 3,616 3,124 2,885 2,179 1,999 1,541 1,424 1,400 1,395 1,355 1,064 1,052 974 811 788 695 663 483 480 440 418 Group 2019 2020 457 553 357 294 374 300 387 231 191 240 230 196 278 262 219 39 315 99 163 217 117 134 155 414 399 355 303 281 268 263 243 229 224 221 199 198 171 169 164 159 142 141 134 125 125 119 Other countries Total 2,556 2,424 94,029 87,649 75 ANNUAL REPORT 2020 | ASSA ABLOYNotes Note 2 continued Contract assets and contract liabilities The Group recognizes the following revenue-related contract assets and contract liabili- ties: 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 2019 607 607 2020 679 679 Group 2019 52 1,836 1,888 2020 44 1,789 1,833 Contract assets during the year have increased by SEK 72 M, primarily as a result of acquired companies which added SEK 172 M. Contract liabilities decreased by SEK 55 M. Acquired and discontinued companies resulted in a net increase in contract liabilities of SEK 270 M during the year. The total contract liability as at 31 December 2019 of SEK 1,888 M has in all important respects been recognized in 2020. Remaining performance obligations The total transaction price allocated to unsatisfied performance obligations at the reporting date amounts to SEK 14,505 M. Of this amount, SEK 13,290 M is expected to be recognized as revenue in 2021, while an estimated SEK 1,216 M will be recognized as revenue in 2022 or later. As of 31 December 2019 the total transaction price allocated to unsatisfied perfor- mance obligations was SEK 12,760 M. NOTE 4 Other operating income and expenses SEK M Restructuring costs Revaluation of previously owned shares in associates Remeasurement of deferred considerations Profit on sales of non-current assets Profit/loss on sales of subsidiaries Business-related taxes Transaction expenses from acquisitions Exchange rate differences Other, net Total Group 2019 –47 – 358 63 – –52 –169 –58 –44 51 2020 –54 1,909 203 3 –46 –22 –233 –97 –248 1,415 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 2019 121 2020 231 17 5 –1 4 0 9 9 2 6 – 147 257 NOTE 3 Auditors’ fees SEK M Audit assignment EY PwC Others Audit-related services in addition to audit assignment EY PwC Tax advice EY PwC Others Other services EY PwC Others Total Group Parent company 2019 2020 2019 2020 On 20 August 2020 a majority stake was acquired in agta record AG and the company transitioned from associate to subsidiary. The share of earnings in agta record AG thus relates to the period 1 January to 20 August. Agta Record AG is consolidated beginning on 20 August 2020. 2 64 17 – 1 1 10 11 8 25 3 61 8 21 1 – 2 8 11 2 6 1 141 121 – 3 – – 1 0 1 1 0 0 0 7 7 – – 1 – 0 2 4 1 1 0 16 NOTE 6 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 com- pany 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: (2020) 2021 (2021) 2022 (2022) 2023 (2023) 2024 (2024) 2025 Total Parent company 2019 2020 13 13 13 5 1 0 0 19 15 15 6 3 3 3 1 16 The auditors’ fee for EY in Sweden during the year was SEK 11 M (–) and the fee for extra services was SEK 1 M (1). 76 ASSA ABLOY | ANNUAL REPORT 2020Notes NOTE 7 Expenses by nature NOTE 12 Tax on income In the income statement costs are broken down by function. Below, these same costs are broken down by nature: SEK M Remuneration of employees (note 34) Direct material costs Depreciation and amortization (notes 8, 14, 15) Other purchase expenses Total Group 2019 27,001 33,885 3,387 15,345 79,619 2020 27,170 30,830 3,776 15,087 76,863 SEK M Current tax Tax attributable to prior years Withholding tax Deferred tax Total Group Parent company 2019 –2,175 –701 –59 –638 2020 –2,713 220 –28 18 2019 –405 –19 –14 –8 2020 –219 –8 –11 –22 –3,574 –2,504 –446 –259 Explanation for the difference between nominal Swedish tax rate and effective tax rate based on income before tax: NOTE 8 Depreciation and amortization Percent Group Parent company Swedish income tax rate SEK M Intangible assets Machinery Equipment Buildings Land improvements Right-of-use assets Total 2019 956 616 381 224 9 1,201 3,387 2020 1,201 617 420 221 9 1,307 3,776 2019 625 2020 733 – 18 – – – – 12 – – – 643 745 Effect of foreign tax rates Non-taxable income/non-deductible expenses Exercised/new, not yet measured tax loss carry- forwards Non-taxable revaluation of associate shareholding Other Effective tax rate in income statement NOTE 13 Earnings per share NOTE 9 Exchange differences in the income statement Earnings per share before and after dilution SEK M 2019 2020 2019 2020 SEK M Group Parent company Group Parent company 2019 21 2020 21 4 1 1 – –1 26 3 1 3 –4 –3 21 2019 2020 21 – –13 – – – 8 21 – –17 – – – 4 Group 2019 9,993 2020 9,171 9,993 9,171 Earnings attributable to the Parent company’s shareholders Net profit Weighted average number of outstanding shares (thousands) 1,110,776 1,110,776 Earnings per share (SEK) 9.00 8.26 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 Exchange differences recognized in operating income Exchange differences recognized in financial expenses Total –58 –4 –63 –97 2 –95 –15 –5 –20 –17 –128 –145 NOTE 10 Financial income Group Parent company SEK M 2019 2020 Earnings from investments in subsidiaries Earnings from investments in associates Intra-Group interest income Other financial income Fair value adjustments shares and interests External interest income and similar items Total – – – 1 – 14 15 2019 4,564 59 287 0 – – 2020 3,667 37 292 – 1,201 – – – – 7 – 3 SEK M Earnings attributable to the Parent company’s shareholders Items affecting comparability 10 4,910 5,197 Revaluation of shares in associates Restructuring costs Tax effect restructuring costs Total items affecting comparability after tax Group 2019 9,993 2020 9,171 – –312 65 –246 1,909 –1,366 255 797 Net profit excluding items affecting comparability 10,240 8,374 Weighted average number of outstanding shares (thousands) 1,110,776 1,110,776 Earnings per share excluding items affecting comparability (SEK) 9.22 7.54 Group Parent company 2019 – –785 34 –239 –4 – –58 –1,052 2020 – –569 –55 –122 2 – –48 –792 2019 –276 –288 – – –5 –876 –26 –1,471 2020 –251 –297 – – –128 – –28 –703 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 items Fair value adjustments shares and interests Other financial expenses Total 1 Of which 103 (18) is fair value adjustments on derivatives, non-hedge accounting, for the Group. 77 ANNUAL REPORT 2020 | ASSA ABLOYNotes NOTE 14 Intangible assets 2020, 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 Divestments of subsidiaries Sales, disposals and adjustments Reclassifications Amortization Impairment Exchange rate difference Closing accumulated amortization and impairment Carrying amount 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 Goodwill 61,970 – 6,421 –882 – – –5,116 62,392 –4,309 – – – – – 260 –4,048 58,344 Goodwill 57,646 – 2,685 – 4 1,635 61,970 –4,233 – – – – –76 –4,309 57,662 Group Parent company Brands 7,410 1 1,904 –95 0 1 –520 8,701 –1,263 4 – – –3 – 68 –1,194 7,506 Other intangible assets Total Intangible assets 12,817 389 1,377 –25 –32 8 –714 13,820 –6,270 6 6 –2 –1,199 –69 308 –7,219 6,601 82,197 390 9,703 –1,002 –32 9 –6,350 84,914 –11,842 10 6 –2 –1,201 –69 637 –12,462 72,452 7,604 122 – – – – – 7,727 –4,496 – – – –733 – – –5,229 2,498 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 Intangible assets 75,512 624 3,981 6 20 2,054 82,197 –10,651 –10 –2 –956 –5 –218 –11,842 70,355 6,868 736 – – – – 7,604 –3,871 – – –625 – – –4,496 3,108 Other intangible assets consist mainly of customer relations and technology. The carry- ing amount of intangible assets with an indefinite useful life, excluding goodwill, amounts to SEK 7,467 M (6,105) and relates to brands. Useful life has been defined as indefinite where the time period, during which an 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. asset is deemed to contribute economic benefits, cannot be determined. 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 princi- ple described in Note 1. Recoverable amounts for Cash Generating Units have been determined by calculating value in use. These calculations are based on estimated future cash flows, which in turn are based on financial budgets for a three-year period approved by management. Cash flows beyond the three-year period are extrapolated using estimated growth rates according to the information below. Management has determined the budgeted operating margin based on previous 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 estimate. Further, an average discount rate in local currency after tax has been used in the calculations. The difference in value com- pared 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 2020Notes Note 14 continued 2020 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: 2020, SEK M Goodwill Intangible assets with indefinite useful life Total EMEA 10,475 136 10,610 Americas Asia Pacific 10,444 718 11,162 3,884 788 4,672 Global Technologies 14,881 811 15,692 Entrance Systems 18,660 5,015 23,675 Total 58,344 7,467 65,811 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 Sensitivity analysis A sensitivity analysis has been carried out for each cash-generating unit. The results of this analysis are summarized below. 2020 If the estimated operating margin after the end of the budget period had been one per- centage point lower than the management’s estimate, the total recoverable amount would be 5 percent lower (EMEA 5 percent, Americas 4 percent, Asia Pacific 8 percent, Global Technologies 4 percent, and Entrance Systems 5 percent). If the estimated growth rate used to extrapolate cash flows beyond the budget period had been one percentage point lower than the basic assumption of 3 percent, the total recoverable amount would be 13 percent lower (EMEA 13 percent, Americas 13 percent, Asia Pacific 10 percent, Global Technologies 13 percent, and Entrance Sys- tems 13 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 15 percent, Global Technologies 17 percent, and Entrance Sys- tems 17 percent). These calculations are hypothetical and should not be viewed as an indication that these factors are any more or less likely to change. The sensitivity analysis should there- fore be interpreted with caution. None of the hypothetical cases above would lead to an impairment of goodwill in an individual Cash Generating Unit. 2019 If the estimated operating margin after the end of the budget period had been one per- centage 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 assumption 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 Sys- tems 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 Sys- tems 17 percent). These calculations are hypothetical and should not be viewed as an indication that these factors are any more or less likely to change. The sensitivity analysis should there- fore be interpreted with caution. None of the hypothetical cases above would lead to an impairment of goodwill in an individual Cash Generating Unit. 79 ANNUAL REPORT 2020 | ASSA ABLOYNotes NOTE 15 Property, plant and equipment 2020, SEK M Opening accumulated acquisition cost Purchases Acquisitions of subsidiaries Divestments of subsidiaries Sales and disposals Reclassifications Exchange rate difference Closing accumulated acquisition cost Opening accumulated depreciation and impairment Divestments of subsidiaries Sales and disposals Impairment incl. reversals Depreciation and amortization Reclassifications Exchange rate difference Closing accumulated depreciation and impairment Carrying amount 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 Land and land improvements Machinery Equipment Construction in progress Group 1,215 11,226 1 60 –19 –49 22 –91 1,139 –150 – 14 – –9 –1 9 –138 1,001 296 80 –290 –393 248 –1,014 10,153 –8,395 248 377 –40 –617 96 749 –7,582 2,572 4,203 338 246 –82 –314 246 –126 4,511 –3,272 73 297 –4 –420 –87 38 –3,375 1,135 692 706 3 –8 –36 –681 –60 616 – – – – – – – – 616 Land and land improvements Machinery Equipment Construction in progress Group 1,142 10,026 1 87 –28 –12 25 1,215 –145 8 – –9 – –4 –150 1,064 249 157 –22 406 409 11,226 –7,458 17 –16 –616 6 –328 –8,395 2,831 3,805 228 33 –145 127 155 4,203 –2,889 132 –2 –381 –2 –130 –3,272 931 684 701 25 –28 –709 19 692 – – – – – – – 692 Buildings 6,301 76 274 –343 –104 157 –212 6,150 –3,321 112 48 –74 –221 –6 13 –3,448 2,703 Buildings 5,958 39 54 –103 167 186 6,301 –3,053 60 –1 –224 –2 –100 –3,321 2,980 Parent company Equipment 85 42 – – – – – 127 –65 – – – –12 – – –77 50 Parent company Equipment 85 4 – –4 – – 85 –47 0 – –18 – – –65 20 Total 23,635 1,417 664 –742 –895 –9 –1,502 22,569 –15,137 433 736 –118 –1,268 2 810 –14,541 8,026 Total 21,614 1,218 356 –326 –20 793 23,635 –13,544 217 –19 –1,230 2 –563 –15,137 8,498 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 SEK M 2019 2,943 20 705 63 2020 2,763 22 676 52 Amortization attributable to right-of-use assets: Buildings Machinery Vehicles Other equipment 3,731 3,513 Operating expenses attributable to: Additions to right-of-use assets for 2020 amounted to SEK 1,164 M (1,016). Short-term leases Leases of low-value assets Variable lease payments are not included in lease liabilities Interest expenses relating to: Lease liabilities Total Group 2019 2020 –860 –8 –305 –29 –78 –12 –16 –96 –912 –11 –354 –31 –62 –14 –18 –85 –1,404 –1,486 The total cash flow attributable to leases in 2020 was SEK 1,360 M (1,255). 