Husqvarna in Global leader in outdoor power products A NNUA L R EPOR T History rich in tradition

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1 A NNUA L R EPOR T Registered office Husqvarna AB (publ) Jönköping Mailing address SE Huskvarna Visiting address Drottninggatan 2 Telephone: Telefax: H USQVA R N A A N N UA L R EP O R T Head office Husqvarna AB (publ) Mailing address Box SE Stockholm Visiting address S:t Göransgatan 143 Telephone: Contents Global leader in outdoor power products Husqvarna in 2006 Husqvarna s strong points 1 Report by the President 8 The market 10 Group operations 13 Financial information 15 Pro forma financial information 16 Report by the Board of Directors 24 Notes 39 Corporate Governance Report Board of Directors 80 Group Management 82 Sustainable development 84 The Husqvarna share 87 Annual General Meeting 89 Listing in June Husqvarna was listed on the Stockholm Stock Exchange on 13 June The operation was previously part of the Electrolux Group, and was spun off following a decision by the Electrolux AGM in April Husqvarna thus became once again a listed company, after 30 years. Higher income and continued high profitability Despite lower demand for garden products, the Group s operating income for 2006 rose to SEK 3,121m (2,927). Operating margin rose to 10.6% (10.2). Complementary acquisitions Agreements for acquisitions signed during the second half of the year included Gardena of Germany, with annual sales of approximately SEK 3,800m, and the outdoor products operation of Komatsu Zenoah of Japan, with annual sales of approximately SEK 1,200m. The acquisitions strengthen the Group s strategic position and provide greater opportunities for growth. Reports in 2007 History rich in tradition Consolidated results 2006 February 23 Husqvarna has a long history that is rich in tradition. The first Husqvarna plant was established in 1689 as a weapons factory. In the course of the centuries, Husqvarna has produced a large range of different products, including sewing machines, bicycles, motorcycles and kitchen equipment. When Electrolux acquired Husqvarna in 1978 the outdoor product range comprised mainly chainsaws. In the 1980s operations expanded strongly through acquisitions. In subsequent years, consistent organic growth gradually gave Husqvarna leading positions in the global market. Annual Report Early April Interim report January March and Annual General Meeting April 19 Interim report April June Interim report July September July 24 October 19 Financial information from Husqvarna is available at The above reports are also available on request by telephone or by at ir@husqvarna.se

2 A NNUA L R EPOR T Registered office Husqvarna AB (publ) Jönköping Mailing address SE Huskvarna Visiting address Drottninggatan 2 Telephone: Telefax: H USQVA R N A A N N UA L R EP O R T Head office Husqvarna AB (publ) Mailing address Box SE Stockholm Visiting address S:t Göransgatan 143 Telephone: Contents Global leader in outdoor power products Husqvarna in 2006 Husqvarna s strong points 1 Report by the President 8 The market 10 Group operations 13 Financial information 15 Pro forma financial information 16 Report by the Board of Directors 24 Notes 39 Corporate Governance Report Board of Directors 80 Group Management 82 Sustainable development 84 The Husqvarna share 87 Annual General Meeting 89 Listing in June Husqvarna was listed on the Stockholm Stock Exchange on 13 June The operation was previously part of the Electrolux Group, and was spun off following a decision by the Electrolux AGM in April Husqvarna thus became once again a listed company, after 30 years. Higher income and continued high profitability Despite lower demand for garden products, the Group s operating income for 2006 rose to SEK 3,121m (2,927). Operating margin rose to 10.6% (10.2). Complementary acquisitions Agreements for acquisitions signed during the second half of the year included Gardena of Germany, with annual sales of approximately SEK 3,800m, and the outdoor products operation of Komatsu Zenoah of Japan, with annual sales of approximately SEK 1,200m. The acquisitions strengthen the Group s strategic position and provide greater opportunities for growth. Reports in 2007 History rich in tradition Consolidated results 2006 February 23 Husqvarna has a long history that is rich in tradition. The first Husqvarna plant was established in 1689 as a weapons factory. In the course of the centuries, Husqvarna has produced a large range of different products, including sewing machines, bicycles, motorcycles and kitchen equipment. When Electrolux acquired Husqvarna in 1978 the outdoor product range comprised mainly chainsaws. In the 1980s operations expanded strongly through acquisitions. In subsequent years, consistent organic growth gradually gave Husqvarna leading positions in the global market. Annual Report Early April Interim report January March and Annual General Meeting April 19 Interim report April June Interim report July September July 24 October 19 Financial information from Husqvarna is available at The above reports are also available on request by telephone or by at ir@husqvarna.se

3 HUSQVARNA ANNUAL REPORT 2006 MARKET POSITION 1 Global market leader Husqvarna is the world s largest producer of lawn mowers and chainsaws as well as portable petrol-powered garden equipment such as trimmers and leaf blowers. The Group is also a global leader in garden tractors. In addition, Husqvarna is the world leader in cutting equipment and diamond tools for the construction and stone industries. The above product categories account for more than 90% of Group sales. Product category Position on world market Chainsaws No. 1 Portable petrol-powered equipment such as trimmers and blowers No. 1 Lawn mowers No. 1 Garden tractors No. 1 2 Cutting equipment and diamond tools for the construction and stone industries No. 1 The Group has a total share of approximately 40% of the global market for professional chainsaws.

4 2 BRANDS HUSQVARNA ANNUAL REPORT 2006 Jonsered Jonsered is a leading brand for high-performance forestry and garden products, and complements Husqvarna in specific markets. Flymo Flymo is the market leader in innovative electric garden equipment for consumer markets in the UK and Scandinavia. Poulan Poulan is a leading brand for chainsaws and garden equipment for the consumer market in North America. Diamant Boart Diamant Boart is the world leading brand in diamond tools for the stone industry. Its newly developed wire for cutting granite enables higher cutting speed and greater productivity. The new garden tractors offer an improved driver environment as well as new features for greater comfort and enjoyment.

5 HUSQVARNA ANNUAL REPORT 2006 BRANDS 3 A strong brand Husqvarna has been a strong global brand for many years, primarily for chainsaws and other portable high-performance products for professional users. It stands for technological leadership and high quality. Husqvarna products are sold in the high-price segments. The brand s position has been built over the years through consistent investments in product development, marketing and service. In recent years, the range of products sold under the Husqvarna brand has been successfully expanded to include high-performance equipment for consumers. Over the past five years, these products have shown an average annual growth rate of approximately 20%. They are sold mainly through servicing dealers. In 2006 Husqvarna was launched as the global brand for all products for the construction industry. The Group continues to invest in making the brand even stronger in order to create favorable conditions for continued profitable growth. Complementary brands In specific markets the Husqvarna brand is complemented by Jonsered, which has a similar position. The Group has a number of other well-known brands, such as Flymo, which is known for innovative electric garden equipment for domestic consumers and is the market leader in the UK and Scandinavia. Poulan and Weed Eater are well-known consumer brands in the US. Diamant Boart is the world leader in diamond tools for the stone industry.

6 TECHNOLOGICAL 4 COMPETENCE HUSQVARNA ANNUAL REPORT 2006 High technological competence Husqvarna s competence in areas such as engine technology and development of engines for portable petrol-powered products has been decisive for achieving the Group s leading position in the global market. The Group is also a leader in developing products that meet increasingly strict criteria for reduced emissions. Husqvarna s patents and expertise in this and other areas represent a considerable competitive advantage. Efficient product development The share of new products in the product range has increased substantially in recent years. Large sales volumes and more efficient development have enabled this without increasing the cost of product development relative to sales. The Group continues to invest in strengthening and broadening the product range, with a special focus on increasing sales under the Husqvarna brand. Automower The Automower is the world s first automatic lawn mower, and cuts grass entirely on its own. It is quiet, efficient and generates no emissions. The most advanced model can mow an area of up to 3,000 m 2.

7 HUSQVARNA ANNUAL REPORT 2006 TECHNOLOGICAL COMPETENCE 5 Innovative chainsaw technology The new Husqvarna chainsaws featuring the patented X-TORQ engine combine high power with low weight, and enable reductions of up to 20% in fuel consumption and up to 60% in exhaust-gas emissions. New riders In addition to ergonomic design and the benefits of front-mounted cutting decks, the new Husqvarna riders are fitted with a unique, innovative rear-wheel steering. This provides superior maneuverability, and at full steering lock, the uncut circle is only about 20 cm in diameter. Better ergonomy, new design The new garden tractors feature improved ergonomy as well as a new design. Cutting height can be adjusted with an easily accessible lever, and the cutting deck is springmounted for easier adjustment. These tractors offer advanced engines and versatile cutting technology. A broad range of accessories enables year-round use of these tractors. New power cutters The latest generation of Husqvarna power cutters is based on the patented Dual-Charge technology, which cuts emissions by 70% and reduces fuel consumption. These units also feature improved ergonomy and considerably lower vibrations in the handles. The Automower is self-charging. When battery power drops to a predefined level, the mower automatically returns to the docking station.

8 6 GLOBAL DISTRIBUTION HUSQVARNA ANNUAL REPORT 2006 Global sales strength Husqvarna has a strong global distribution network. More than 20,000 servicing dealers world-wide sell Group products under the Husqvarna and Jonsered brands. Sales and support to these dealers are handled by the Group s own global sales organization, which has been developed over many years and is a substantial asset. Continuous reinforcement and expansion of the distribution network also helps to create favorable conditions for profitable growth. Since the 1980s, Husqvarna s US subsidiary has been the main supplier to Sears, the world s largest retailer of outdoor products. The Group also sells consumer products in the US through Lowe s, Wal-Mart and Home Depot. Husqvarna products are sold in more than 100 countries. Approximately 90% of sales are through the Group s own sales companies. More than 20,000 servicing dealers world-wide sell the Group s products under the Husqvarna and Jonsered brands.

9 HUSQVARNA ANNUAL REPORT 2006 GLOBAL DISTRIBUTION 7 Strong positions with leading retailers Husqvarna has also established strong positions with leading retailers in both Europe and the US for massmarket consumer products. Investments in product renewals together with greater efficiency in the supply chain have enabled the Group to steadily strengthen these positions. Since the 1980s, Husqvarna has been the main supplier to Sears, the American retail chain, which is the world s largest retailer of outdoor products, under the Craftsman brand. In the European market for consumer products, the Group has strong positions with leading retailers such as B&Q, Bauhaus and K-Rauta. Cutting machines and diamond tools for the construction industry are sold mainly through rental companies and specialized dealers, with whom the Group has strong positions.

