Treasury Activities

Credit Facilities

During 2003, the Company refinanced its revolving credit facility ("RCF"). The Company now has an $850 million RCF syndicated among 16 banks. The facility is subject to financial covenants requiring the Company to maintain a certain level of debt to earnings and a certain interest coverage ratio. The Company was in compliance with these covenants at December 31, 2003. These covenants do not impair the ability of Autoliv to make regular dividend payments or to meet other expected cash commitments. For a detailed discussion of the Company's credit facilities and borrowings outstanding, see Note 11 to the Consolidated Financial Statements included herein.

1) Total outstanding commercial paper programs ("CP") should not exceed total undrawn revolving credit facilities ("RCF") according to the Company's financial policy.
2) Debt Related Derivatives, (DRD), i.e. the fair market value adjustments associated with hedging instruments as adjustments to the carrying value of the underlying debt.

Shares and Share Buy-backs

In May 2000, the Board of Directors authorized a Share Repurchase Program for up to 10 million of the Company's shares. In April 2003, the program was expanded by an additional 10 million shares. Purchases can be made from time to time as market and business conditions warrant, in open market, negotiated or block transactions.
   During 2003, the Company repurchased 2,052,600 shares at a cost of $43 million. During 2002, the Company repurchased 1,554,600 shares at a cost of $30 million. During 2000, the Company repurchased 4,542,438 shares at a cost of $103 million. There were no repurchases during 2001. The Company had not purchased any shares since May 2003, but resumed purchases in late February 2004. At December 31, 2003, 11.9 million shares remained under authorizations for repurchases. Since the inception of the program, through the end of 2003, 8.1 million shares have been repurchased at an average cost of $21.66. At December 31, 2003, there were 94.9 million shares outstanding, net of treasury shares. At December 31, 2002, there were 96.3 million shares outstanding, net of treasury shares.

Financial risks and policies

The Company is exposed to financial risks through its international operations and debt-financed activities. This financial risk is caused by variations in the Company's cash flows resulting from changes in foreign exchange rates and interest rate levels, as well as from refinancing and credit risks.
  Below follows a description of the Company's financial risks and its overall policy to manage them. The Board of Directors monitors compliance under the financial policy on an on-going basis. Autoliv is, in all material respect, compliant with its financial policy at year-end.
  The Company defines the financial risks as currency risk, interest rate risk, refinancing risk and credit risk. In order to reduce these risks and to take advantage of economies of scale, the Company has a central treasury function supporting operations and management. The Treasury Department handles external financial transactions and functions as the Company's in-house bank for its subsidiaries.

Currency Risk: Transaction Exposure

Transaction exposure arises because the cost of a product originates in one currency and the product is sold in another.
  The Company's gross transaction exposure is $760 million annually. Part of the flow has counter-flows in the same currency pair, which reduces the net exposure to $720 million per annum.
  In the four largest net exposures Autoliv sells EUR against SEK for the equivalent of $117 million, USD against MXN for $99 million, USD against CAD for $90 million and EUR against GBP for the equivalent of $61 million. Together these account for more than half of the Company's net exposure.
  Hedging these flows postpones the impact of fluctuations but it does not reduce the impact. In addition, the exposure only relates to 14% of sales and is spread over 38 different currency pairs. Autoliv has therefore changed its policy and has discontinued to hedge these flows with the last contracts maturing at the end of March 2004.
  These hedges reduced pre-tax income by $15 million in 2003 and by $2 million in 2002.

Currency Risk: Translation Exposure in the Income Statement

Another effect of exchange rate fluctuations arises when the income statements of the non-U.S. subsidiaries are translated into U.S. dollars. The Company's policy is not to hedge this type of translation exposure.
  Outside the U.S., the Company's most significant currency is the Euro. The Company has estimated that a one percent change in the value of the U.S. dollar versus the Euro has approximately a $30 million annual impact on reported U.S. dollar sales and approximately a three million dollar impact on operating income.

Currency Risk: Translation Exposure in the Balance Sheet

A translation exposure also arises when the balance sheets of non-U.S. subsidiaries are translated into U.S. dollars. The general policy of the Company is to finance major subsidiaries in the country's local currency. Consequently, changes in currency rates relating to funding have a small impact on the Company's income.

Net borrowings

Given this interest rate profile, a 1% change in interest rates on the Company's floating rate debt would change net interest cost by approximately $3 million during the first year and by $4 million during the second year.

Interest Rate Risk

Interest rate risk is the risk that interest rate changes will affect the Company's borrowing costs.
  Autoliv's policy is that, a 1% interest increase in floating rates should not increase the annual net interest expense by more than $5 million in the following year and not more than $10 million in the second year.
  The fixed rate debt is achieved both by issuing fixed rate notes and through interest rate swaps. The table above shows the maturity and composition of the Company's net borrowings at year end.

Refinancing Risk

Refinancing risk or borrowing risk refers to the risk that it could become difficult to refinance outstanding debt.
  In order to protect against this risk, the Company has a syndicated revolving credit facility with a group of banks which backs its short-term commercial paper programs. The committed facility of $850 million has a $570 million long-term portion, which matures in March 2008, and a $280 million 364-day facility, which may - but is not guaranteed - to be renewed each March.
  The Company's policy is that total net debt shall be issued or covered by long-term facilities with an average maturity of at least three years with a target maturity of four years.
  At December 31, 2003, net debt was $785 million and total available long-term facilities were $1,100 million with an average life of 3.5 years.

Credit Risk

Credit risk is the risk of a counterparty being unable to fulfill an agreed obligation. In the Company's financial operations, this risk arises in connection with the investment of liquid assets and when entering into forward exchange agreements, swap contracts or other financial instruments.
  In order to reduce credit risk, deposits and financial instruments can only be entered into with a limited number of banks and in limited amounts, as approved by the Company's Board. The policy of the Company is to work with banks that have a high credit rating and that participate in the Company's financing.

Debt Limitation Policy

In order to manage the inherent risks and cyclicality in Autoliv's business, the Company maintains a relatively conservative gearing. At the same time, it is important to have a capital structure, which is optimal for the shareholders.
  Autoliv's policy is to always maintain a net debt that is significantly below 3 times the EBITDA, (Earnings before Interest, Taxes, Depreciation and Amortization) and an interest coverage ratio significantly above 2.75 times.
  At the end of 2003, these ratios were 1.2 and 10.2, respectively. The tables below reconcile these two non-GAAP measures to GAAP measures. The thresholds in the financial policy are set to coincide with the financial covenants in the Company's revolving credit facility.
  In addition, it is the objective of Autoliv to maintain its current long-term credit rating from Standard and Poor's of BBB+.

Financial covenants calculations

1) Interest expense net is interest expense less interest income.
2) Net dept is short- end long-term dept and debt-related derivatives (see Note 11) less cash and cash equivalents.