80 ASSA ABLOY | ANNUAL REPORT 2020 Notes Corporate identity number, Registered office Number of shares Share of equity, % Carrying amount, SEK M Parent company 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 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 556071-8149, Landskrona PT500243700, Alfragide 556909-5929, Stockholm IT01254420597, Rome CUIT 30-61783980-2, Buenos Aires FR21341213411, Nanterre C.20402, Nairobi CH-020.3.900.822-0, Zürich 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 01 100 01 100 100 100 100 100 100 100 21 100 100 392 197 287 475 6,036 1,819 185 189 4,257 538 376 1,086 771 1,964 47 109 3,091 293 901 217 2,410 0 138 844 0 762 0 203 303 72 5,323 0 25 974 0 679 90 1,160 35,821 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 13,500 5,166,945 Group 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. 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 ASSA ABLOY Entrance Systems IDDS AB ASSA ABLOY Portugal, Unipessoal, Lda (Portugal) ASSA ABLOY Mobile Services AB ASSA ABLOY Holding Italia S.p.A. HID SA (Argentina) HID Global SAS ASSA ABLOY East Africa Ltd Agta record ag Total 1 The Group’s holdings amount to 100 percent. 2 The Group’s holdings amount to 99.7 percent. NOTE 18 Investments in associates Country of registration Number of shares Share of equity 2019, % Share of equity 2020, % Carrying amount 2019, SEK M Carrying amount 2020, SEK M Company name Agta record ag Goal Co., Ltd PT Jasuindo Arjo Wiggins Security SARA Loading Bay Ltd Saudi Crawford Doors Ltd Others Total Switzerland Japan Indonesia United Kingdom Saudi Arabia – 2,778,790 1,533,412 4,990 800 39 46 49 50 40 – 46 49 50 40 1,916 637 23 13 5 1 2,595 On 20 August 2020 a majority stake was acquired in agta record ag and the company transitioned from associate to subsidiary. In conjunction with the acquisition the previ- ous share of equity was revalued to fair value, which entailed a revaluation effect of SEK 1,909 M. Further information on the transaction can be found in the Report of the Board of Directors. – 589 28 15 5 1 637 81 ANNUAL REPORT 2020 | ASSA ABLOYNotes NOTE 19 Deferred tax NOTE 22 Trade receivables 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 disposals Recognized in income statement Actuarial gain/loss on post-employment benefit obligation Exchange rate differences Closing balance Group 2019 2020 SEK M 84 430 321 370 70 470 174 624 1,205 1,338 1,848 520 2,368 2,386 482 2,868 –1,163 –1,531 Group 2019 –410 –183 –638 81 –13 2020 –1,163 –546 18 56 104 Trade receivables Loss allowance Total Trade receivables by currency SEK M USD EUR CNY GBP SEK AUD CAD KRW Other currencies Total Maturity analysis –1,163 –1,531 SEK M 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 Total Change in loss allowance for trade receivables SEK M Opening balance Acquisitions and divestments of subsidiaries Receivables written off Reversal of unused amounts Provision for bad debts Exchange rate differences Closing balance 2020 461 – – 131 592 2020 3,057 2,164 4,790 68 Group 2019 3,102 2,402 5,701 71 11,276 10,079 The Group has tax loss carryforwards and other tax credits of SEK 4,545 M (3,375) for which deferred tax assets have not been recognized, as it is uncertain whether they can be offset against taxable income in future taxation. NOTE 20 Other financial assets Group Parent company SEK M Investments in associates Other shares and interests Non-current interest-bearing receivables Other non-current receivables Total 2019 2020 – 6 45 52 104 – 6 159 47 212 2019 1,621 – – 153 1,774 NOTE 21 Inventories SEK M Materials and supplies Work in progress Finished goods Advances paid Total Impairment of inventories during the year amounted to SEK 474 M (487). 82 Group 2019 16,598 –898 15,701 2020 14,990 –1,325 13,665 Group 2019 5,376 3,521 1,388 848 643 432 376 509 2020 4,496 3,457 1,184 766 613 430 338 274 2,608 2,107 15,701 13,665 Group 2019 2020 11,201 10,475 3,554 1,206 637 5,397 2,908 922 685 4,515 –57 –272 –120 –146 –575 –898 15,701 –155 –226 –671 –1,325 13,665 Group 2019 1,178 26 –477 –125 257 39 898 2020 898 123 –174 –49 646 –119 1,325 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, statutory 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. ASSA ABLOY | ANNUAL REPORT 2020 Notes NOTE 24 Share capital, number of shares and dividend per share Number of shares, thousands Series A shares Series B shares Total Share capital, SEK K 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 age term of these is normally somewhat shorter than the term of the underlying 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 2020, shares accounted for 44 percent (45) and fixed income securities for 29 percent (32) of plan assets, while other assets accounted for 27 percent (23). The actual return on plan assets in 2020 was SEK 345 M (817). Number of votes, thousands 575,259 1,055,052 1,630,311 Amounts recognized in the income statement Opening balance at 1 January 2020 57,525 1,055,052 1,112,576 370,859 Pension costs, SEK M 2019 2020 692 186 31 910 824 86 2019 2,717 615 14 877 188 25 1,091 1,030 61 2020 2,925 586 3 Closing balance at 31 December 2020 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) during 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 Decem- ber 2020 amounted to 1,800,000. No shares have been repurchased during the year. 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 The dividend paid during the financial year totaled SEK 4,276 M (3,888), equivalent Pension provisions, SEK M to SEK 3.85 (3.50) per share. NOTE 25 Post-employment employee benefits Post-employment employee benefits include pensions and medical benefits. Pension plans are classified as either defined benefit plans or defined contribution plans. Pen- sion 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 limits within which asset allocation should be made. Each pension fund adjusts its local asset allocation according to the nature of the local pension obligation, 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 allocation 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- Provisions for defined benefit pension plans Provisions for post-employment medical benefit plans Provisions for defined contribution pension plans Total 3,346 3,514 Pensions with Alecta Commitments for old-age pensions and family pensions for salaried employees in Swe- den are secured in part through insurance with Alecta. According to UFR 10, this is a defined benefit plan that covers many employers. For the 2020 financial year, the com- pany has not had access to information 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 contributions that are contracted to Alecta total SEK 29 M (29), of which SEK 13 M (13) relates to the Parent company. Pension contributions are expected to remain largely unchanged in 2021. Alecta’s surplus can be distributed to policyholders and/or the insured. As at 30 Sep- tember 2020, Alecta’s surplus expressed as the collective consolidation level amounted preliminarily to 144 percent (148 percent as at 31 December 2019). The collective con- solidation level consists of the market value of Alecta’s assets as a percentage of its insurance commitments calculated according to Alecta’s actuarial calculation assump- tions, 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 United Kingdom Germany US 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 Key actuarial assumptions 2019 3,246 2020 3,206 –2,983 –2,796 263 410 – – 263 – 263 – – 410 – 410 2019 2020 109 –23 86 780 – 866 – 866 99 –21 78 779 – 857 – 857 2019 2,224 2020 2,095 2019 1,817 2020 2,055 –1,972 –1,842 –1,206 –1,376 252 – 610 862 – 862 254 – 582 836 – 836 611 724 5 679 726 3 1,341 1,408 14 3 2019 7,396 –6,184 1,213 1,504 615 3,332 14 2020 7,455 –6,035 1,420 1,506 586 3,511 3 Key actuarial assumptions (weighted average), % 2019 2020 2019 2020 2019 2020 United Kingdom Germany US Discount rate Expected annual salary increases Expected annual pension increases Expected annual medical benefit increases Expected annual inflation 2.0 n/a 1.9 n/a 2.1 1.4 n/a 1.9 n/a 2.2 1.2 2.8 1.5 n/a 1.5 0.9 2.8 1.5 n/a 1.5 3.2 n/a n/a 5.9 3.0 2.5 n/a n/a 5.8 3.0 1,356 1,412 3,346 3,514 83 ANNUAL REPORT 2020 | ASSA ABLOYNotes Note 25 continued Movement in obligations 2020, SEK M Opening balance 1 January 2020 Acquisitions and divestments Recognized in the income statement: Current service cost Past service cost 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 2020 2019, SEK M Opening balance 1 January 2019 Recognized in the income statement: Current service cost Past service cost Gains and losses 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 Plan assets allocation Plan assets Publicly traded shares Government bonds Corporate bonds Inflation-linked bonds Property Cash and cash equivalents Alternative investments Insurance contracts and other assets Total 84 Post-employment medical benefits Defined benefit pension plans 615 – 6 – 19 25 – 53 – – 53 –81 –27 – – –27 –27 586 8,901 411 139 7 167 313 – 245 295 –54 486 –743 –257 – 32 –439 –407 8,960 Post-employment medical benefits Defined benefit pension plans 571 7,523 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 Plan assets –6,184 –271 – – –125 –125 –220 – – – –220 604 384 –178 –32 369 160 –6,035 Plan assets –5,227 – – – –161 –161 –655 – – – –655 –306 –961 –89 –22 277 166 –6,184 Total 3,332 140 145 7 61 213 –220 298 295 –54 319 –219 99 –178 – –96 –274 3,511 Total 2,868 129 8 –5 86 218 –655 234 797 –14 362 74 436 –89 0 –101 –189 3,332 Sensitivity analysis of defined benefit obligations and post-employment medical benefits The effect on defined benefit obligations and post-employment medi- cal benefits of a 1.0 percentage change in some actuarial assumptions, change in percent Discount rate Expected annual medical benefit increases +1.0% –15.2% 9.4% -1.0 % 16.2% –7.8% 2019 2,772 2020 2,630 829 946 205 427 36 50 666 892 176 325 55 50 919 6,184 1,242 6,035 ASSA ABLOY | ANNUAL REPORT 2020 Notes NOTE 26 Other provisions NOTE 29 Assets pledged against liabilities to credit institutions SEK M Real estate mortgages Other mortgages and collateral Total Group Parent company 2019 2020 2019 2020 35 88 123 – 137 137 – – – – – – NOTE 30 Contingent