10 8 REPORT BY THE PRESIDENT HUSQVARNA ANNUAL REPORT 2006 Strong position and good growth opportunities The year was naturally marked by the spin-off and Husqvarna s debut as a listed company. On the whole, we handled this process very well, without losing our business focus. Operations developed largely according to plan with the exception of demand for garden products in the US, which was weaker than we expected. Nevertheless, we were able to increase our market shares and the sales shortfall in Consumer Products, which referred to the fourth quarter and to a delayed inventory build-up by retailers, was rather small for the year as a whole. The structure of our operations for these products involves relatively low fixed costs, so that the negative effect of a downturn in sales on operating margin is limited. Improvements in product mix and cost-efficiency enabled us despite everything to increase operating margin for garden products in the US. We also achieved good performance for chainsaws, an important product category, for which very strong sales growth in Russia more than offset lower sales in the markets where storms had positive effects in The strength of the Professional Products business area as a whole was confirmed, as sales showed good growth and operating margin remained high. The Group s operating income was in line with our financial goals. Five acquisitions since June 2006 Together with the new Board of Directors, we have reviewed and developed the Group s strategic plans. In this context I would like to confirm our previously announced goal of increasing annual Sales and EBIT margin* SEKm % Sales EBIT margin Average annual growth Sales: 6.4% (4.2% excluding acquisitions) Operating income: 9.1% * According to Electrolux segment reporting for , i.e. common Group costs related to the present Husqvarna Group are not included. sales by 5% organically over a business cycle, at the same time growing through acquisitions. We have achieved this over the past ten years and we expect to continue doing so in the years to come. This is a great challenge that requires increasing our market shares as well as a broadening our product range. Our success to date has been based on continuous investment Long-term financial goals Net sales Annual organic growth of approximately 5% over the course of a business cycle. Additional growth through complementary acquisitions. Profitability Operating margin of more than 10% over the course of a business cycle. Capital structure Capital structure should meet criteria for longterm credit rating corresponding to at least BBB. This currently is considered to require that seasonally adjusted net debt in relation to operating income (EBITDA) should not exceed a multiple of 2.5 in the long term. Dividend In the long term the dividend should correspond to 25 50% of income for the period. Strategies Organic growth Maintain high operating margin Complementary acquisitions Invest in product development. Expand distribution network. Fully utilize Husqvarna brand s potential. Focus on products in high-price segments, particularly under the Husqvarna brand. Greater cost-efficiency, e.g. through relocation of some production and increased purchasing from low-cost countries. Rapid and successful integration in Group operations.

11 HUSQVARNA ANNUAL REPORT 2006 REPORT BY THE PRESIDENT 9 Acquired operation Product area Annual sales Dixon Industries, USA Zero-turn mowers, mainly for professional users SEK 400m Jikai, China Diamond tools SEK 160m Klippo, Sweden* Professional lawn mowers SEK 140m Komatsu Zenoah s outdoor products, Japan* Gardena, Germany* Professional forestry and garden equipment Garden equipment for consumer market SEK 1,200m SEK 3,800m * Not included in the accounts for For more information on acquisitions, seepage30. in product development, a strong global sales organization, and good customer relations. Our strengths in these areas will endure, and will generate continued good organic growth. Another goal is for our operating margin to exceed 10%. The extent to which we exceed it will depend on several factors, including which operations we acquire and which parts of our operations grow fastest. One result of our work on Group strategies is that we are aiming to increase the rate of acquisitions, and we are very pleased that since June we have been able to implement or reach agreements for five acquisitions, of varying size. All of them offer a good potential in terms of cost synergies, and for most of them we also expect substantial synergies in the form of higher sales. For example, an increase in sales can be generated by selling the products of an acquired operation through Husqvarna s global sales organization and/or under the Husqvarna brand. The Gardena acquisition includes a strong sales organization, a strong brand and strong customer relations, which will provide greater sales opportunities for the Group s other garden products. Gardena is the European leader in irrigation products, a new area for Husqvarna where we see good opportunities for growth. Husqvarna has considerable experience and skill in terms of efficient integration of acquisitions, and we definitely expect to be able to realize the potential benefits. Outlook for 2007 We feel well-prepared for 2007, with a number of new products and an increased share of the large retailers product offerings for the garden season. Naturally, we do not forecast the extent of demand with reference to weather conditions, but we are planning for unchanged demand on the global level, with some decline in the US. We consider this to be reasonable in light of the fact that demand in the US has fallen considerably over the past two years, weather conditions in 2006 were somewhat worse than normal, and approximately 75% of sales represent replacement buying. In addition to our work on integrating acquired operations, we will give high priority to cutting costs in production and purchasing. We will also continue to accelerate building the Husqvarna brand on the basis of product development, service and market communications. To sum it up, I see promising opportunities for a continued good performance by the Group in Bengt Andersson President and CEO

12 10 THE MARKET HUSQVARNA ANNUAL REPORT 2006 The market The total global market for Husqvarna s consumer and professional products is estimated at approximately SEK 150 billion. North America accounts for about 60% of this market, Europe for over 30%, and other countries for less than 10%. Demand is driven by general business conditions, activity in the forest and construction industries, and trends in private consumption of capital goods for households. Dependence on weather, seasonal variations It is estimated that annual demand for Husqvarna s products increases by 2 3% in volume in the course of a business cycle. However, substantial variations can occur year-on-year and between markets as a result of weather conditions, principally in terms of garden equipment. These are favored by an early spring and a long growing season, while demand for chainsaws is favored by storms and fallen trees. Garden equipment in particular shows considerable seasonal variations, as most sales refer to the first half of the year. In contrast, demand for forestry products is greatest during the second half. Distribution channels Consumer products for the mass market are sold mainly through large retailers. The US market for consumer products is highly consolidated, and the four largest chains Sears, Lowe s, Wal- Mart and Home Depot account for approximately 70% of the market. The European market is more fragmented, but includes a number of large chains such as B&Q, Carrefour, Bauhaus and K-Rauta. Professional products for forestry and garden care are sold either through servicing dealers or directly to end-users. Diamond tools and equipment for the construction industry are sold mainly to rental companies and specialized dealers, but also directly to large contractors. Diamond tools for the stone industry are sold almost exclusively directly to companies that quarry and/or process stone. Garden products show considerable seasonal variations, with the greater part of sales in the first half of the year. Demand depends on such factors as weather and the length of the growing season. Demand for cutting equipment and diamond tools is driven e.g. by infrastructure projects and industrial construction.

13 HUSQVARNA ANNUAL REPORT 2006 THE MARKET 11 Market trends Demand for consumer garden equipment is being stimulated by a growing interest in garden care. The trend for forestry in the Western world has for many years showed increasing use of forestry machines instead of manual felling, which led to a considerable decline in the market for chainsaws until the early 1990s. This market has subsequently shown growth on the basis of increasing demand from new markets in Russia, Turkey and Latin America. In addition, consumer demand for high-performance professional chainsaws has been increasing steadily. Particularly in the US, companies, municipalities and consumers are increasingly contracting out garden care to companies that specialize in this type of service. These contractors thus comprise a growing customer category for professional garden equipment. In recent years demand for professional chainsaws has shown good growth in countries such as Russia and Turkey. Demand for garden products in the consumer market is beeing positively affected by increasing interest in garden care. Particularly in the US, contractors that specialize in garden care have become a growing customer category.

14 12 THE MARKET HUSQVARNA ANNUAL REPORT 2006 In order to optimize product performance and reduce environmental impact, Husqvarna has developed a range of two-stroke oils, and also supplies a vegetable-based chain oil and environmental petrol. The new professional blower from Husqvarna features a noise level of 64 db, which is the lowest on the market and is below the criteria of the American National Standards Institute (ANSI). Environmental requirements Stricter criteria for reducing emissions from petrol-powered garden equipment and chainsaws were introduced in the US in 1997 and The latest criteria are being phased in until Similar criteria will be phased in in Europe in Such criteria are also expected to be introduced in other countries, including Japan. In 2005 the EU established producer responsibility for handling and recycling waste from electric and electronic products, and also prohibited the use of hazardous substances in such products. For information on the Group s environmental activities, see page 84. Prices Consumer products are subject to continuous downward pressure on prices, which means that prices are falling by 1 2% annually. Husqvarna responds through continuous product development and improvement of cost-efficiency. Prices for professional products are largely unchanged year-on-year. Competitors Husqvarna s major competitors are shown in the table below. The largest of them, such as Stihl of Germany and the US companies MTD and John Deere, compete with Husqvarna in several product areas. However, most competitors specialize in either wheeled or portable products, and in some cases only in electric products. Major competitors Company Country Major markets Consumer Garden equipment Professional Forestry Cutting equipment & diamond tools GGP Italy Europe X Hilti Liechtenstein Europe, US, Asia X Jenn Feng Taiwan Asia, Europe X John Deer US US, Europe X X MTD US US X X Saint Gobain France Europe, US X Stihl Germany US, Europe X X X X Toro US US X X TTI China US X Tyrolit Austria Europe, US, Asia X Wheelabrator France Europe, Asia X

15 HUSQVARNA ANNUAL REPORT 2006 OPERATIONS 13 Group operations Operations in Husqvarna comprise two business areas Consumer Products and Professional Products. Consumer Products Consumer Products are divided into two geographical areas, i.e. North America and Rest of the world. The American operation accounts for approximately two-thirds of total sales in this business area. Seasonal patterns Operations in Consumer Products are subject to substantial seasonal variations, and the greater part of sales are during the first half of the year. Factors affecting demand include weather conditions and the length of the growing season. The sales season for garden equipment is essentially over at the end of the third quarter. Inventory build-ups for the coming season begin in the fourth quarter, and the season peaks in the second quarter. Key indicators SEKm, unless otherwise stated Net sales 18,335 18,360 Share of Group sales, % Operating income 1,415 1,332 Operating margin, % Net assets 6,034 5,719 Capital expenditure Average number of employees 5,751 6,054 Market position World s largest producer of lawn mowers and portable petrolpowered garden equipment such as trimmers and leaf blowers. One of the world s largest producers of garden tractors. The Group s share of the global market is estimated at 20 40% for the major product categories. North America Brands Husqvarna Poulan Weed Eater Rest of the world Husqvarna Jonsered Flymo Partner McCulloch Major plants US Sweden UK Major competitors John Deere MTD Stihl Toro Bosch GGP Stihl Product range Petrol-powered wheeled products such as lawn mowers, garden tractors and snow throwers. Petrol-powered portable products such as chainsaws and trimmers. Electric products such as lawn mowers, the automatic lawnmower Automower, hedge trimmers and leaf blowers. Garden equipment is exposed to severe competition and price pressure. High cost-efficiency in operations is a prerequisite for profitability. Other vital factors include strong brands created by successful product development, high quality, and sustained marketing, which normally generate higher profit margins. Husqvarna, Jonsered and Flymo are such brands. Consumer products include both portable and wheeled products, such as chainsaws, trimmers, hedge cutters, lawn mowers and garden tractors.