liabilities SEK M Guarantees on behalf of subsidiaries Other guarantees and contingent liabilities Total Group Parent company 2019 2020 – 123 123 – 139 139 2019 7,652 – 2020 9,190 – 7,652 9,190 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 mate- rial liabilities are expected as a result of these guarantees. Restruc- turing reserve 778 1,366 _ – –747 –105 –68 1,224 Restruc- turing reserve 1,190 312 – – –726 –29 31 778 SEK M Opening balance at 1 January 2020 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 2020 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 Balance sheet breakdown: Other non-current provisions Other current provisions Total Group Other 573 175 19 –138 –74 – –4 551 Group Other 445 400 4 –237 –38 – 0 Total 1,351 1,542 19 –138 –822 –105 –72 1,775 Total 1,635 711 4 –237 –764 –29 31 Group 2019 722 630 1,351 2020 616 1,159 1,775 The restructuring reserve at year-end relates mainly to the ongoing restructuring pro- gram launched during the year and the previous year. The restructuring reserve is expected to be used over the next two years. The non-current part of the reserve totaled SEK 193 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. Maturity profile – guarantees, SEK M <1 year >1 <2 years >2 <5 years >5 years 573 1,351 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 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 Change in working capital Group Inventories increase/decrease (–/+) 2019 618 159 2020 653 143 Trade receivables increase/decrease (–/+) Trade payables increase/decrease (+/–) Other working capital increase/decrease (–/+) 1,267 1,224 Change in working capital 128 883 710 110 781 970 Divestments of subsidiaries Purchase prices received, net 3,765 3,880 Cash and cash equivalents in divested subsidiaries Change in consolidated cash and cash equivalents due to divestments 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 2019 3,486 1,170 569 158 1,786 7,170 2020 3,407 1,236 565 126 2,353 7,687 2019 354 – – 93 55 2020 252 – – 83 90 502 425 Group 2019 61 22 22 18 2020 123 7 4 5 123 139 Group 2019 2020 –63 – 132 –147 59 –358 54 –324 572 –229 –443 248 148 84 – 84 –3 46 152 –257 40 –203 131 –95 687 1,331 –370 958 2,606 1,206 –37 1,170 ANNUAL REPORT 2020 | ASSA ABLOY 85 Notes NOTE 32 Reserves See below for an account of some acquisitions completed in 2020 and 2019. Hedging reserve Cash flow hedges Exchange rate difference SEK M Opening balance 1 January 2019 Other comprehensive income in associates Net investment hedges Exchange rate differences Tax attributable to reserves Closing balance 31 December 2019 Opening balance 1 January 2020 Other comprehensive income in associates Reclassified to profit or loss Net investment hedges Cash flow hedges Exchange rate differences Tax attributable to reserves Net investment hedges –243 – –5 – 1 –247 –247 – –5 –3 – – 1 Closing balance 31 December 2020 –255 5,339 86 – Total 5,096 86 –5 1,556 1,556 –6 –4 6,975 6,728 6,975 6,728 –70 –313 – – –70 –318 –3 0 –4,559 –4,559 16 16 –2,049 1,794 – – – – – – – – – – 0 – – 0 Of the item Net investment hedges, the entire amount relates to closed hedge relation- ships for which hedged objects remain. 2020 agta record On 20 August 2020 ASSA ABLOY, previously a 39% shareholder in the Swiss company agta record, announced that it had completed the indirect acquisition of the 54% share- holding in agta record from the shareholders of Agta Finance. agta record is a well- established manufacturer and service organization for entrance automation. It is head- quartered in Fehraltorf, Switzerland. ASSA ABLOY then launched a public offer for the acquisition of all remaining out- standing shares in agta record at a price of EUR 70.58 per share. As at 31 December 2020 ASSA ABLOY owns 99.7% of agta record. Agta record was fully consolidated into ASSA ABLOY on 31 August 2020. Intangible assets in the form of technology, brands and customer relationships have been dis- closed in the purchase price allocation. Residual goodwill mainly relates to synergies and other intangible assets that do not meet the criteria for separate reporting. AM Group On 28 February 2020 ASSA ABLOY acquired 100 percent of the share capital in AM Group, an Australian industrial door company within entrance automation. The acquisition of AM Group complements the product offering and geographic cov- erage in Australia. AM Group has its headquarters in Sydney, Australia Intangible assets in the form of technology, brands and customer relationships have been disclosed in the purchase price allocation. Residual goodwill mainly relates to syn- ergies and other intangible assets that do not meet the criteria for separate reporting. 2019 2020 whereof agta record Other acquisitions Other noteworthy acquisitions during the year include Biosite (UK) and Access-IS (UK). Please see the Report of the Board of Directors for further information on these acquisi- tions. Cash paid for acquisitions during the year 3,564 8,058 6,054 NOTE 33 Business combinations SEK M Purchase prices Holdbacks and deferred considerations for acquisitions during the year Fair value previously owned shares in associates 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 255 –7 318 3,752 5 45 3,752 – 3,813 12,134 9,850 3,281 2,691 1,296 356 61 95 – 208 681 120 –278 – –225 664 265 132 4 646 1,062 2,239 –706 –189 –462 –1,186 –1,223 1,128 2,685 3,564 –120 459 3,903 1,078 117 86 5,713 6,421 8,058 –2,239 418 6,238 2,091 175 138 477 131 119 2 472 895 2,149 –557 –189 –136 –918 5,135 4,715 6,054 –2,149 – 3,905 1,346 145 117 The table above includes fair value adjustments of acquired net assets from acquisitions made in previous years. The only acquisition conducted in 2020 that is significant in terms of size for which separate acquisition details need to be provided is agta record, which is presented separately in the table above. The figures for agta record are also included in the total column for 2020. Purchase price allocations have been prepared for all acquisitions in 2020. The net sales of acquired units for 2020 totaled SEK 4,801 M (2,509) and net income amounted to SEK 453 M (230). Acquisition-related costs for 2020 totaled SEK 233 M (169) and have been reported as other operating expenses in the income statement. 86 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 headquartered 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 relationships have been disclosed in the purchase price allocation. Residual goodwill mainly relates to syn- ergies and other intangible assets that do not meet the criteria for separate reporting. Placard On 27 September 2019 ASSA ABLOY acquired 100 percent of the share capital in Plac- ard, Australia’s largest secure card manufacturer. The acquisition of Placard expands the Group’s offering of secure identities, while offering customers a broad range of secure card and digital ID solutions. Placard is head- quartered in Melbourne, Australia. Intangible assets in the form of brands and customer relationships have been dis- closed 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 solutions business from De La Rue. The acquisition strengthens ASSA ABLOY’s market position through an expanded offer- ing within digital citizen ID solutions. The operation is headquartered in Basingstoke, UK. On the reporting date the acquisition analysis is preliminary with respect to valua- tion 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 informa- tion about this acquisition. ASSA ABLOY | ANNUAL REPORT 2020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 Group Parent company 2019 21,109 5,892 824 2020 21,462 5,708 1,029 27,001 27,170 2019 2020 295 193 52 488 295 158 51 454 Remuneration and other benefits of the Executive Team in 2020, SEK thousands Name Fixed salary Variable salary Stock- related benefits Other benefits Pension costs Nico Delvaux, President and CEO 18,389 1,350 8,482 152 6,446 Other members of the Executive Team (9 positions) Total remuneration and benefits 41,030 59,420 5,702 7,052 8,729 17,211 2,298 2,450 9,997 16,444 Total remuneration and other benefits of the Executive Team amounted to SEK 122.8 M in 2019. Fees to Board members in 2020 (including committee work), SEK thousand Name and post Lars Renström, Chairman Carl Douglas, Vice Chairman Eva Karlsson, Board member Birgitta Klasén, Board member Lena Olving, Board member Sofia Schörling Högberg, Board member Jan Svensson, Board member Joakim Weidemanis, Board member Employee representatives (4) Total Board of Directors Remu- neration Committee Audit Committee 2,350 150 900 685 685 685 685 685 685 – 7,360 – – – – – 75 – – 225 Total 2,500 900 685 885 685 885 1,035 685 – – – – 200 – 200 275 – – 675 8,260 Total fees to Board members amounted to SEK 7.6 M in 2019. 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 2020 totaled SEK 49 M (64), excluding pension costs and social secu- rity costs. Pension costs amounted to SEK 10 M (10). Pension obligations for several sen- ior executives are secured through pledged endowment insurances. Guidelines for remuneration to senior executives Scope The Annual General Meeting 2020 adopted 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 remu- neration 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 resi- dent outside Sweden or that is not a Swedish citizen, may be duly adjusted for compli- ance 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 remuneration and other employment conditions shall be offered on market conditions and be competitive, tak- ing 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. Pre- requisites are thereby established for successful implementation of the Group’s busi- ness strategy, which on overall level is to lead the trend towards the world’s most inno- vative 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. Notes ASSA ABLOY has on-going share-based long-term incentive programs in place that have been resolved by the General Meeting and which are therefore excluded from these guidelines. Future share-based long-term incentive programs 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 contrib- ute to ASSA ABLOY providing a total remuneration that is on market conditions and com- petitive, 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’ remu- neration is tied to ASSA ABLOY’s future earnings and value growth. At present the perfor- mance 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 Executive 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 remuneration shall consist of fixed base salary, variable cash remuneration, pension benefits and other benefits (which are spec- ified 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 predetermined and measurable targets, which are further described below, and may amount to not more than 75 per- cent of the yearly base salary. The members of the Executive Team shall be covered by defined contribution pen- sion plans, for which pension premiums 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 occupa- tional healthcare, should be payable 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 allowance 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 predetermined and measurable finan- cial 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 tar- gets individually adjusted on the basis of responsibility and function. These targets shall be designed so as to contribute to ASSA ABLOY’s business strategy and long-term inter- ests, including its sustainability, by for example being linked to the business strategy or promote the senior executive’s long-term development within ASSA ABLOY. The Remuneration Committee shall for the Board of Directors prepare, monitor and eval- uate 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, establish 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 bene- fits plus severance pay amounting to a maximum of an additional 12 months’ base sal- ary. 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 compensated 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. 87 ANNUAL REPORT 2020 | ASSA ABLOYNotes Note 34 continued Remuneration and employment conditions for employees In the preparation of the Board of Directors’ proposal for these remuneration guide- lines, remuneration and employment conditions for employees of ASSA ABLOY have been taken into account by including information on the employees’ total remunera- tion, 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 eval- uating 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’ deci- sion to propose guidelines for remuneration to the Executive Team. The Board of Direc- tors shall prepare a proposal for new guidelines at least every fourth year and submit it to the Annual General Meeting. The guidelines 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 remu- neration structures and remuneration levels in ASSA ABLOY. The members of the Remu- neration 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 neces- sary to serve ASSA ABLOY’s long-term interests, including its sustainability, or to ensure ASSA ABLOY’s financial viability. 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. each performance-based share award linked to the relevant year entitles the holder to one Series B share at the end of the three-year vesting period, provided that the other conditions are met. The performance-based condition was 60 percent fulfilled for LTI 2018. Fulfilment of the performance-based condition for LTI 2019 and LTI 2020, respectively, is intended to be presented in the Annual Report for the financial years 2021 and 2022. Outstanding performance-based share awards for LTI 2020 total 594,625. The total number of outstanding performance-based share awards for LTI 2018, LTI 2019 and LTI 2020 amounted to 1,409,499 on the reporting date of 31 December 2020. 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 also adjusted for performance-based share awards not expected to be realized at the end of the vesting period of the respective program. The company further assesses the probability of the performance targets being met when calculating the compensation expense. The fair value of ASSA ABLOY’s Series B share on the allotment date for LTI 2020, 28 May 2020, was SEK 196.25. The fair value of ASSA ABLOY’s Series B share on the allot- ment 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 total cost of the Group’s long-term incentive programs (LTI 2017–LTI 2020) excluding social security costs amounted to SEK 49 M (49) in 2020. In April 2020 vesting of remaining parts of LTI 2017 took place equivalent to 126,551 shares (108,193) at a total market value at the time of vesting of SEK 22 M (21). The payment referred to above for the transferred shares in LTI 2017 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. Transitional provisions applicable for the Annual General Meeting 2020 The total expensed remuneration of the Executive Team, including previous commit- ments not yet due for payment is reported in the Annual Report 2019 in Note 34. Average number of employees per country, broken down by gender Group 2019 2020 Long-term incentive programs At the Annual General Meeting 2010, 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 qualified employees for the Group, to contribute to provide a total remuneration that is on market condi- tions and competitive and align the interests of the shareholders with the interests of the employees concerned. At the 2011 to 2020 Annual General Meetings, it was decided to implement further long-term incentive programs for senior executives and other key employees in the Group. The incentive programs were named LTI 2011 to LTI 2020. LTI 2011 to LTI 2017 were based on similar terms to LTI 2010. LTI 2018 to LTI 2020 is based on similar princi- ples as the earlier program, 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 2018, LTI 2019 and LTI 2020, 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 programs (LTI 2018–LTI 2020), employees have acquired a total of 369,906 Series B shares in ASSA ABLOY AB, of which 141,791 Series B shares were acquired in 2020 within the framework of LTI 2020. Each performance-based share award for LTI 2018, LTI 2019 and LTI 2020 entitles the holder to receive one Series B share in the company free of charge three years after allot- ment, provided that the holder, with certain exceptions, at the time of the release of the interim report for the first quarter 2021 (LTI 2018), first quarter 2022 (LTI 2019) and first quarter 2023 (LTI 2020) still is employed by the Group and has maintained the shares acquired within the framework of the respective program. In addition to these conditions, the number of performance-based share awards that entitles the holder to Series B shares in the company depends on the annual development of ASSA ABLOY’s earnings per share based on the target levels, as defined the Board of Directors, during the measurement period 1 January 2018 – 31 December 2020 (LTI 2018), the measure- ment period 1 January 2019 – 31 December 2021 (LTI 2019) and the measurement period 1 January 2020 – 31 December 2022 (LTI 2020), 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 measurement 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 target level in the interval 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 target level in the interval is achieved, US China Sweden United Kingdom France Mexico Germany Brazil India Australia Poland Finland Netherlands Czech Republic Canada Malaysia Romania Belgium Norway Switzerland South Korea South Africa Spain Denmark Italy New Zealand United Arab Emirates Hungary Chile Ireland Israel Austria Others Total 88 Total 10,914 8,731 2,344 2,034 1,917 1,740 1,461 1,465 1,690 953 1,269 1,208 1,054 1,204 822 814 762 729 664 609 703 716 580 559 435 356 373 311 271 191 253 201 of which women of which men 3,012 3,565 613 672 585 527 450 450 142 249 349 338 189 389 250 425 322 152 130 164 212 302 150 113 111 105 36 71 80 56 81 33 7,902 5,166 1,731 1,362 1,333 1,213 1,011 1,015 1,547 704 920 870 865 816 573 389 440 577 534 446 491 414 430 446 324 251 337 241 191 135 172 168 Total 11,112 7,625 2,386 2,139 2,034 1,765 1,556 1,550 1,491 1,250 1,232 1,194 1,151 1,081 820 793 744 711 646 640 634 620 573 544 418 355 347 297 245 228 217 200 of which women of which men 3,047 3,412 632 536 592 539 459 465 133 322 340 322 210 381 255 399 295 143 122 169 176 253 153 117 118 100 37 57 68 81 68 29 8,065 4,213 1,754 1,603 1,442 1,227 1,097 1,084 1,357 929 891 872 941 701 565 395 449 568 524 470 458 367 420 427 301 254 310 240 177 147 149 171 1,462 386 1,075 1,873 688 1,185 48,992 14,785 34,207 48,471 14,718 33,753 ASSA ABLOY | ANNUAL REPORT 2020Notes Parent company 2019 2020 of which women of which men 71 71 198 198 Total 269 269 of which women of which men 85 85 196 196 Total 281 281 Sweden Total Gender distribution of Board of Directors and Executive Team stakeholders. Maintaining an optimal capital structure enables the Group to keep capi- tal costs at a low level. The Group can adjust the capital structure based on the require- ments that arise by varying the dividend paid to shareholders, returning capital to share- holders, 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 market values of derivatives, plus pension provisions and lease obligations, less cash and cash equiva- lents, and other interest-bearing investments including positive market values of deriv- atives. The table ‘Net debt and equity’ shows the position as at 31 December. 2019 2020 of which women of which men Total of which women of which men Total Net debt and equity Board of Directors1 Executive Team – of which Parent company’s Executive Team Total 7 9 4 16 1 Excluding employee representatives. 4 1 1 5 3 8 3 11 8 10 3 18 4 1 1 5 4 9 2 13 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 2019 –45 –257 –442 3,346 3,739 2020 –159 –472 –2,756 3,514 3,562 Other non-current interest-bearing liabilities 21,100 22,381 NOTE 35 Financial risk management and financial instruments Current interest-bearing liabilities incl. negative market values of derivatives 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. Total Equity Net debt/equity ratio 5,610 3,685 33,050 59,154 0.56 29,755 58,879 0.51 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 management of financial risks and financial activities. ASSA ABLOY’s financial activities are coordinated centrally and the majority of finan- cial 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 economies 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 Rating Another important variable in the assessment of the Group’s capital structure 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. Standard & Poor’s revised the outlook for the long-term credit rating to nega- tive in May. The reason for the change was the uncertainty about the effects the Covid- 19 pandemic would have for ASSA ABLOY’s financial development. Agency Standard & Poor’s Moody’s Short-term Outlook Long-term Outlook A2 P2 Stable Stable Negative A – n/a Maturity profile – financial instruments1 SEK M2 Long-term bank loans Long-term capital market loans Short-term bank 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 31 December 2019 31 December 2020 <1 year >1 <2 years >2 <5 years >5 years <1 year >1 <2 years >2 <5 years >5 years –1,444 –1,567 –1,507 –9,357 –329 –8,575 –1,368 –1,462 –1,179 –1,089 –2,417 –1,160 –9,101 –51 –146 –136 –13,960 –20 –55 –3,062 –11,010 –9,040 –17,969 –3,526 –10,315 106 66 –451 190 –32 3,174 165 14,049 44 60 –157 166 –6 –3,257 –6,582 –33 –9,871 155 98 –961 –1,336 –4,302 –12,188 –4,302 –12,525 –24,713 –463 –9,338 –2,401 –11,739 –781 13,665 –7,028 –1,145 3,966 12,058 16,024 –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 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. –874 –1,259 –408 –4,453 –11,415 –10,027 –4,453 –12,058 –23,472 –10,027 89 ANNUAL REPORT 2020 | ASSA ABLOYNotes Note 35 continued Financing risk and maturity profile Financing risk is defined as the risk of being unable to meet payment obligations 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 availa- ble loan facilities, 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. 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 important component of liquidity plan- ning is the Group’s Multi-Currency Revolving Credit Facility totaling EUR 1,200 M. The maturity for EUR 1,116 M was extended in 2020 and is now due in April 2025. A smaller portion, EUR 84 M will still mature in April 2024. This credit facility was wholly unutilized at year-end. 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 therefore not found in the balance sheet. Cash and cash equivalents and other interest-bearing receivables Current interest-bearing investments totaled SEK 46 M (55) at year-end. In addition, ASSA ABLOY has long-term interest-bearing receivables of SEK 159 M (45) and financial derivatives with a positive market value of SEK 426 M (202) 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 4 days (18) at year-end 2020. 