16 14 OPERATIONS HUSQVARNA ANNUAL REPORT 2006 Professional Products The Professional Products business area comprises three areas, i.e. Forestry, Commercial Lawn and garden, and Construction. Seasonal patterns The three areas show different seasonal patterns. Most sales of equipment for commercial lawn and garden care are during the first half of the year, while chainsaws are sold mainly during the second half. Sales of cutting equipment and diamond tools for the construction industry are spread more evenly over the year. Key indicators SEKm, unless otherwise stated Net sales 11,067 10,408 Share of Group sales, % Operating income 1,875 1,739 Operating margin, % Net assets 4,714 4,626 Capital expenditure Average number of employees 5,661 5,627 Product range High-performance chainsaws, clearing saws and accessories such as chains, blades, protective clothing and tools. Riders and walk-behind lawn mowers, zero-turn mowers, specialty turf-care equipments, trimmers, hedge trimmers, leaf blowers etc. Floor saws, tile and masonry saws, wall and wire saws, drill motors and stands, power cutters and diamond tools, and diamond tools for the stone industry. Market position Husqvarna and Jonsered are two of the three leading brands for professional chainsaws in the global market, with a combined market share of approximately 40%. The Group is also the world leader in diamond tools and cutting equipment for the construction and stone industries. Brands Forestry Husqvarna Jonsered Commercial Husqvarna Lawn and garden Jonsered Bluebird Yazoo/Kees Construction Husqvarna Diamant Boart Major plants Sweden Sweden US Sweden US China Major competitors Stihl John Deere Stihl Toro Hilti Saint Gobain Tyrolit Wheelabrator Professional products include high-performance chainsaws, clearing saws, lawn mowers, ZTH mowers, specialty turf-care equipment, and trimmers. This business area also includes cutting equipment and diamond tools.

17 HUSQVARNA ANNUAL REPORT 2006 FINANCIAL INFORMATION 15 Financial information Operations in Husqvarna previously comprised the Outdoor Product segment within the Electrolux Group and were spun-off as an independent group following a decision by the Electrolux Annual General Meeting in April The Husqvarna Group was established and capitalized as of 31 May 2006, and listed on the Stockholm Stock Exchange on 13 June Husqvarna publishes pro forma financial information and combined financial statements. Pro forma financial information The pro forma financial information is prepared in order to describe the Group on a stand-alone basis, and is based on the assumption that the Group was established and capitalized as of 1 January 2005 for the pro forma income statement, and 31 December 2005 for the pro forma balance sheet. The pro forma financial information on pages has not been audited. However, the auditors have performed certain procedures on the pro forma financial information, which are reported on page 23. Combined Financial Statements Operations were transferred to Husqvarna AB at book values reported by Electrolux according to the predecessor basis. The combined financial statements represent the financial position, results of operations and cash flows of Husqvarna AB and its subsidiaries and other legal entities, which were included in the former Outdoor Product segment within Electrolux. The report by the Board of Directors is based on the combined financial statements. As the establishment of the Group was finalized by 31 May 2006, the income statement, balance sheet, equity statement and cash flow statement as of 1 June 2006 and onward represent the consolidated values for the Group. For more information, see Accounting and valuation principles in Note 1 on page 40. The difference between the pro forma information and the combined financial statements are described in Note 29 on page 67.

18 16 PRO FORMA HUSQVARNA ANNUAL REPORT 2006 Pro forma financial information (unaudited) Net sales for 2006 rose by 2% to SEK 29,402m (28,768) Sales were negatively impacted by lower demand for garden products Operating income rose by 7% to SEK 3,121m (2,927), operating margin improved to 10.6% (10.2) Sales for Consumer Products were unchanged from 2005 despite lower demand, operating income and margin improved Sales for Professional Products increased, income and margin improved Income for the period rose to SEK 1,862m (1,641), corresponding to SEK 6.29 (5.54) per share The Board of Directors proposes a dividend payment of SEK 2.25 per share, and a bonus issue to increase the number of A-shares Key data Change in comparable SEKm, unless otherwise stated 2006 Change, % currencies, % 1) 2005 Net sales 29, ,768 Operating income 3, ,927 Operating margin, % Income after financial items 2, ,448 Margin, % Income for the period 1, ,641 Earnings per share, SEK 2) Return on capital employed Return on equity, % Net debt/equity ratio Capital expenditure 890 1,259 Average number of employees 11,412 11,681 1) Including both transaction and translation effects. 2) Before dilution. To enable comparison, figures for both 2006 and 2005 are based on the number of shares as of 31 December 2006, i.e. 296,259,153. For definitions, see Note 30 on page 69.

19 HUSQVARNA ANNUAL REPORT 2006 PRO FORMA 17 Net sales and income pro forma Net sales Net sales in 2006 rose by 2% to SEK 29,402m as against SEK 28,768m in the previous year. After adjustment for exchange rate fluctuations, net sales also rose by 2%. The low growth in sales as compared with the previous year is mainly explained by lower demand and a decline in sales of consumer garden products. Also, sales of chainsaws were particularly strong in 2005 due to hurricanes in the US and effects of storms in Scandinavia. In terms of business areas, net sales for Consumer Products were largely unchanged from the previous year and amounted to SEK 18,335m (18,360). Net sales for Professional Products rose by 6% SEK 11,067m (10,408). Operating income Operating income in 2006 rose by 7% to SEK 3,121m (2,927m) and operating margin improved to 10.6% (10.2). After adjustment for exchange rate fluctuations, operating income rose by 7%. The improvement in operating income refers mainly to Professional Products, where Forestry, as well as Commercial Lawn and garden and Construction, reported higher operating income. Consumer Products also showed an improvement, mainly as a result of an improved mix in terms of both products and geographical markets, and greater cost efficiency. Operating income for Consumer Products improved by 6% to SEK 1,415m (1,332), corresponding to a margin of 7.7% (7.3). Operating income for Professional Products rose by 8% to SEK 1,875m (1,739), corresponding to a margin of 16.9% (16.7). Effects of changes in exchange rates Changes in exchange rates in comparison with the previous year, including both transaction and translation effects, had a total negative impact on operating income of approximately SEK -2m. Transaction effects, net of hedging contracts, had a negative impact of approximately SEK -25m, and referred mainly to the strengthening of the Swedish krona against the euro. Translation of income statements in subsidiaries had a positive impact of approximately SEK 23m, and is mainly explained by the weaker Swedish krona against the US dollar in the first half of the year. Net sales by business area Change in comparable Change, currencies, SEKm 2006 % % 1) 2005 Consumer Products 18, ,360 Professional Products 11, ,408 Total 29, ,768 1) Including both transaction and translation effects. Net sales by business area SEKm 17,579 9,623 18,360 18,335 10, ) ,067 Consumer Products Professional Products 1) For 2004, according to Electrolux segment reporting. Operating income by business area Change in comparable Change, currencies, SEKm 2006 % % 1) 2005 Consumer Products 1, ,332 Margin, % Professional Products 1, ,739 Margin, % Total business areas 3, ,071 Margin, % Group common costs etc Total 3, ,927 Margin, % ) Including both transaction and translation effects. Operating income by business area SEKm 1,607 1,521 1,739 1,332 Consumer Products Professional Products 1, ) ,875 1) For 2004, according to Electrolux segment reporting. Financial net Net financial items for the year amounted to SEK -429m (-479). The financial net was negatively impacted by higher interest rates, which was more than compensated by reduced net borrowings. Income after financial items Income after financial items increased by 10% to SEK 2,692m (2,448), corresponding to a margin of 9.2% (8.5). Taxes Total taxes amounted to SEK -830m (-807), corresponding to 30.8% (33.0) of income after financial items. Earnings per share Income for the period rose by 13% to SEK 1,862m (1,641), corresponding to SEK 6.29 (5.54) per share before dilution. Seasonality in sales and income Husqvarna s sales and income are subject to marked seasonal variations, with significantly higher demand and sales during the first half of the year, with the second quarter normally the strongest. This refers particularly to Consumer Products but also for Commercial Lawn and garden within Professional Products. In contrast, chainsaws are subject to stronger demand and show higher sales during the second half of the year. Equipment

20 18 PRO FORMA HUSQVARNA ANNUAL REPORT 2006 Net sales by quarter SEKm 7, ,338 9,73010,133 6,158 5,3925,000 4,539 Q1 Q2 Q3 Q4 Operating income by quarter SEKm ,275 1, Q1 Q2 Q3 Q4 Total value created in 2006 amounted to SEK 1,894m (1,815). The WACC rate for 2006 was computed at 10% (10). For information on value created as a basis for remunerations, see Notes 21 and 26. Operating cash flow pro forma Operating cash flow for 2006 amounted to SEK 535m (949). The decline refers mainly to lower trade payables, while lower inventories had a positive impact. Trade payables were at an unusually high level in 2005 and were normalized during the year. Operating cash flow shows a strong seasonal pattern. It is normally negative during the first quarter and part of the second quarter, as a result of the build up of inventories and trade receivables ahead of the lawn and garden season. for the construction industry normally shows a more even distribution throughout the year. Sensitivity analysis Husqvarna s sales and earnings are impacted by numerous factors. The presentation below shows the effects on operating income from changes in selected key factors. The estimated effects should be viewed as income effects that could occur with an isolated change in each variable. A change in total sales volume of 5 percentage points would impact operating income by approximately SEK 300m. A decline of 10 percentage points in the rate for SEK against USD would impact operating income negatively in the amount of approximately SEK 75m, i.e. SEK 165m in negative transaction effects and SEK 90m in positive translation effects. A decline of 10 percentage points in the rate for SEK against EUR would impact operating income positively in the amount of approximately SEK 270m, i.e. SEK 240m in transaction effects and SEK 30m in translation effects. An individual decline of 10 percentage points in the rate for SEK against all other currencies, including USD and EUR, would have a positive impact on operating income in the amount of approximately SEK 560m, i.e. SEK 385m in transaction effects and SEK 175m in translation effects. A change in the borrowing rate of 1 percentage point would impact net income by approximately SEK 55m. Operating cash flow pro forma SEKm Cash flow from operations, excluding changes in operating assets and liabilities 2,626 2,468 Changes in operating assets and liabilities -1, Cash flow from operations 1,432 2,291 Cash flow from investments ,342 Operating cash flow Acquisitions of operations -558 Total cash flow from operations and investments Capital expenditure Capital expenditure in 2006 amounted to SEK 890m (1,259), corresponding to 3% (4) of net sales. The decline from the previous year is due to the fact that capital expenditure in 2005 was at a high level following the completion of a new platform for garden tractors within Consumer Products. Value created Value created is a performance indicator for measuring and evaluating financial performance, and is the basis for variable remuneration to senior managers in the Group. The model links operating income and asset efficiency with the cost of capital employed in operations. Value created is measured by business area, sector, product line and regions. Net sales and expenses, by currency Average Average Closing Closing Share of net sales, % Share of expenses, % exchange rate 2006 exchange rate 2005 exchange rate 2006 exchange rate 2005 SEK 3 13 USD EUR GBP Other 17 7 Total

21 HUSQVARNA ANNUAL REPORT 2006 PRO FORMA 19 Financial Position pro forma Operating working capital Operating working capital at year-end increased to SEK 6,062m (5,367). Inventories amounted to SEK 5,165m (6,264), trade receivables to SEK 3,106m (3,325) and trade payables to SEK 2,209m (4,222). Total capital employed Total capital employed at year-end increased to SEK 11,354m (11,121). The return on capital employed decreased to 23.8% (24.1). Equity The Group s equity as of 31 December 2006, excluding minority interest, amounted to SEK 6,252m (4.755), corresponding to SEK (16.05) per share. The net debt/equity ratio was 0.68 (1.11) and the equity/assets ratio rose to 38.3% (26.1). Net borrowings The Group s net borrowings as of 31 December 2006 decreased to SEK 4,250m (5,262). Net borrowings were reduced by SEK 2,522m in the second half of the year. Net borrowings SEKm Interest-bearing liabilities 5,090 6,366 Liquid funds 840 1,104 Net borrowings 4,250 5,262 Net debt/equity Equity/assets ratio, % Liquid funds Liquid funds at year-end amounted to SEK 840m (1,104). See note 30 for definition. The unused portion of the Group s committed revolving credit facility of SEK 8,000m was SEK 6,350m. Performance by business area Consumer Products Lower demand for garden products, particularly in the US Sales in the US declined, but operating income improved due to a better mix in garden products and greater cost-efficiency Sales in Europe showed good growth, operating income and margin improved Consumer Products Change in comparable Change, currencies, SEKm 2006 % % 1) 2005 Net sales 18, ,360 Operating income 1, ,332 2) Operating margin, % ) Including both transaction and translation effects. 2) Operating income in 2005 includes a provision of SEK 40m for closure of a plant in Italy. Industry shipments of garden products in the US in 2006 are estimated to have declined by 6 8% from the previous year. Sales for the Group s North American operation, which accounts for about two thirds of this business area, were somewhat lower than in Sales showed good growth in the first half of the year, but declined significantly in particularly the third quarter, following substantial inventory reductions by retailers in comparison with the previous year. Overall, the Group is estimated to have increased its market shares somewhat for garden products in the US. Operating income for the North American operation increased slightly for the full year. Operating margin improved, mainly as a result of a more favorable product mix within garden products and greater cost-efficiency. Operating income was adversely affected by costs for a recall of garden tractors. In 2005, both sales and income were positively impacted by strong demand for chainsaws following hurricanes in the US. Demand in Europe was negatively impacted by unfavorable weather during the garden season, particularly in the UK. Sales for the Group s European operation showed good growth, however, mainly referring to chainsaws and other handheld products in particularly Russia and Eastern Europe as well as garden products in Scandinavia. Sales of Husqvarna branded products showed a continued positive trend. Operating income and margin improved, on the basis of a more favorable product mix, positive effects from previous restructuring and favorable impact of exchange rates on products imported from the US operation. Overall, sales for the Consumer Products business area were largely unchanged from the previous year. Operating income and margin improved.

22 20 PRO FORMA HUSQVARNA ANNUAL REPORT 2006 Professional Products Demand largely unchanged from the previous year Continued strong performance for chainsaws Improved operating income for both Commercial Lawn and garden and Construction Professional Products Change in comparable Change, currencies, SEKm 2006 % % 1) 2005 Net sales 11, ,408 Operating income 1, ,739 2) Operating margin, % ) Including both transaction and translation effects. 2) Operating income in 2005 includes a provision of SEK 46m for closure of a plant in France within Construction. Demand for professional chainsaws is estimated to have increased slightly from the previous year. Group sales were somewhat higher overall, as lower sales in the US and Scandinavia were compensated by higher volumes in other markets such as Central Europe, Russia and Latin America. Operating income rose slightly, despite a less favorable mix and negative impact from changes in exchange rates. In 2005, both sales and income were positively impacted by hurricanes in the US and effects of previous storms in Scandinavia. Sales for Commercial Lawn and garden rose substantially from the previous year. The increase is traceable mainly to a strong trend in sales for the Group s riders in Europe and the acquisition of Dixon Industries in the US, which was consolidated as of August Operating income improved from the previous year. Demand for diamond tools and cutting equipment for the construction industry is estimated to have been largely unchanged in the US, and shown some growth in Europe. Group sales increased slightly from the previous year. Operating income and margin improved significantly, mainly as a result of lower restructuring costs than in Operating income was adversely affected by costs for the consolidation of brands and change to Husqvarna as the global brand for all products sold to the construction industry. Total sales for the Professional Products business area rose from the previous year. Operating income and margin improved, despite a negative impact of changes in exchange rates. Consolidated income statement Pro forma, unaudited SEKm Net sales 29,402 28,768 Cost of goods sold -21,477-21,109 Gross operating income 7,925 7,659 Selling expense -3,727-3,695 Administrative expense -1,086-1,037 Other operating income/expenses 9 0 Operating income* 3,121 2,927 Financial items, net Income after financial items 2,692 2,448 Taxes Income for the period 1,862 1,641 Income for the period attributable to: Equityholders of the Parent company 1,862 1,641 Minority interests in income for the period 0 0 1,862 1,641 Earnings per share Before dilution, SEK After dilution, SEK Average number of shares, million * Group common costs for the full year 2005 were initially estimated at SEK -200m. In order to enable year-on-year comparison, these costs pro forma have been assumed to equal the outcome for 2006, excluding an insurance provision of SEK 25m relating to the Group s captive insurance companies.

23 HUSQVARNA ANNUAL REPORT 2006 PRO FORMA 21 Consolidated balance sheet Pro forma 31 Dec 31 Dec SEKm ) ) Assets Non-current assets Property, plant and equipment 3,575 3,846 Goodwill 1,780 1,728 Other intangible assets Investments in associates 6 9 Deferred tax assets Financial assets Total non-current assets 6,746 6,959 Current assets Inventories 5,165 6,264 Trade receivables 3,106 3,325 Derivatives Tax receivables Other current assets Short-term investments Cash and cash equivalents Total current assets 9,609 11,289 Total assets 16,355 18,248 Equity and liabilities Equity attributable to equity holders of the Parent company 6,252 4,755 Minority interests 12 Total equity 6,264 4,755 Non-current liabilities Long-term borrowings 4,683 6,220 Deferred tax liabilities Provisions for pensions and other post-employment benefits Other provisions Total non-current liabilities 6,090 7,565 Current liabilities Trade payables 2,209 4,222 Tax liabilities Other liabilities 1,096 1,329 Short-term borrowings Derivatives Other provisions Total current liabilities 4,001 5,928 Total equity and liabilities 16,355 18,248 1) Actual and audited. 2) Unaudited. Consolidated cash flow statement Pro forma, unaudited SEKm Operations Income after financial items 2,692 2,448 Depreciation and amortization Change in accrued and prepaid interest 1 0 Taxes paid Cash flow from operations, excluding changes in operating assets and liabilities 2,626 2,468 Changes in operating assets and liabilities Change in inventories Change in trade receivables Change in other current assets Change in trade payables -1, Change in operating liabilities and provisions Cash flow from operating assets and liabilities -1, Cash flow from operations 1,432 2,291 Investments Acquisitions of operations -558 Capital expenditure in property, plant and equipment ,111 Capitalization of product development and software Other Cash flow from investments -1,455-1,342 Total cash flow from operations and investments Financing Change in short-term investments 233 Change in interest-bearing liabilities Cash flow from financing Total cash flow Cash and cash equivalents at beginning of year Exchange-rate differences Cash and cash equivalents at year-end

24 22 PRO FORMA HUSQVARNA ANNUAL REPORT 2006 Net sales and income by quarter Pro forma, unaudited SEKm Q1 Q2 Q3 Q4 Full year Net sales ,338 10,133 5,392 4,539 29, ,880 9,730 6,158 5,000 28,768 Operating income , ,121 Margin, % , ,927 Margin, % Income after financial items , ,692 Margin, % , ,448 Margin, % Income for the period , ,641 Earnings per share, SEK Net sales by business area per quarter Consumer Products ,540 6,993 2,774 2,028 18, ,417 6,841 3,583 2,519 18,360 Professional Products ,798 3,140 2,618 2,511 11, ,463 2,889 2,575 2,481 10,408 Total ,338 10,133 5,392 4,539 29, ,880 9,730 6,158 5,000 28,768 Operating income by business area per quarter Consumer Products ,415 Margin, % ,332 Margin, % Professional Products ,875 Margin, % ,739 Margin, % Group common costs etc.* Total , ,121 Margin, % , ,927 Margin, % * In order to enable year-on-year comparison, Group common costs for 2005 have been adjusted to equal actual costs for the first, second, third and fourth quarters of 2006 excluding an insurance provision of approximately SEK 25m taken in the fourth quarter of 2006.

25 HUSQVARNA ANNUAL REPORT 2006 PRO FORMA 23 Auditor s Report on Pro Forma Financial Information To the shareholders in Husqvarna AB (publ) Corporate Identity Number We have examined the pro forma financial information set out on pages in the printed version of Husqvarna AB s annual report for The pro forma financial information has been prepared for illustrative purposes only to provide information about how the income statements and balance sheets for the Husqvarna Group would have been presented for the financial years 2005 and 2006, if the formation of the Husqvarna Group had taken place as per 1 January The Board of Directors and the Managing Director s responsibility It is the Board of Directors and Managing Director s responsibility to prepare the pro forma financial information. The auditor s responsibility Our responsibility is to provide an opinion based on our audit. We provide no other opinion on the pro forma financial information or any of its constituent elements. We accept no responsibility for any financial information used in the compilation of the pro forma financial information beyond that owed to those to whom any reports on that financial information were addressed by us at the date(s) of issue. Work performed We performed our work in accordance with generally accepted auditing standards in Sweden. Our work, which did not include an independent examination of the underlying financial information, consisted primarily of comparing the unadjusted financial information with source documentation, assessing the evidence supporting the pro forma adjustments and discussing the pro forma financial information with the management of the company. Our work did not include an independent examination of any of the underlying financial information. We planned and performed our work so as to obtain the information and explanations we considered necessary in order to obtain reasonable assurance that the pro forma financial information has been compiled on the basis stated on pages As the pro forma financial information addresses a hypothetical situation and, therefore, does not represent the company s actual financial results or position, we can express no opinion as to whether the actual results and position reported would have corresponded to those shown in the pro forma financial information. The differences may prove to be material. Opinion In our opinion, the pro forma financial information has been properly compiled on the basis stated on pages and in accordance with the accounting principles applied by the company. Stockholm 28 February 2007 PricewaterhouseCoopers AB Anders Lundin Authorized Public Accountant Auditor in Charge Christine Rankin Johansson Authorized Public Accountant