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 Group Parent company 2019 418 24 442 55 45 202 745 2020 2,756 0 2,756 46 159 426 3,388 2019 2020 0 – 0 – – – 0 0 – 0 – – – 0 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 Agreements) may be used to man- age interest rate risk. These interest-bearing assets are mostly short-term. Maturity for the investments has risen during the year. The fixed interest term for such short-term investments was 164 days (144) at year-end 2020. A downward change in the yield curve of one percentage point would reduce the Group’s interest income by around SEK 0 M (1) and consolidated equity by SEK 0 M (0). Interest-bearing liabilities The Group’s long-term loan financing mainly consists of a GMTN Program of SEK 16,189 M (17,886), of which SEK 15,047 M (15,814) is long-term, Private Placement Program in the US totaling USD 225 M, of which USD 225M (225) is long-term, and loans from financial institutions such as the European Investment Bank (EIB) of EUR 18 M (37) and USD 366 M (120), and loans from the Nordic Investment Bank of EUR 190 M (55). Dur- ing the year, three new issues were made under the GMTN program for a total amount of SEK 1,570 M. Other changes in long-term loans are mainly due to some of the origi- nally long-term loans now having less than 1 year to maturity. The size of the loans decreased because of currency fluctuations, in particular regarding the USD. A total of SEK 5,806 M was raised in new long-term loans, while SEK 3,252 M in originally long- term loans matured during the year. The Group’s short-term loan financing mainly consists of two Commercial Paper Pro- grams 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 (0). In addition, substantial credit facilities are available, mainly in the form of a Multi-Currency Revolving Credit Facility of EUR 1,200 M (1,200). At year-end the aver- age time to maturity for the Group’s interest-bearing liabilities, excluding the pension provision and lease obligations, was 53 months (51). Some of the Group’s main financing agreements contain a customary Change of Con- trol 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. 90 ASSA ABLOY | ANNUAL REPORT 2020Note 35 continued External financing/net debt Credit lines/facilities US Private Placement Program US Private Placement Program Multi-Currency RCF Multi-Currency RCF Bank loan EIB Bank loan EIB Bank loan NIB Bank loan NIB Global MTN Program Other long-term loans Total long-term loans/facilities Global MTN Program Global CP Program Swedish CP Program Other bank loans Overdraft facility Total short-term loans/facilities Total loans/facilities Cash and cash equivalents Current and Non-current interest-bearing investments Derivative financial instruments Pension provisions Lease liabilities Net debt Notes Amount, SEK M Maturity Carrying amount, SEK M Currency Amount 2019 Amount 2020 Of which Parent company, SEK M Aug 2022 Aug 2024 Apr 2024 Apr 2024 Apr 20242 Apr 20232 Jun 2026 Jun 2028 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 Jun 2025 Dec 2025 Mar 2026 Nov 2026 Feb 2027 Feb 2027 Jun 2027 Sep 2027 Oct 2027 May 2029 Jun 2029 Aug 2029 Oct 2029 Oct 2029 Dec 2029 Mar 2030 Apr 2030 Feb 2031 Aug 2034 1,238 614 844 11,214 702 2,154 678 678 23,978 1,124 43,225 1,142 8,190 5,000 1,938 3,221 19,491 62,716 USD USD EUR EUR USD USD EUR EUR USD EUR USD EUR USD SEK EUR EUR USD USD USD EUR SEK USD USD EUR USD EUR EUR USD EUR USD USD EUR CHF EUR EUR NOK EUR NOK EUR USD EUR EUR EUR USD EUR EUR EUR EUR SEK SEK 150 75 – 1,200 103 – – – 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 – 100 150 75 84 1,116 86 263 68 68 20 50 10 10 5 500 15 20 25 100 100 30 550 20 30 100 20 50 30 100 50 30 50 20 50 30 50 300 50 200 15 10 10 28 26 100 30 70 10 100 1,215 1,142 – – – – 1,238 614 – – 702 2,154 678 678 164 502 82 100 41 500 151 201 2201 8291 819 301 550 164 246 1,002 164 502 3341 819 501 246 4441 201 4681 299 502 2931 499 2021 149 82 100 3121 259 8571 300 698 100 991 1,124 22,381 1,142 – – 1,938 433 3,514 25,895 –2,756 –205 –255 3,514 3,562 29,755 164 502 82 100 41 500 151 201 818 819 301 550 164 246 1,002 164 502 301 819 501 246 410 201 463 299 502 286 499 191 149 82 100 279 259 809 300 698 100 991 886 15,677 1,142 452 1,594 17,271 91 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. ANNUAL REPORT 2020 | ASSA ABLOYNotes Note 35 continued Change in loans SEK M Long-term loans Short-term loans Total Opening balance 1 January 2020 21,100 5,460 26,560 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 Divestments of subsidiaries Reclassifications Unrealized exchange rate differences Other changes in non-cash items Total Closing balance 31 December 2020 5,806 – – 5,806 182 – –3,181 –1,631 105 –4,525 22,381 – –3,252 –1,522 –4,774 43 –66 3,181 –319 –11 2,828 3,514 5,806 –3,252 –1,522 1,032 225 –66 – –1,950 94 –1,697 25,895 SEK M Long-term loans Short-term loans Total Opening balance 1 January 2019 19,398 7,594 26,992 Currency composition The currency composition of ASSA ABLOY’s borrowing depends on the currency com- position 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 SEK M USD EUR GBP CNY AUD NOK CZK PLN KRW CHF SEK Other Total 31 December 2019 31 December 2020 Net debt excl. derivatives Net debt incl. derivatives Net debt excl. derivatives Net debt incl. derivatives 11,843 14,389 403 606 232 789 146 56 335 922 2,283 1,048 33,050 15,603 8,183 1,688 1,880 1,218 798 784 465 614 977 -1,263 2,103 33,050 11,201 13,525 493 577 64 612 124 62 234 748 1,477 636 12,311 11,783 2,120 1,868 1,340 656 628 554 505 -1,616 -1,968 1,574 29,755 29,755 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 –6,316 632 3,461 67 23 4,182 5,460 4,615 –2,903 –3,413 –1,701 796 – 461 13 1,269 26,560 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 different 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 indi- vidual business units. The main principle is to allow currency fluctuations to have an impact on the business as quickly as possible. As a result of this strategy, current cur- rency flows are not normally hedged. Transaction flows relating to major currencies (import + and export –) 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 32 months (34). An upward change in the yield curve of one percentage point would increase the Group’s interest expense by around SEK 89 M (102) and reduce consolidated equity by SEK 65 M (75). Currency, SEK M AUD CAD CHF CNY DKK EUR GBP RON SEK USD Currency exposure 2019 574 921 –552 2020 679 852 –772 –1,908 –1,653 236 1,954 615 –387 –2,236 1,375 192 1,523 589 –342 –2,223 1,120 Change in lease liabilities SEK M Opening balance Effects of the transition to IFRS 16 Acquisitions of subsidiaries Divestments of subsidiaries New and terminated leases Amortization of lease liabilities Exchange rate difference Closing balance Balance sheet breakdown: Non-current lease liabilities Current lease liabilities Total 92 Group 2019 91 3,711 61 – 917 –1,159 118 3,739 Group 2019 2,588 1,151 3,739 2020 3,739 – 265 –37 1,169 –1,275 –299 3,562 2020 2,477 1,085 3,562 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 currencies, with all other variables constant. Impact on income before tax of a 10 percent weakening of SEK Currency, SEK M 2019 2020 AUD CHF CNY DKK EUR GBP HKD KRW NOK USD 44 37 26 15 227 15 95 19 23 792 44 41 20 12 188 –16 66 –14 17 753 ASSA ABLOY | ANNUAL REPORT 2020Note 35 continued 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 legislation. When- ever 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 individ- ual currencies. Treasury uses currency derivatives and loans to achieve appropriate financing and to eliminate undesirable currency exposure. The table “Net debt by currency” on page 92 shows the use of forward exchange con- tracts 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 96 percent (97) of the Group’s sales were settled through cash pools in 2020. 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 deriva- tive contracts with banks that have a high credit rating. 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 94 shows the impact of this netting. Commercial credit risk The Group’s trade receivables are distributed across a large number of customers 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 mar- kets. 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 “Impairment of finan- cial assets” in the information on accounting principles. Commodity risk The Group is exposed to price risks relating to purchases of certain commodities (pri- marily 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 derivative instruments is lim- ited to reducing exposure to financial risks. The positive and negative fair values in the table ‘Outstanding derivative financial instruments’ on page 94 show the fair values of outstanding instruments 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 measurement cate- gories in accordance with IFRS 9. The table ‘Financial instruments’ on page 94 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 management. 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 regard- ing 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 subsidiaries. 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 are used to adjust the interest rate risk for variable interest rates. Interest rate risk related to the long-term loans are hedged through hedge account- ing using interest rate swaps. In cases where the loans are denominated in a currency other than SEK, currency risk is not included in the applied hedge accounting. For risks related to net investments in foreign subsidiaries, hedge accounting is only applied to Notes 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, settlement 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 rela- tionship 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 differences in the critical terms between the interest rate swap and the loan should arise. All critical terms matched dur- ing 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 mar- kets, where proposed changes include how LIBOR for USD and CHF are determined. Most likely, the methods will be reviewed for the majority of currencies, for which rea- son 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 Carrying amount of hedged item Nominal amount of hedging instrument 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 or loss Fair value 2019 Fair value 2020 Net in- vestments 2019 Net in- vestments 2020 3,532 3,532 3,041 3,041 373 373 2020 to 2029 2021 to 2029 2020 to 2029 1:1 –88 –34 38 –38 0 1:1 –187 –20 99 –99 0 1:1 –53 –194 –255 –5 5 0 –3 3 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 recognized against interest income or expenses, respectively. Changes in value of hedge instruments in net investment hedges are recognized in the hedging reserve in equity. 93 ANNUAL REPORT 2020 | ASSA ABLOYNotes Note 35 continued Disclosures of offsetting of financial assets and liabilities SEK M Financial assets Financial liabilities 2019 2020 Gross amount Amounts netted in the balance sheet Net amounts in the balance sheet Amount covered by netting agree- ment but not offset Net amount Gross amount Amounts netted in the balance sheet Net amounts in the balance sheet Amount covered by netting agree- ment but not offset 202 150 – – 202 150 46 46 157 104 426 172 – – 426 172 76 76 Net amount 350 96 Netted financial assets and financial liabilities only consist of derivative instruments. Outstanding derivative financial instruments at 31 December Instrument, SEK M Foreign exchange forwards, funding Interest rate swaps1, fair value hedges Interest rate swaps1, cash flow hedges Total 31 December 2019 31 December 2020 Positive fair value2 Negative fair value2 Nominal value Positive fair value2 Negative fair value2 Nominal value 108 94 – 202 –143 –6 – –150 10,375 3,532 – 13,907 240 187 – 426 –172 – 0 7,923 2,609 432 –172 10,963 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. Financial instruments: carrying amounts and fair values by measurement category SEK M Financial assets 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 2019 2020 Carrying amount Fair value Carrying amount Fair value 15,701 15,701 153 442 6 94 108 153 442 6 94 108 13,665 252 2,756 6 187 240 13,665 252 2,756 6 187 240 16,504 16,504 17,106 17,106 7,908 3,739 2,933 18,167 688 4,772 7,908 3,739 2,933 18,422 688 4,772 1,366 1,366 6 143 39,722 6 143 39,977 7,028 3,562 2,781 19,600 – 3,514 944 0 171 7,028 3,562 2,781 20,157 – 3,515 944 0 171 37,600 38,158 The fair value of long-term borrowing is based on observable data by discounting cash flows to market rate, which is deemed to correspond with level 2 according to the fair value hierarchy. 