26 REPORT BY THE BOARD 24 OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 Report by the Board of Directors The Report by the Board of Directors is based on the combined financial statements. These statements represent the financial position, results of operations and cash flows of Husqvarna AB and its subsidiaries and other legal entities, which were included in the former Outdoor Product segment within Electrolux. The differences between the combined financial statements and the pro forma information with regard to the income statement refer mainly to financial costs for borrowings, administrative costs and taxes. The differences with regard to the balance sheet refer mainly to the capitalization of the Group. For a description of the principles for the combined financial statements and the differences compared to the pro forma financial information, see Note 1 on page 40 and Note 29 on page 67. Net sales and income Net sales Net sales in 2006 rose by 2% to SEK 29,402m as against SEK 28,768m in the previous year. After adjustment for exchange rate fluctuations, net sales also rose by 2%. The low growth in sales as compared with the previous year is mainly explained by lower demand and a decline in sales of consumer garden products. Also, sales of chainsaws were particularly strong in 2005 due to hurricanes in the US and effects of storms in Scandinavia. In terms of business areas, net sales for Consumer Products were largely unchanged from the previous year and amounted to SEK 18,335m (18,360). Net sales for Professional Products rose by 6% to SEK 11,067m (10,408). Contents Net sales and income 24 Financial position 25 Cash flow 25 Group income statement 26 Group balance sheet 27 Group cash flow statement 28 Statement of shareholder s equity Group 29 Changes in Group structure 30 Other facts 31 Proposals to the Annual General Meeting in Risks and risk management 33 Parent company 36 Notes 39 Definitions 69 Proposed Distribution of Earnings 70 Auditor s Report 71 Operating income Operating income in 2006 rose by 8% to SEK 3,121m (2,898m) and operating margin improved to 10.6% (10.1). After adjustment for exchange rate fluctuations, operating income rose by 7%. The improvement in operating income refers mainly to Professional Products, where Forestry, as well as Commercial Lawn and garden and Construction, reported higher operating income. Consumer Products also showed an improvement, mainly as a result of an improved mix in terms of both products and geographical markets, and greater cost efficiency. Operating income for Consumer Products rose by 6% to SEK 1,415m (1,332) corresponding to a margin of 7.7% (7.3). Operating income for Professional Products rose by 8% to SEK 1,875m (1,739), corresponding to a margin of 16.9% (16.7). For comments on performance by business area, see the Pro forma financial information, on pages Effects of changes in exchange rates Changes in exchange rates in comparison with the previous year, including both transaction and translation effects, had a total negative impact on operating income of approximately SEK -2m. Transaction effects, net of hedging contracts, had a negative impact of approximately SEK -25m, and referred mainly to the strengthening of the Swedish krona against the euro. Translation of income statements in subsidiaries had a positive impact of approximately SEK 23m, and is mainly explained by the weaker Swedish krona against the US dollar in the first half of the year. Depreciation and amortization Depreciation and amortization in 2006 amounted to SEK -836m (-827). Financial net Net financial items for the year amounted to SEK -378m (-177). The increase in net financial items compared to the previous year was mainly due to higher net borrowings in average during 2006 and to higher interest rates for loans in USD. Income after financial items Income after financial items improved to SEK 2,743m (2,721), corresponding to a margin of 9.3% (9.5). Taxes Total taxes amounted to SEK -846m (-816), corresponding to 30.8% (30.0) of income after financial items. Earnings per share Income for the period was SEK 1,897m (1,905), corresponding to SEK 6.40 (6.54) per share before dilution.

27 HUSQVARNA ANNUAL REPORT 2006 REPORT BY THE BOARD OF DIRECTORS 25 Financial Position Operating working capital Operating working capital at year-end increased to SEK 6,062m (5,367). The increase is due to trade payables that were at an unusually high level in This was partly offset by exchange rate effect as well as lower inventories compared to last year. Inventories amounted to SEK 5,165m (6,264), trade receivables to SEK 3,106m (3,325) and trade payables to SEK 2,209m (4,222). Equity The Group s equity as of 31 December 2006, excluding minority interest, amounted to SEK 6,252m (2,416), corresponding to SEK (8.24) per share. On 15 May 2006, Husqvarna received an unconditional shareholder s contribution from Electrolux in the amount of SEK 4,250m. The net debt/equity ratio was 0.68 (3.23) and the equity/assets ratio increased to 38.3% (13.8). Net borrowings The Group s net borrowings as of 31 December 2006 decreased to SEK 4,250m (7,816). The net borrowings were reduced by approximately SEK 2.3 billion due to capital transactions with the Electrolux Group prior to the spin-off. Net borrowings SEKm Interest-bearing liabilities 5,090 8,187 Liquid funds Net borrowings 4,250 7,816 Net debt/equity Equity/assets ratio, % Liquid funds Liquid funds at year-end amounted to SEK 840 (371). See Note 30 for definition. The unused portion of the Group s committed revolving credit facility of SEK 8,000m was SEK 6,350m. Cash flow Operating cash flow Operating cash flow in 2006 declined to SEK 1,157m (1,736). The decline refers mainly to lower trade payables, while lower inventories had a positive impact. Trade payables were at an unusually high level in 2005 and was normalized during the year. Operating cash flow shows a strong seasonal pattern. It is normally negative during the first quarter and part of the second quarter, as a result of the build up of inventories and trade receivables ahead of the lawn and garden season. Cash flow SEKm Cash flow from operations, excluding changes in operating assets and liabilities 2,974 3,162 Changes in operating assets and liabilities Cash flow from operations 2,054 3,078 Cash flow from investments ,342 Operating cash flow 1,157 1,736 Acquisitions of operations -558 Total cash flow from operations and investments 599 1,736 Capital expenditure Capital expenditure in 2006 amounted to SEK 890m (1,259), corresponding to 3% of net sales (4). The decline from the previous year is traceable to a high level of capital expenditure in 2005, following the completion of a new platform for garden tractors within Consumer Products. Approximately 45% of capital expenditure in 2006 referred to new products, approximately 20% to rationalization and replacement of equipment in production, approximately 10% to expansion of capacity, and approximately 7% to IT-systems. Investments related to new products that were finalized during the year include new Husqvarna branded 55cc clearing saws, new hobby saws, and upgrades of professional riders and consumer garden tractors. Research and development The cost of research and development in 2006, including capitalization of product development of SEK 155m (140), amounted to SEK 386m (445). R&D costs thus corresponded to 1.3% of net sales (1.5). Major R&D projects during the year referred mainly to products scheduled for launch in 2007 and 2008, and included new platforms for Husqvarna chainsaws, new leaf blowers for both consumers and professional users, a broader range of Automowers and an upgrade of the snow thrower product line.

28 REPORT BY THE BOARD 26 OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 Group income statement SEKm Note Net sales 3, 4 29,402 28,768 Cost of goods sold -21,477-21,128 Gross operating income 7,925 7,640 Selling expense -3,727-3,663 Administrative expense -1,086-1,094 Other operating income Other operating expenses Shares of income in associated companies 0 2 Operating income 3,121 2,898 Financial income Financial expenses Financial items, net Income after financial items 2,743 2,721 Taxes Income for the period 1,897 1,905 Income for the period attributable to: Equity holders of the Parent company 1,897 1,905 Minority interests in income for the period 0 0 1,897 1,905 Earnings per share Before dilution, SEK After dilution, SEK Average number of shares Before dilution, million ) After dilution, million ) 1) Earnings per share 2005 are calculated on the average number of shares in Electrolux.

29 HUSQVARNA ANNUAL REPORT 2006 REPORT BY THE BOARD OF DIRECTORS 27 Group balance sheet 31 Dec 31 Dec SEKm Note Assets Non-current assets Property, plant and equipment 7, 11 3,575 3,846 Goodwill 10 1,780 1,728 Other intangible assets Investments in associates Deferred tax assets Financial assets Total non-current assets 6,746 6,959 Current assets Inventories 13 5,165 6,264 Trade receivables 15 3,106 3,325 Derivatives Tax receivables Other current assets Cash and cash equivalents Total current assets 9,609 10,556 Total assets 16,355 17,515 Assets pledged Equity and liabilities Equity attributable to equity holders in the Parent company Share capital Other reserves Retained earnings 5,545 1,392 6,252 2,416 Minority interests 12 0 Total equity 6,264 2,416 Non-current liabilities Long-term borrowings 16 4,683 7,838 Deferred tax liabilities Provisions for pensions and other post-employment benefits Other provisions Total non-current liabilities 6,090 8,878 Current liabilities Trade payables 2,209 4,222 Tax liabilities Other liabilities 23 1,096 1,419 Short-term borrowings Derivatives Other provisions Total current liabilities 4,001 6,221 Total equity and liabilities 16,355 17,515 Contingent liabilities

30 REPORT BY THE BOARD 28 OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 Group cash flow statement SEKm Note Operations Income after financial items 2,743 2,721 Depreciation and amortization Change in accrued and prepaid interest 1 0 Taxes paid Cash flow from operations, excluding change in operating assets and liabilities 2,974 3,162 Change in operating assets and liabilities Change in inventories Change in trade receivables 2-64 Change in trade payables -1, Change in other current assets Change in operating liabilities and provisions Cash flow from operating assets and liabilities Cash flow from operations 2,054 3,078 Investments Acquisitions of operations Capital expenditure in property, plant and equipment ,111 Capitalization of product development and software Other Cash flow from investments -1,455-1,342 Total cash flow from operations and investments 599 1,736 Financing Change in short-term investments Change in short-term loans Amortizations of long-term loans to Electrolux -7, New long-term loans 4,029 Dividend/Group contribution to Electrolux ,656 Contribution from Electrolux 4,250 Cash flow from financing ,597 Total cash flow Cash and cash equivalents at beginning of year Exchange rate differences referring to cash and cash equivalents Cash and cash equivalents at year-end

31 HUSQVARNA ANNUAL REPORT 2006 REPORT BY THE BOARD OF DIRECTORS 29 Statement of shareholders equity Group Attributable to equity holders of the company Other Retained Minority Total SEKm Share capital reserves earnings Total interest equity Opening balance 1 January ,270 4, ,686 Cash flow hedges Gain/loss taken to equity Exchange differences on translation of foreign operations Revaluation of opening balance Translation difference Share-based payment Income for the period recognized directly in equity Income for the period 1,905 1,905 1,905 Total recognized income and expense for the period 608 1,916 2,524 2,524 Transactions with Electrolux, net 1) -4,794-4,794-4,794 Closing balance 31 December ,392 2, ,416 Cash flow hedges Gain/loss taken to equity Transferred to income statement Exchange differences on translation of foreign operations Revaluation of opening balance Equity hedge Translation difference Share-based payment Income for the period recognized directly in equity Income for the period 1,897 1,897 1,897 Total recognized income and expense for the period ,904 1,489 1,489 Unconditional shareholder contribution 2) 4,250 4,250 4,250 Transactions in equity, net 1) -1,903-1,903-1,903 Total transactions with Electrolux 2,347 2,347 2,347 Bonus issue Other changes Closing balance 31 December ,545 6, ,264 1) Mainly effects of transfers of operations from Electrolux and dividend/group contributions from Husqvarna to Electrolux. 2) An unconditional shareholder s contributions of SEK 4,250m from Electrolux 15 May 2006 in order to adjust the capital structure of Husqvarna AB prior to distribution.

32 REPORT BY THE BOARD 30 OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 Establishment of the Husqvarna Group Operations in Husqvarna previously comprised the Outdoor Product segment within the Electrolux Group, and were spun off as an independent group following a proposal by the Electrolux Board of Directors. The Electrolux Annual General Meeting in April 2006 decided to distribute all shares in Husqvarna to the shareholders in Electrolux. One A-share in Husqvarna was received for each A-share in Electrolux, and one B-share in Husqvarna was received for each B-share in Electrolux. Most operations and subsidiaries were transferred from Electrolux to Husqvarna in September December Additional subsidiaries, among them the US operations, were transferred in January May The Husqvarna Group was established and capitalized as of 31 May 2006, and listed on the Stockholm Stock Exchange on 13 June For more information, see the Listing prospectus and the Supplement to the listing prospectus. Changes in Group structure Acquisitions Canadian distributor As of 1 March 2006, Husqvarna acquired McOuat, the Group s major distributor of professional products in Canada. The company had annual sales of approximately SEK 200m and about 50 employees. McOuat is included in the Group s accounts for 2006, within Professional Products, with sales of SEK 70m and operating income of SEK 35m. The purchase price was SEK 193m, and the goodwill arising from the acquisition amounts to SEK 121m. Dixon Industries As of 31 July 2006 the Group acquired the assets and liabilities of Dixon Industries Inc in the US, a subsidiary of Blount International Inc. Dixon manufactures zero-turn riding lawnmowers for both professional users and consumers. In 2005 Dixon reported sales of approximately SEK 400m (USD 54.4m) and operating income of approximately SEK 20m (USD 3.1m). Dixon is included in the accounts for 2006, within Professional Products, with sales of SEK 74m and operating income of SEK -18m. The purchase price was SEK 240m. The goodwill recognized amounted to SEK 146m and other intangibles to SEK 58m. Joint venture in China for diamond tools At the end of October 2006, Husqvarna signed an agreement to establish a joint venture with Hebei Jikai Industrial Co Ltd in China (Jikai), which will include Jikai s operation in diamond tools. Jikai is one of the largest producers in China of diamond tools for the construction industry and has a leading position in the domestic market. Sales in 2005 amounted to approximately SEK 160m (CNY 170m), of which about half in China and the rest in the international market. The transaction was completed in December The joint venture is included in the Group s accounts, within Professional Products, as of 31 December 2006, and thus had no impact on sales and income for Husqvarna owns 80% of the joint venture and has an option to acquire the remaining 20% after five years, according to an agreed price formula. The assets and liabilities were acquired at SEK 125m and the goodwill recognized amounts to SEK 35m. Klippo AB At the beginning of January 2007, Husqvarna signed an agreement to acquire Klippo AB of Sweden. Klippo is the largest producer of petrol-powered walk-behind lawnmowers in the Swedish market, mainly for professional users. In 2005 the company reported sales of approximately SEK 140m. Klippo has about 50 employees, and production is based in Sweden. Klippo was included in the Group s accounts as of 1 February 2007, within Professional Products. The purchase price amounts to SEK 221m on a debt-free basis. A preliminary analysis indicates that goodwill and other intangibles amounts to SEK 195m. For further information on the above acquisitions, see Note 25 on page 64. Agreements for acquisitions Gardena AG In late December 2006 the Group signed an agreement to acquire Gardena AG of Germany. Gardena is the leader in the European consumer market for irrigation products, and has a leading position in garden tools, garden ponds and pumps, as well as electric garden products. In the fiscal year ending September 2006 the company reported sales of approximately SEK 3,800m (EUR 422m). About half of Gardena s sales refer to Germany and neighboring countries, and the remainder mainly to other European markets. Gardena s products are sold in more than 80 countries. Irrigation products account for more than two-thirds of sales. Production is based in Germany and the Czech Republic and the company has approximately 2,900 employees. The purchase price amounts to approximately SEK 6.5 billion (EUR 730m) on a debt-free basis. The acquisition is expected to be completed during the first quarter of 2007, subject to approval by relevant authorities. Gardena is expected to contribute positively to Husqvarna s net income in The operation will be integrated in the Group s Consumer Products operation. Komatsu Zenoah s outdoor-products operation At the end of January 2007, Husqvarna signed a final agreement for acquisition of the outdoor products operation within Komatsu Zenoah Co of Japan. Komatsu Zenoah is a leading producer of portable outdoor power products, and is the market leader in Japan. The product range comprises mainly brush cutters, chainsaws, trimmers and blowers. Sales for this operation in the latest fiscal year ending 31 March 2006 amounted to approximately SEK 1,200m (approximately JPY 19 billion), of which about half were in Japan. The number of employees was approximately 700. Production is based in Japan and China. The purchase price is approximately SEK 1,100m (approximately JPY 18.2 billion) on a debt-free basis. The acquisition is expected to be completed in the beginning of April 2007, subject to approval by the relevant authorities. The operation will be consolidated in the Group s accounts within Professional Products. Financing of acquisitions In order to secure the financing of the above acquisitions, both completed and agreed, as well as seasonal working capital needs, Husqvarna has increased its committed bank credit facility by SEK 8 billion.

33 HUSQVARNA ANNUAL REPORT 2006 REPORT BY THE BOARD OF DIRECTORS 31 Other information Incentive programs Prior to the establishment of the Husqvarna Group, there were several existing incentive programs within Electrolux for senior managers. All these programs were exercised in 2006, see Note 21 on page 62. Further information about these programs is available at under Investor Relations and in the Supplement to the prospectus for listing of Husqvarna AB in 2006, page 29 Note 19. Incentive program for 2006 The Electrolux Annual General Meeting on 24 April 2006 approved the long-term incentive program proposed by the Husqvarna Board of Directors, covering about 40 senior managers. This performance-based share program is based on targets for value creation established by the Husqvarna Board. If these targets are reached or exceeded after a three-year period, B-shares will be allocated. For a detailed description of this program and related costs, see Note 21 on page 61. Legal matters Husqvarna is involved in disputes in its ordinary course of business. On the basis of currently known circumstances, Husqvarna estimates that none of the disputes in which the Group is presently involved or which have been settled recently have had, or may have, a material effect on Husqvarna s financial situation or profitability. A description of current legal matters is given in Note 24 on page 63. Insurance provision A provision of SEK 25m was made in the fourth quarter of 2006 referring to the Group s captive insurance companies in the US and Europe. The provision is based on actuarial recalculations during 2006, and is included in Group common costs. Recall of garden tractors in US In June, the Group decided to recall approximately 174,000 garden tractors in the US due to the risk for fuel leakage that could cause fire. The tractors were manufactured in the US for the North American market. The total cost of the recall in 2006 amounted to approximately SEK 75m. Environmental activities Husqvarna operates 14 major plants, of which seven are located in Europe, five in the US, one in Brazil and one in China. All plants have the environmental permits required for current operations. In accordance with Swedish environmental legislation, permits are required for three plants in Sweden. Of these, the facility in Huskvarna is the largest and has the greatest environmental impact. The foundry in this plant generates emissions of particles, and surface treatment of products generates emissions of metals. Product testing generates emissions of several types of substances. This plant also handles a relatively large volume of chemicals and waste management. The Group also operates four small plants in Sweden for which environmental notification is required. Employees The average number of employees in 2006 was 11,412 (11,681), of whom 2,457 (2,456) were in Sweden. At year-end, the total number of employees was 11,317. Of the total average number of employees in 2006, 7,418 (7,593) were men and 3,994 (4,088) were women. Salaries and remuneration in 2006 amounted to SEK 3,033m (3,047), of which SEK 747m (732) refers to Sweden. See also Note 21 on page 58. Proposals to the Annual General Meeting in 2007 Dividend for 2006 The Board of Directors proposes a dividend for 2006 of SEK 2.25 per share, for a total dividend payment of SEK 667m. The proposed dividend corresponds to 35% of income for the period according to the combined financial statements. The Group s long-term goal is for the dividend to correspond to 25 50% of income for the period. Bonus issue The Husqvarna Board of Directors proposes that the Annual General Meeting resolve on a bonus issue of 88,877,745 A-shares. The bonus issue will increase the share capital by SEK 177,755,490, which will be obtained through re-allocation of funds from unrestricted equity according to the most recently adopted balance sheet. The following conditions shall apply to the bonus issue: Each existing A- or B-share shall entitle to one (1) bonus share right for A-shares. Ten bonus share rights shall entitle to three (3) new A-shares. Shareholder s bonus share rights that are not multiples of ten shall be sold through the company and the funds received shall be allocated net of sales costs to the shareholders whose bonus share rights have been sold. The new shares shall entitle to dividend from and including the financial year Record date The record date proposed for the bonus issue is 16 May The last day of trading in the Husqvarna share including the right to participate in the bonus issue will be 11 May The first day of trading excluding this right will be 14 May Effects on the share structure Following the bonus issue, the number of A-shares will correspond to 25.5% of the capital and 77.4% of the votes, as compared to the Before bonus issue After bonus issue Share series Number % votes % capital Number % votes % capital A-shares 9,502, ,380, B-shares 286,756, ,756, Total 296,259, ,136,