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 2019 2020 Carrying amounts Quoted prices (level 1) Observable data (level 2) Non-observable data (level 3) Carrying amounts Quoted prices (level 1) Observable data (level 2) Non-observable data (level 3) 202 150 1,366 – – – 202 150 – – – 1,366 426 172 944 – – – 426 172 – – – 944 Measurement at fair value is classified hierarchically in three different levels based on input data used in measurement of the instruments. 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. Belongs to level 3 in the hierarchy. For derivatives, the present value of future cash flows is calculated based on observa- ble yield curves and exchange rates on the balance sheet date. Belongs to level 2 in the hierarchy. 94 ASSA ABLOY | ANNUAL REPORT 2020 % 20 15 10 5 0 16 17 18 19 20 Operating margin (EBIT)1 % 20 15 10 5 0 16 17 18 19 20 Five years in summary Five years in summary Amounts in SEK M unless stated otherwise 2016 2017 2018 2019 2020 71,293 76,137 84,048 94,029 87,649 Return on capital employed1 Operating income (EBIT) excluding items affecting comparability 11,254 Sales and income Sales Organic growth, % Acquisitions and divestments, % 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 2 3 9,657 8,952 6,653 8,575 –4,063 –4,271 240 10,467 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 70,351 47,544 75,932 50,330 17,618 19,144 – 2,109 23,127 5 – 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 –8 4 11,916 12,458 11,676 9,172 13,658 –6,741 –4,558 2,359 14,560 88,634 58,344 22,134 3,513 637 29,755 9 Shareholders’ equity, excluding non-controlling interest 47,220 50,648 51,890 59,143 58,870 Data per share, SEK Earnings per share before and after dilution 5.99 7.77 2.48 9.00 8.26 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 comparability 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 7.09 42.51 3.00 7.77 45.60 3.30 8.09 46.71 3.50 9.22 53.25 3.85 169.10 170.40 158.15 219.00 7.54 53.00 3.901 202.50 Average number of employees 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 13.6 14.2 13.3 13.6 13.0 15.5 50.1 0.51 16.7 Number 50,000 40,000 30,000 20,000 10,000 0 16 17 18 19 20 1,112,576 1,112,576 1,112,576 1,112,576 1,112,576 1 Excluding items affecting comparability. Number of outstanding shares, thousands 1,110,776 1,110,776 1,110,776 1,110,776 1,110,776 Weighted average number of outstanding shares, before and after dilution, thousands Average number of employees 1 Dividend proposed by the Board of Directors. 1,110,776 1,110,776 1,110,776 1,110,776 1,110,776 46,928 47,426 48,353 48,992 48,471 95 ANNUAL REPORT 2020 | ASSA ABLOYFive years in summary Comments on five years in summary 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, innova- tion and sustainability continued at a high level during 2016. The technology shift toward an increased share of electrome- chanics 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, exclud- ing 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 electromechanical 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 provide substantial potential for robust profitable growth for some time to come. ASSA ABLOY also has a growing selection of products with environmental product declara- tions as part of its sustainable solutions initiative. Operating income for the year, excluding items affect- ing 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 electrome- chanical 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 re- mained strong. Earnings per share after full dilution, exclud- ing 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 commercial business segments. Growth in Europe and Asia was generally mixed. The trend for the emerging markets continued 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 re- mained strong. Earnings per share after full dilution, exclud- ing 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 ac- quisition of agta record, the largest acquisition since 2011. 2020 Demand was negatively impacted during the year by the Covid-19 pandemic. Organic growth was –8 percent for the Group, with a negative sales trend in all divisions. Cost-saving measures and staff cuts have largely offset the negative impact on earnings from lower sales. A new restructuring programme was also launched at the end of the year, with plans to close about ten plants and about thirty offices for a two-year period. The operating cash flow remained strong thanks to, among other things, cost reductions and reduced working capital. Demand was generally more stable in the more mature markets in Europe and the US compared with the trend in the emerging markets, especially in Asia, the Middle East and Africa. The focus on product development and innovation continued with undiminished strength. Major investments were made in R&D, where the full workforce was kept intact during the year. Operating income for the year, excluding items affecting comparability, decreased by 20 percent. Cash flow remained strong. Acquisition activity continued to be high during the year; for example, the acquisition of agta record was completed. 96 ASSA ABLOY | ANNUAL REPORT 2020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. Operating cash flow Cash flow from operating activities excluding restructuring payments and tax paid on income minus net capital ex- penditure 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. Depreciation and amortization Depreciation and amortization of intangible assets, prop- erty, plant and equipment and right-of-use assets. Net debt Interest-bearing liabilities less interest-bearing assets. See the table on net debt for detailed information. 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 aver- age capital employed, excluding restructuring reserves. 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. Shareholders’ equity per share after dilution Equity excluding non-controlling interests in relation to number of outstanding shares after any potential dilution. Definitions 97 ANNUAL REPORT 2020 | ASSA ABLOY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 10,112 M Net income for the year: SEK 5,552 M TOTAL: SEK 16,452 M The Board of Directors proposes that a dividend of SEK 3.90 per share, a total of SEK 4,332 M, be distributed to shareholders and that the remainder, SEK 12,120 M, be carried forward to the new financial year. The dividend amount is calculated on the number of outstanding shares as per 5 February 2021. In order to facilitate a more efficient cash management, the dividend is proposed to be paid in two equal installments, the first with the record date 30 April 2021 and the second with the record date 23 November 2021. If the proposal is adopted by the general meeting, the first installment is estimated to be paid on 5 May 2021 and the second installment on 26 No- vember 2021. 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 5 February 2021. The Board of Directors and the President and CEO declare that the consolidated accounts have been prepared in accord- ance with International Financial Reporting Standards, IFRS, as adopted by the EU and give a true and fair view of the Group’s financial position and results. The Parent company’s annual accounts have been prepared in accordance with generally ac- cepted 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, 5 February 2021 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 Joakim Weidemanis Board member Rune Hjälm Board member Employee representative Mats Persson Board member Employee representative Our audit report was issued on 5 February 2021 Ernst & Young AB Hamish Mabon Authorized Public Accountant Auditor in charge 98 ASSA ABLOY | ANNUAL REPORT 2020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) except for the corporate governance statement on pages 47–57 for the year 2020. The annual accounts and consolidated accounts of the com- pany are included on pages 40–94 and 98 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 the parent company as of 31 December 2020 and its financial perfor- mance 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 2020 and their financial performance and cash flow for the year then ended 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. This 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. For each matter below, our description of how our audit addressed the matter is provided in that context. S in accordance with International Financial Reporting Stand- ards (IFRS), as adopted by the EU, and the Annual Accounts Act. Our opinions do not cover the corporate governance statement on pages 47–57. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts. We therefore recommend that the general meeting of shareholders adopts the income statement 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 audit committee in accordance with the Audit Regulation (537/2014) Article 11. 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 con- trolled companies within the EU. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial state- ments section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the proce- dures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements. Auditor’s report 99 ANNUAL REPORT 2020 | ASSA ABLOYAuditor’s report 100 Goodwill and other intangibles with an indefinite useful life Description of the matter How this matter was addressed in the audit In our audit we have evaluated and reviewed key assumptions, the application of recognized valuation practices, discount rate (and other source data that the Company has applied. Our eval- uation has included comparing to external data sources, such as forecasts of inflation or assessment of future market growth and by evaluating the sensitivity in the Company’s valuation model. We have specifically focused on the sensitivity in the calculations and have made an independent evaluation of whether there is a risk that reasonably probable events would give rise to a situation where the value in use would be lower than the carrying amount. We have included valuation experts with appropriate skills in the team performing our review. Finally, we have evaluated disclosures provided in Note 14 (“Intangible assets”), specifically with regards to the disclosure of which of the stated assumptions that are most sensitive in calculating the value in use and the sensitivity analysis for those key assumptions. The value of goodwill and other intangibles with an indef- inite useful life as of 31 December 2020 amounted to 72.5 billion SEK. The Company performs an annual impairment test as well as whenever impairment indica- tors are identified. The recoverable amount for each cash-generating unit is determined as the value in use, which is calculated based on the discounted present value of future cash flows. Key assumptions in these cal- culations include forecast operating results, growth rates to extrapolate future cash flows and discount rates to be applied on future estimated cash flows. Applied discount rate (also referred to as “WACC- Weighted Average Cost of Capital”) is presented in note 14 (“Intangible assets”). An impairment test is a complex process and contains a high degree of judgment regarding future cash flows and other assumptions, not least because it is based on esti- mates of how the Company’s business will be affected by future market developments and by other economic events. Therefore, we have assessed valuation of goodwill and other intangibles assets