34 REPORT BY THE BOARD 32 OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 current 3.2% of the capital and 24.9% of the votes. The share structure will be changed as in the table on the preceding page. Effects on share price and key ratios Following the bonus issue, the number of shares in Husqvarna will increase, which will lead to a decrease in the share price. Assuming a share price of SEK 110 prior to the bonus issue, the new theoretical share price can be calculated at approximately SEK 85, i.e. 110 x10 / (10+3). Key ratios based on the number of shares will also be affected, for example: Before After Key ratio bonus issue bonus issue Earnings per share according to combined, SEK Earning per share according to pro forma, SEK Equity per share, SEK Amendment of articles of association In order to enable the bonus issue from a technical perspective, the Board of Directors proposes that: The last paragraph of 5 of the Articles of Association shall be deleted, to enable issuing only one class of shares by way of a bonus issue. Three shares be redeemed without payment in order to obtain an even number of shares. Authorization for new share issue The Board of Directors also proposes that the Annual General Meeting authorize the Board to issue not more than 38.5 million new A- and B-shares, on one or more occasions, during the period until the Annual General Meeting in The proportion of A- and B-shares shall largely correspond to the division of shares at the time of the issue of new shares. The purpose of the authorization is to facilitate acquisitions for which payment will be made in own shares. The price of the new shares shall be based on the prevailing market price of the Husqvarna share. Guidelines for remuneration of senior management The Board of Directors proposes that the Annual General Meeting approve the principles below for remuneration and other conditions of employment for Husqvarna Group Management. These principles shall apply to remuneration and other conditions of employment for the CEO and President as well as for other members of Husqvarna AB s Senior Management (the Group Management ). The principles shall apply to contracts of employment entered into after the Annual General Meeting 2007 and also to amendments made thereafter to contracts of employment which are in force. Remuneration to Group Management is determined by the Board of Directors on the basis of proposals from the Board of Director s Remuneration Committee. Guidelines The overall principles for remuneration to the Group Management shall be based on the position, individual performance, and the Group s income for the period, and remuneration shall be competitive in the country of employment. Total remuneration to a member of Group Management shall consist of a fixed salary, variable salary in the form of short-term incentives based on yearly performance targets, long-term incentives, pensions, and other benefits. In addition, conditions apply to notice of termination and severance pay. Husqvarna shall aim to offer a competitive total remuneration with a primary focus on performance-related payment. This means that variable remuneration can constitute a substantial component of total remuneration. Fixed salary Fixed salary shall comprise the basis for total remuneration. The salary shall be related to the relevant market and shall reflect the degree of responsibility involved in the position. The salary levels shall be reviewed regularly (usually through an annual salary review) in order to ensure continued competitiveness and to correctly reward performance. Variable salary (Short-term Incentive STI ) Members of the Group Management shall receive STI in addition to the fixed salary. The emphasis in STI shall be on the financial results for the Group or for the sector or function for which the member is responsible. In addition, performance indicators can be used in order to focus on questions of special interest to the company Clearly defined objectives for target and stretch levels of performance shall be stated at the start of every year and shall reflect the plans approved by the Board. STI shall be dependent on the position and may amount to a maximum of 50% of the salary on attainment of the target level and a maximum of 100% of the salary on attainment of the stretch level, which also is the cap for the STI. In the US, the STI component is normally higher and may in some cases amount to a maximum of 100% on attainment of the target level and a maximum of 150% of the salary on attainment of the stretch level. The Board of Directors shall decide if the full 50/100/150% shall apply, or if a lower percentage is appropriate. Long-term incentive The Board of Directors shall evaluate on a yearly basis whether a long-term incentive program (e.g. share or share-price based) shall be proposed to the Annual General Meeting. Pensions and insurance Pension and sickness benefits shall be designed to reflect regulations and practice in the country of employment, and the value of the benefits shall match normally accepted levels within the country. If possible, pension plans shall be defined contribution plans in accordance with the Group s pension policy. Other benefits Other benefits can be provided in accordance with normal practice in the country where the member of Group Management is employed. However, these benefits shall not constitute a significant part of the total remuneration. Notice of termination and severance pay Members of Group Management shall be offered periods of notice and levels of severance pay which are in line with accepted practice in the country where the member is employed. Members of Group Management shall be obliged not to compete with the company during the notice period. Based on the circumstances in each case,

35 HUSQVARNA ANNUAL REPORT 2006 REPORT BY THE BOARD OF DIRECTORS 33 a non-compete obligation with continued payment may also apply after the end of the notice period. Such non-compete obligations shall not apply for more than 24 months from the end of the notice period. Previously determined remuneration which has not become payable The principal conditions for remuneration to the Group Management in current contracts of employment may be seen in Note 26, with references. Authority for the Board to deviate from the guidelines If special circumstances exist, the Board of Directors may deviate from these guidelines. In the event of such a deviation, the next Annual General Meeting shall be informed of the reasons. New long-term incentive program The Board of Directors proposes that the Annual General Meeting adopt a new performance-based incentive program for approximately 50 senior managers. Participants will invest in B-shares in Husqvarna at the market price. For each B-share which the employee purchases within the framework of the program, the company will grant 1.5 share awards and a number of stock options. Each share award entitles the holder to one B-share free of charge, three years after grant. Each stock option entitles the holder to purchase one B-share at a purchase price of 110% of the closing price of the company s B-share during a period of 10 trading days prior to the day of the grant. The stock options may be exercised at the earliest four years and at the latest eight years from the day of the grant. The number of stock options that may be exercised depends on the number of B-shares that the employee has purchased, as well as the development of the company s earnings per share during the period Assuming a price of SEK 100 each for the shares purchased as part of the personal investment, the program will comprise a maximum of 2,400,000 B-shares. If all share awards and stock options are fully exercised, it is estimated that the 2007 program will comprise no more than 0.81% of the share capital. More information will be provided well in advance of the Annual General Meeting Repurchase of own shares The Board of Directors proposes that the Annual General Meeting authorize the Board to acquire B-shares totalling up to 3% of the total number of shares, and to pay for the shares in cash. The shares may be purchased only on the Stockholm Stock Exchange, in order to hedge the company s obligations (including employer contributions) pursuant to 1) the Husqvarna Performance Share Plan 2006, and 2) the proposed new 2007 share purchase/ option program. The company shall on an ongoing basis be able to adapt the number of shares that it holds as a hedge of the company s obligations pursuant to the implemented incentive programs. The participants in the above incentive programs shall be entitled to receive a maximum number of shares in accordance with the conditions of the programs, and transfers of shares under the programs will be made without consideration. Transfers of shares in accordance with the stock options granted under the proposed 2007 plan will be made at a price corresponding to 110% of the close price of the company s B-share on the Stockholm Stock Exchange during a period of 10 trading days prior to the grant of options. The number of shares that may be transferred in connection with the programs will be subject to recalculation in case the company implements a bonus issue, a split, a rights issue or similar, all in accordance with the conditions of the programs. Risks and risk management A number of risk factors affect and may affect the operations in Husqvarna. Work is performed in all business sectors to identify risk areas in order to minimize risks. The essential risk areas presented below are classified as either financial risks or operational risks. Risk management in 2006 Group risk management is administered by the Risk Management function, which is part of Group staff Legal Affairs. Risk Management supports the work of minimizing risks at all levels within the organization, and issues appropriate guidelines. Extensive work was performed during the year together with the Group s Internal Audit function. The Audit Committee continuously discussed the changes implemented and updated the Board of Directors on a regular basis. During the year, all business sectors conducted initial business risk assessment sessions. The objectives of these risk evaluation exercises were to: Identify key sector risks that could negatively affect the long-term strategy. Prioritize key risks, based on likelihood and severity. The next step is to evaluate the probability of each individual risk in relation to the Group s entire risk portfolio. This process helps to ensure that resources are allocated to essential risk areas and that controls are in place for achieving the appropriate balance between opportunity and risk. Financial Risks Changes in commodity prices Recent developments in many commodity markets have resulted in higher prices, particularly for plastics, aluminum, steel and oil, which are important raw materials for Husqvarna. To counter the consequences of higher prices for raw materials and components, the Group continuously works on improving cost-effectiveness and increasing procurement from low-cost countries. Foreign exchange risks Husqvarna conducts operations in approximately 40 countries and is thereby subject to risks associated with financial transactions in different currencies. In particular, the Group is exposed to foreign currency exchangerate risks. Husqvarna is also exposed to risks arising from translation of balance sheets and income statements in foreign subsidiaries. Since only a small part of the Group s sales are in Sweden, change in the value of the Swedish krona compared to other currencies is of great importance. The major currencies that Husqvarna is exposed to are the euro, the US dollar (including currencies correlating with the dollar) and the British pound. Husqvarna s geographically widespread production and its use of hedging transactions reduce the effects of changes in exchange rates.

36 REPORT BY THE BOARD 34 OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 Interest rate risks Husqvarna finances its operations partly through borrowing. This means that part of the company s cash flow is used to pay interest on the Group s debts, which reduces the funds available for Husqvarna s operations and future business opportunities. A rise in interest rates could increase the portion of the Group s cash flow that is used for interest payments.in addition, the Group s assets and liabilities are sensitive to interest-rate changes and are therefore by nature subject to interest-rate risks. The above exposures to interest-rate changes and other interest-rate risks are reduced by the use of derivative financial instruments. Tax risk Prior to the distribution of the Husqvarna shares, Electrolux received a private letter containing a ruling from the US Internal Revenue Service (IRS) with regard to the distribution and the US corporate restructuring that preceded it. The IRS ruling was based on the facts presented and representations made by Electrolux in the request for the ruling. The ruling confirms that the transactions did not entail any adverse US tax consequences for Electrolux, its US subsidiaries or the US shareholders in Electrolux who received Husqvarna shares. In accordance with IRS ruling policy, the IRS ruling does not address certain issues. With regard to those issues, Electrolux relied on an opinion of counsel, which is not binding on the IRS or any court. If the IRS finds that the facts presented and representations made to it are incorrect or incomplete in any material respect, Electrolux may not rely on the IRS ruling. Similarly, if the facts presented and representations made to counsel in connection with the opinion are found to be incorrect or incomplete in any material respect, the opinion may cease to be valid. In either eventuality, the distribution of the Husqvarna shares or related transactions could subject the Electrolux US group, Electrolux, and the US holders of Electrolux shares who received Husqvarna shares, to US tax. Additionally, future events that may or may not be within the control of Electrolux or Husqvarna, including extraordinary purchases by third parties of Husqvarna shares or Electrolux shares, could mean that the distribution of the Husqvarna shares fails to qualify as tax- free for Electrolux and/or for US holders of Electrolux shares. Husqvarna has entered into a Tax Sharing and Indemnity Agreement with Electrolux. In this agreement Husqvarna covenanted and represented among other things, that during a two-year period following the distribution of the Husqvarna shares (i) Husqvarna and its US subsidiaries (Husqvarna Outdoor Products Inc and Husqvarna Professional Outdoor Products Inc) would both continue normal active conduct of trade, (ii) the US subsidiaries would not be liquidated and (iii) neither Husqvarna nor either of its US subsidiaries would sell or otherwise dispose of assets other than in the ordinary course of business. Husqvarna also covenanted and represented that its US subsidiaries would not participate in any negotiations or agreements pursuant to which one or more persons would acquire 50% or more of the stock of Husqvarna or its US subsidiaries (measured by reference to either value or voting power) if such negotiations or agreements might cause the distribution of the Husqvarna shares to become taxable. Pursuant to the Tax Sharing and Indemnity Agreement, Husqvarna and its US subsidiaries have undertaken to indemnify Electrolux and its group of companies for certain US taxes, arising as a consequence of a breach of representation made by Husqvarna or its US subsidiaries in the Tax Sharing and Indemnity Agreement, a change in ownership in respect of Husqvarna or its US subsidiaries as described above, or an action or event subsequent to the distribution of the Husqvarna shares that is inconsistent with information and representations furnished in connection with the IRS ruling or the opinion of counsel. The taxes to which Husqvarna s indemnity relates include (i) taxes (US capital gains tax) resulting from the distribution of the Husqvarna shares or the US corporate restructuring preceding such distribution and (ii) any claims that Electrolux shareholders may assert with respect to US taxes relating to the distribution of the Husqvarna shares. According to the estimate by Electrolux, the US capital gains tax for Electrolux could amount to approximately USD 500m. For further information, see the prospectus: AB Electrolux distribution of shares in Husqvarna AB and prospectus for listing of the company Operational Risks Innovation and product development Product development and innovation are critical factors for maintaining Husqvarna s current market shares and brand positions. In order to meet customer needs, environmental demands and other requirements, the Group must continuously improve performance, develop the existing product range and invest in and develop new technology. Husqvarna has a reliable and well established R&D function that works in close cooperation with Production, Marketing, Legal Affairs and Risk Management to help ensure that the development process gives adequate consideration to the risk perspective. Global economic conditions Historically, the market for Husqvarna s products has generally been characterized by relatively stable demand over the business cycle. Husqvarna generates the majority of its sales in North America and Europe and therefore depends on economic growth in these markets. A downturn in economic development and consumption in North America or Europe may have an adverse effect on the earnings of the Group s operations. Weather conditions Demand for the Group s products is to some extent dependent on the weather. Unforeseen or unusual weather conditions in some areas or regions may have adverse as well as positive effects on sales of the Group s products. Experience shows that demand for lawn mowers and tractors tends to fall in dry weather, which to a certain extent was the situation in 2006, whereas demand for chainsaws increases after storms. In order to manage sudden fluctuations in demand, Husqvarna has adapted the production process and supply chain to respond better and more rapidly, thereby mitigating any financial impact. Seasonality Husqvarna s business is subject to seasonal variations, with demand concentrated at limited periods of the year. The peak demand season for Consumer Products and Commercial Lawn and garden within Professional Products is normally the second quarter of the year. The peak demand season for chainsaws is normally the third quarter of the year. Parameters such as cash flow and production follow the seasonal demand variations, which results in relatively greater risk exposure for Husqvarna during concentrated periods of time.