with an indefinite useful life to be a key audit matter. Provisions – Restructuring programs Description How our audit addressed this key audit matter The restructuring program is described in the Report of Board of Directors in the annual report in note 26. Restructuring programs have been launched during the year and previous years and provision amounts to 1.4 bil- lion SEK as per December 31, 2020. A provision for restructuring measures is recognized when the Company has established a detailed plan and either implementa- tion has begun, or the main features of the measures have been communicated to the parties involved. In our audit we have focused on the recognition in the proper period and valuation of the restructuring provision as they require management judgment and estimation. Because of the significant amount and subjectivity of the estimates involved, we have assessed restructuring provi- sions to be a key audit matter. We have reviewed the Company’s process for identifying restructuring projects and the estimated costs for these pro- jects. Our audit procedures include evaluating if the restructur- ing programs in all material respects are in line with the accounting principles for provisions, i.e. IAS 37. We have evalu- ated if there is a present obligation. We have challenged man- agement’s assumptions related to the provisions with the aim of assessing the appropriateness of the provisions. Based on risk and materiality, we have compared the inputs in the calcu- lation to supporting documentation. This includes, among other things, the examination of minutes, agreements and communication with employees. We have evaluated manage- ment’s assessment of remaining cash flows by reviewing their quarterly project updates. Finally, we have evaluated the disclo- sures provided regarding restructuring activities in Note 26. 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 on pages 1–39, 95–97 and 104–109. The Board of Directors and the Managing Director are responsible for this other infor- mation. 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. 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. 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 regards. ASSA ABLOY | ANNUAL REPORT 2020Responsibilities of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsible for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accordance with the Annual Accounts Act and, concern- ing 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 has no realistic alternative but to do so. The Audit Committee shall, without prejudice to the Board of Director’s responsibilities and tasks in general, among other things oversee the company’s financial report- ing process. 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. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the annual accounts and consolidated accounts, whether due to fraud or error, design and perform audit proce- dures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstate- ment resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, inten- tional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of the company’s internal con- trol relevant to our audit in order to design audit proce- dures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effective- ness of the company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors and the Managing Director. • Conclude on the appropriateness of the Board of Direc- tors’ and the Managing Director’s use of the going con- cern basis of accounting in preparing the annual accounts and consolidated accounts. We also draw a conclusion, based on the audit evidence obtained, as to whether any material uncertainty exists related to events or conditions that may cast significant doubt on the company’s and the group’s ability to continue as a going concern. If we con- clude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related dis- closures in the annual accounts and consolidated accounts or, if such disclosures are inadequate, to modify our opinion about the annual accounts and consolidated accounts. Our conclusions are based on the audit evi- dence obtained up to the date of our auditor’s report. However, future events or conditions may cause a com- pany and a group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the annual accounts and consolidated accounts, including the disclosures, and whether the annual accounts and consolidated accounts represent the underlying transac- tions and events in a manner that achieves fair presenta- tion. • Obtain sufficient and appropriate audit evidence regard- ing the financial information of the entities or business activities within the group to express an opinion on the consolidated accounts. We are responsible for the direc- tion, supervision and performance of the group audit. We remain solely responsible for our opinions. We must inform the Board of Directors of, among other mat- ters, the planned scope and timing of the audit. We must also inform of significant audit findings during our audit, including any significant deficiencies in internal control that we identified. We must also provide the Board of Directors with a state- ment that we have complied with relevant ethical require- ments regarding independence, and to communicate with them all relationships and other matters that may reasona- bly be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board of Direc- tors, we determine those matters that were of most signifi- cance in the audit of the annual accounts and consolidated accounts, including the most important assessed risks for material misstatement, and are therefore the key audit mat- ters. We describe these matters in the auditor’s report unless law or regulation precludes disclosure about the matter. Auditor’s report 101 ANNUAL REPORT 2020 | ASSA ABLOY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 2020 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 pro- 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 posal in the statutory administration report and that the members of the Board of Directors and the Managing Direc- tor be discharged from liability for the financial year. A separate list of loans and collateral has been prepared in accordance with the provisions of the Companies Act. our ethical responsibilities in accordance with these require- ments. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. 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’s equity, consolidation requirements, liquidity and position in general. 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 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. Auditor’s report 102 ASSA ABLOY | ANNUAL REPORT 2020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 Com- panies Act. As part of an audit in accordance with generally accepted auditing standards in Sweden, we exercise professional judg- ment and maintain professional skepticism throughout the audit. The examination of the administration and the pro- posed appropriations of the company’s profit or loss is based primarily on the audit of the accounts. Additional audit pro- cedures performed are based on our professional judgment with starting point in risk and materiality. This means that we focus the examination on such actions, areas and relation- ships that are material for the operations and where devia- tions and violations would have particular importance for the company’s situation. We examine and test decisions undertaken, support for decisions, actions taken and other circumstances that are relevant to our opinion concerning discharge from liability. As a basis for our opinion on the Board of Directors’ proposed appropriations of the compa- ny’s profit or loss we examined the Board of Directors’ rea- soned statement and a selection of supporting evidence in order to be able to assess whether the proposal is in accord- ance with the Companies Act. The auditor’s examination of the corporate governance statement The Board of Directors is responsible for that the corporate governance statement on pages 47–57 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. The auditor’s opinion regarding the statutory sustainability report The Board of Directors is responsible for the statutory sus- tainability report and that it is prepared in accordance with the Annual Accounts Act. Our examination has been conducted in accordance with FAR’s auditing standard RevR 12 The auditor’s opinion regarding the statutory sustainability report. This means that our examination of the statutory sustainability report is dif- ferent and substantially less in scope than an audit con- ducted in accordance with International Standards on Audit- ing and generally accepted auditing standards in Sweden. We believe that the examination has provided us with suffi- cient basis for our opinion. A statutory sustainability report has been prepared. Ernst & Young AB with Hamish Mabon as auditor in charge, Box 7850, 103 99 Stockholm, was appointed auditor of ASSA ABLOY AB (publ) by the general meeting of the shareholders on the 29 April 2020. Stockholm 5 February 2021 Ernst & Young AB Hamish Mabon Authorized Public Accountant Auditor’s report 103 ANNUAL REPORT 2020 | ASSA ABLOYShareholder information ASSA ABLOY as an investment We are the global leader in access solutions. Since ASSA ABLOY was founded in 1994, we have created significant customer and shareholder value by continuously optimizing our produc- tion and developing new, innovative products that meet our customers’ needs and demands. Below are the main reasons why we create customer and shareholder value. +138% sales in 10 years 107% EPS in 10 years SEK 28 bn dividend in 10 years 4 Good industry to be in – We are subject to under- 1 lying strong megatrends supporting growth and demand for our products. These include increased demand for security and sustainable buildings, urbanization, digita- lization, changing codes and continuous changes in local market regulations (see page 7). Our customer offering is aligned with the fundamental growth trends and a usually steady aftermarket makes us less vulnerable to the cyclical demand affecting many other industries. 4 Consistent profitable growth – We have a long track 2 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 above 16%, when excluding the year of the pandemic. 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. The shift to electromechanical products also enables us to continue to grow in a profitable way long-term. 4 Leading market position – We have the largest 3 installed base and through our employees the deep- est know-how of locks and different access solutions in the world, which is continuously maintained and upgraded with new solutions. Two thirds of our revenue is generated from the aftermarket, which provides us with a stable customer and revenue base. established customer bases and brands. After realizing syner- gies, we grow the businesses and increase their profitability and margins. This strategy has proven successful and since 2011, we have acquired businesses with SEK 37 billion in sales that after integration have generated significant value. 4 Strong brand portfolio – There is considerable value 6 in our well-known and trusted brands that play an important role in creating loyalty and differentiation. We use a multi-brand strategy to combine global and local strengths. ASSA ABLOY is the Group brand and is increas- ingly 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 comple- ment 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. tured around local assembly lines close to the cus- 4 Operational efficiency – Our production is struc- 7 tomer, adapted according to the local standards, with some strategic components concentrated to larger plants. 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. revenue in R&D. Given the size of our business, this 4 Investing in innovation – We invest about 4% of our 4 gives us a strong competitive advantage, both short and long term. Our innovation capacity is based on our common platforms, the global reach but local competence of our in- novation organization, our more than 2,800 R&D employees and more than 9,000 patents. Products launched in the past three years account for 25% of our total sales. than 300 companies globally since ASSA ABLOY 4 Strong acquisition record – We have acquired more 5 was established in 1994. In many cases, the businesses are leading access providers in their respective market with well- our revenue is generated by products which have an 4 Active sustainability initiatives – About one third of 8 environmental product declaration (EPD), based on a life cycle assessment. As sustainability will be vital to economic and industrial development in the coming decades, in 2020 we committed to science-based targets. This will further improve our competitiveness and provides sound business production and product development incentives. 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 and to recycle once they reach their end of life. 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 Omsättning Rörelseresultat1 Sales Operating income1 1 Excluding items affecting comparability. SEK 10 8 6 4 2 0 16 17 18 19 20 SEK M 100,000 80,000 60,000 40,000 20,000 0 104 Utdelning per aktie Dividend per share Vinst per aktie efter Earnings per share after utspädning1 dilution1 16 17 18 19 20 1 Excluding items affecting comparability. % 30 25 20 15 10 5 0 16 17 18 19 20 ASSA ABLOY | ANNUAL REPORT 2020The ASSA ABLOY share Share price trend The beginning of 2020 started with a positive share price development with the share price peaking in February. In March, stock exchanges and ASSA ABLOY’s share price fell sharply following the outbreak of the Covid-19 pandemic. By 23 March, OMX Stockholm PI Index and ASSA ABLOY’s share price had decreased by 30 percent respective 27 percent. Thereafter, capital markets stabilized and for the full year OMX Stockholm PI Index increased 12.9 percent. ASSA ABLOY’s share price closed at SEK 202.5, a decrease of 7.5 percent for the full year. The highest closing price for ASSA ABLOY Series B during the year was SEK 246.5 recorded on 20 February 2020 and the lowest of SEK 159.35 was recorded on 23 March 2020. At year-end, market capitalization amounted to SEK 225,297 M (243,654), calculated on both Series A and Series B shares. Listing and trading ASSA ABLOY’s Series B share has been listed on Nasdaq Stockholm, Large Cap since 8 November 1994 under the code ASSA-B.ST. Turnover of the Series B share on Nasdaq Stockholm amounted to 623 million shares (468), equiva- lent to a turnover rate of 59 percent (55). The implementation of the EU’s Markets in Financial Instruments Directive (MiFID) in 2007 has changed the structure of equity trading in Europe and trading now takes place on both regulated markets and other trading plat- forms. Trading is now more fragmented with an important proportion of trading in shares in Swedish companies on markets other than Nasdaq Stockholm. In 2020, the ASSA ABLOY share was traded on numerous markets, with trading on Nasdaq Stockholm accounting for 30 percent of share turnover, compared with 65 percent in 2009. The total trade of the Series B share including other markets in 2020 was 2.070 (1.611) million shares, equivalent to a turnover rate of 196 percent (153). 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 and turnover 2011–20201 Dividend per share 2011–2020 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 11 12 13 14 15 16 17 18 19 20 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ASSA ABLOY B ASSA ABLOY B, total return OMX Stockholm PI No. of shares traded, thousands (incl. after hours) 2020 proposed dividend Share price and turnover 2020 SIX Return Index Source: Nasdaq, Fidessa and Bloomberg No. of shares traded, thousands Markets for the share1 No. of shares traded, millions SEK 270 250 230 210 190 170 150 300,000 250,000 200,000 150,000 100,000 50,000 0 2,500 2,000 1,500 1,000 500 0 16 17 18 19 20 J F M A M J J A S O N D ASSA ABLOY B OMX Stockholm PI No. of shares traded, thousands (incl. after hours) Source: Nasdaq, Fidessa and Bloomberg Cboe (APA, BXE, CXE) Stockholm London Turquoise Boat Others Source: Fidessa 105 ANNUAL REPORT 2020 | ASSA ABLOY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 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 3.85 1.8 41.8 2020 7.542 3.903 1.9 51.7 113.27 138.27 178.00 169.10 170.40 158.15 219.00 202.50 114.07 139.17 189.00 190.10 197.10 193.90 231.40 246.50 79.33 25.94 105.63 135.00 148.40 163.80 155.85 154.45 159.35 32.50 37.43 42.51 45.60 46.71 53.25 53.00 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 1,112.6 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, 2018-2020. 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 2020 was 43,734 (29,784) and the ten largest shareholders accounted for 34.9 percent (36.5) of the share capital and 55.5 percent (56.7) of the votes. Shareholders with more than 50,000 shares, a total of 433 shareholders, accounted for 97 percent (98) of the share capital and 98 percent (98) of the votes. Investors outside Sweden owned 66.8 percent (69.5) of the share capital and accounted for 45.6 percent (47.5) 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 2020. Shareholders Investment AB Latour Melker Schörling AB Capital Group BlackRock Fidelity Investments Alecta Pension Insurance Swedbank Robur Funds Vanguard Norges Bank Allianz Global Investors 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 48,366,240 34,785,666 32,847,109 32,445,000 27,600,834 26,549,043 23,222,727 22,233,744 725,072,010 57,525,969 1,055,050,365 105,495,729 33,958,232 48,366,240 34,785,666 32,847,109 32,445,000 27,600,834 26,549,043 23,222,727 22,233,744 9.5 3.1 4.4 3.1 2.9 2.9 2.5 2.4 2.1 2.0 725,072,010 1,112,576,334 65.1 100.0 29.4 10.9 3.0 2.1 2.0 2.0 1.7 1.6 1.4 1.4 44.5 100.0 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 Capital Group, 4.4% Legend Melker Schörling AB, 3.1% Legend BlackRock, 3.1% Legend Fidelity Investments, 2.9% Latour, 29.4% Legend Melker Schörling AB, 10.9% Legend Capital Group, 3.0% Legend BlackRock, 2.1% Legend Fidelity Investments, 2.0% Legend Alecta Pension Insurance, 2.9% Legend Swedbank Robur Funds, 2.5% Vanguard, 2.4% Norges Bank, 2.1% Allianz Global Investors, 2.0% Other shareholders, 65.1% Legend Alecta Pension Insurance, 2.0% Legend Swedbank Robur Funds, 1.7% Vanguard, 1.6% Norges Bank, 1.4% Allianz Global Investors, 1.4% Other shareholders, 44.5% 106 ASSA ABLOY | ANNUAL REPORT 2020Share capital and voting rights The share capital amounted to SEK 370,858,778 at year-end 2020, 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 Annual General Meeting 2020 autho- rized 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 2020. 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 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 proposes a dividend to sharehold- ers of SEK 3.90 per share (3.85) for the 2020 financial year. In order to facilitate a more efficient cash management, the dividend is proposed to be paid in two equal installments, the first with the record date 30 April 2021 and the second with the record date 23 November 2021. If the proposal is adopted by the Annual General Meeting, the first install- ment is estimated to be paid on 5 May 2021 and the second installment on 26 November 2021. The proposal is equivalent to a total dividend yield on the Series B share of 1.9 percent (1.8). In 2020 the total return on the ASSA ABLOY share, defined as market price move- ment plus reinvested dividends, was –5.7 percent, compared with the reinvested SIX Return Index in Stockholm, which was up 14.8 percent. Over the ten-year period 2011–2020, the total return on ASSA ABLOY’s Series B share was 284 percent, compared with the reinvested SIX Return Index in Stockholm which increased 193 percent. 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). Shareholder information 107 ANNUAL REPORT 2020 | ASSA ABLOYShareholder information Information for shareholders Annual General Meeting The ASSA ABLOY Annual General Meeting 2021 will be held on 28 April 2021. The notice to convene the Annual General Meeting will be made in the prescribed manner. Nomination Committee The Nomination Committee has the task of preparing, on behalf of the shareholders, proposals regarding the elec- tion 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, 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 2021 Annual General Meeting comprises Carl Douglas (Investment AB Latour), Mikael Ekdahl (Melker Schörling AB), Marianne Nilsson (Swedbank Robur funds), Liselott Ledin (Alecta) and Yvonne Sörberg (Handelsbanken Fonder). Carl Douglas is Chairman of the Nomination Committee. Dividend The Board of Directors proposes a dividend to shareholders of SEK 3.90 per share for the 2020 financial year. In order to facilitate a more efficient cash management, the dividend is proposed to be paid in two equal installments, the first with the record date 30 April 2021 and the second with the record date 23 November 2021. If the proposal is adopted by the Annual General Meeting, the first installment is esti- mated to be paid on 5 May 2021 and the second installment on 26 November 2021. 108 ASSA ABLOY | ANNUAL REPORT 2020Financial calendar and contact details Shareholder information Annual General Meeting and dividend Annual General Meeting 28 April 2021 Shares traded excluding right to dividend of SEK 1.95 Record day for dividend Payment of dividend Shares traded excluding right to dividend of SEK 1.95 Record day for dividend Payment of dividend 29 April 2021 30 April 2021 5 May 2021 22 November 2021 23 November 2021 26 November 2021 Financial reporting Interim Report January–March 2021 Half-year Report January–June 2021 Interim Report January–September 2021 Year-end Report 2021 28 April 2021 19 July 2021 27 October 2021 4 February 2022 Further information Hedvig Wennerholm Telephone +46 (0)8 506 485 51 hedvig.wennerholm@assaabloy.com Reports can be ordered from ASSA ABLOY AB • Website • Telephone • Email • Mail assaabloy.com +46 (0)8 506 485 00 info@assaabloy.com ASSA ABLOY AB Box 70340 SE-107 23 Stockholm Production: ASSA ABLOY in cooperation with Narva. Photo: Peter Hoelstad and ASSA ABLOY’s own photographic library, among others. Printing: Print Run, Stockholm, 2021. DIC S W AN EC O L A B E L R O N Printed matter 3041 0701 109 ANNUAL REPORT 2020 | ASSA ABLOY The cover of the annual report and some of the pictures in the report show the Royal College of Music in Stockholm. This college educates musicians and music teachers at the highest international level. Recently, the Royal College of Music moved into this new modern campus area that was custom-made for music education, and for creating, experiencing and researching music. About 1,300 students, together with more than 200 teach- ers, work in the building. As a center for music, concerts and events are a natural part of its operation with hundreds of guests. The different activities in the building create a demanding environment for security and access. To manage the access in a secure and convenient way a decision was made to install more than 300 ASSA ABLOY Pando readers and integrated WiFi-connected escutcheon DBL350, all controlled with ASSA ABLOY’s ARX access control system. ARX is an easy system to use and a secure way to control connected readers and locks. 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 

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