37 HUSQVARNA ANNUAL REPORT 2006 REPORT BY THE BOARD OF DIRECTORS 35 Competition and price pressure The market for consumer products is particularly susceptible to price pressure. This is particularly true for low-end products for the mass market, which the Group sells through large retailers in North America and Europe. Companies from low-cost regions are seeking to enter the market and by improving their current technology and product know-how could become competitors and compete for market shares. Husqvarna is managing this threat by actively improving its cost structure and supply chain as well as by building on the strong Husqvarna brand portfolio. Customers If Husqvarna were to experience, in relation to a major customer, a significant reduction in orders, termination of relationship or inability to fully collect its trade receivables, this would have a negative effect on earnings. Husqvarna s customers within the Professional Products business area are mainly servicing dealers who are not individually material for the Group. This combined customer base is a mitigating factor and balances the customer risk for the Group as a whole. Suppliers Husqvarna s manufacturing process depends on the availability and timely supply of raw materials and components from external suppliers. Materials and components, such as steel, plastics and chains for chainsaws, and engines for lawn mowers and other wheeled products, are particularly sensitive for Husqvarna. In order to avoid supply-related problems, Husqvarna works closely with its suppliers and endeavors to distribute purchases of important components among at least two suppliers. Manufacturing Husqvarna manufactures and assembles its products in several plants world-wide. In order to avoid production disturbances, various preventive measures are undertaken. An established riskinspection program has been in place for many years, whereby the Group s production facilities are inspected according to best practice in the insurance industry. Deviations from the standards are reported to operational management and are suitably prioritized, monitored and corrected. Acquisitions and divestments The Group s strategy includes making acquisitions within existing or complementary product areas or increasing its geographical presence in such areas. Growth through acquisitions involves risks due to difficulties in integrating operations, employees, technologies and products. Husqvarna has made a number of acquisitions over the years and consequently has accumulated knowledge regarding the opportunities and risks associated with acquisitions. As regards competition-law regulations, it should be noted that Husqvarna s strong position in various product areas may lead to restrictions on the Group s ability to act freely in certain markets and to grow through acquisitions. Insurance coverage The central Risk Management function is responsible for maintaining well-balanced insurance coverage in order to achieve financial economies of scale. Insurance cover is acquired through external insurers for a variety of exposures and risks, such as property damage, business interruption and product liability claims. Husqvarna has two wholly-owned insurance subsidiaries (captives) that assist in the process of optimizing the Group s risk structure. Insurance premiums are allocated internally to reflect the associated risk. In the coming year the allocation model will also reward improvements in addition to the current model. Product liability General and product liability risks are mainly present in relation to contractual parties, risks of personal injury or damage to property related to products sold, or other risks evolving from legislation and regulations. A structured review of the Group s contractual liability risks was introduced during the year with the aim of systematically identifying and assessing these risks. The objective was to determine how to best prevent contractual risks from maturing into financial loss. In addition, Husqvarna established a Committee on Products Safety (COPS), chaired by the Group s Quality Manager, which includes representatives from operations as well as Legal Affairs including Risk Management. This Committee has responsibility for ensuring that product safety is integrated in the design, production and distribution of all Husqvarna products. Intellectual property rights Husqvarna sells products under several well-known brands such as Husqvarna, Jonsered, Flymo, Partner, McCulloch, Poulan, WeedEater and Diamant Boart. The intellectual property portfolio (IP) which was transferred from Electrolux is managed in-house. A main task in 2006 was to establish a new and more effective data-handling system encompassing all IP related information. It is important for Husqvarna s future competitive position that Group brands, new technologies and designs are protected against unauthorized use by competitors. To ensure this protection, Husqvarna Intellectual Property function has been strengthened during the year and IP activities have been in-sourced to gain enhanced control. Disputes Husqvarna is involved in disputes in the ordinary course of business. The disputes concern, among other things, product liability, alleged defects in delivery of goods, services and other issues pertaining to rights and obligations in connection with Husqvarna s operations. Disputes are immediately reported to Group Legal Affairs for analysis and review, and Legal Affairs handles all major claims in cooperation with external lawyers. The Board is supplied with information by the General Counsel on an ongoing basis. Environmental risks The environmental risks within Husqvarna consist both of legislation affecting the Group s products and risks connected with production, maintenance and ownership of industrial buildings. The legislation which affects the products refers principally to restrictions of exhaust emissions from petrol-powered engines, noise levels, and recycling of electrical products. Husqvarna s environmental risk management is decentralized and integrated in the local operations management systems for the environment, health and safety. Husqvarna considers environmental issues in all phases of the product life-cycle, from the design of new products to manufacturing, customer handling and disposal. This process involves not only Husqvarna s own employees but also other relevant stakeholders.

38 REPORT BY THE 36 BOARD OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 Parent company The Parent Company Husqvarna AB (Corporate identity number ) comprises the functions of the Group s head office including Group Treasury as well as development, manufacturing, marketing and sales of motor driven products for forestry and garden care. Net sales for the Parent company in 2006 amounted to SEK 9,404m (6,848), of which SEK 7,097m (4,390) related to sales to Group companies and SEK 2,307m (2,458) to external customers. Income after financial items in 2006 amounted to SEK 1,405m (1,248). After appropriations of SEK -257m (20) and taxes of SEK -338m (-353), income for the period was SEK 810m (915). Investments in tangible and intangible fixed assets during the year were SEK 224m (177). Short-term investments at the end of the period amounted to SEK 0m (694) and cash and cash equivalents amounted to SEK 5,955m (0). Undistributed earnings in the Parent company at year-end amounted to SEK 7,517m (21). Group contributions in 2006 amounted to SEK -349m (-1,399) and are reported in retained earnings. For information on employees, salaries and remunerations, see Note 21 on page 58. For information on shareholdings, net and participations, see Note 28 on page 67. Income statement SEKm Note Net sales 3 9,404 6,848 Cost of goods sold -7,020-4,573 Gross operating income 2,384 2,275 Selling expense Administrative expense Other operating income Other operating expenses Operating income 1,324 1,384 Financial income Financial expenses Income after financial items 1,405 1,248 Appropriations Income before taxes 1,148 1,268 Taxes Income for the period

39 HUSQVARNA ANNUAL REPORT 2006 REPORT BY THE BOARD OF DIRECTORS 37 Balance sheet 31 Dec 31 Dec SEKm Note Assets Non-current assets Intangible assets Tangible assets Financial assets 12 3, Total non-current assets 4, Current assets Inventories Receivables Receivables from subsidiaries 6, Trade receivables Deferred tax assets 3 15 Tax-refund claim 0 4 Derivative instruments Other receivables Prepaid expenses and accrued income ,923 1,203 Short-term investments Cash and cash equivalents 5,955 0 Total current assets 13,845 2,846 Total assets 18,017 3,743 Assets pledged 17 Equity and liabilities 31 Dec 31 Dec SEKm Note Equity Restricted equity: Share capital Statutory reserves Revaluation reserve 3 4 Non-restricted equity: Fair value reserve 1 0 Profit and loss brought forward 6, Income for the period Total equity 8, Untaxed reserves Provisions Provisions for pensions and similar commitments Other provisions Total provisions Interest-bearing liabilities Payables to subsidiaries 2,613 0 Long-term loans 4,537 0 Short-term loans 54 0 Total interest-bearing liabilities 7,204 0 Current liabilities Payables to subsidiaries 850 1,724 Trade payables Tax liabilities 63 0 Other liabilities Derivative instruments Accrued expenses and prepaid income Total current liabilities 1,958 2,637 Total equity and liabilities 18,017 3,743 Contingent liabilities

40 REPORT BY THE 38 BOARD OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 Cash flow statement SEKm Operations Income after financial items 1,405 1,248 Depreciation according to plan charged against above Adjustment for items not included in Cash flow Capital gain/loss included in operating income ,625 1,599 Taxes paid Cash flow from operations, excluding change in operating assets and liabilities 1,397 1,595 Change in operating assets and liabilities Change in inventories Change in trade receivables Change in current intra-group balances -2,748-7 Change in other current assets Change in current liabilities and provisions Cash flow from operations -1,373 1,463 Investments Change in shares and participations Capital expenditure in property, plant and equipment Intangible assets Cash flow from investments Total cash flow from operations and investments -2,187 1,164 Change in equity Share Restricted Retained SEKm capital reserves earnings Total Opening balance, 1 Jan Transfer between retained and restricted reserves Group contributions -1,399-1,399 Tax effect of Group contributions Conditional shareholders contributions 1 1 Income for the period Closing balance, 31 Dec Transfer between retained and restricted reserves Bonus issue Group contributions Tax effect of Group contributions Unconditional shareholders contributions 6,932 6,932 Share-based payments 4 4 Income for the period Closing balance, 31 Dec ,517 8,131 Financing Change in short-term loans Change in long-term loans 4,537 0 Change in short-term investments Shareholders contributions 4,250 0 Group contribution paid -1,393-1,080 Cash flow from financing 8,142-1,164 Total cash flow 5,955 0 Cash and cash equivalents at beginning of year 0 0 Cash and cash equivalents at year-end 5,955 0

41 HUSQVARNA ANNUAL REPORT 2006 NOTES 39 Notes Amounts in SEKm, unless otherwise stated Note Page 1 Accounting and valuation principles 40 2 Financial risk management 47 3 Segment information 48 4 Net sales and operating income 49 5 Other operating income 49 6 Other operating expenses 49 7 Leasing 50 8 Financial income and expenses 50 9 Taxes Intangible assets Property, plant and equipment Financial assets Inventories Other current assets Trade receivables Financial instruments Assets pledged for liabilities to credit institutions Other reserves Share capital and number of shares Untaxed reserves, Parent Company Employees and employee benefits Other provisions Other liabilities Contingent liabilities Business Combinations Remuneration to the Board of Directors, the President and other members of Group Management Fees to auditors Shares and participations Combined Financial Statements and Pro forma Financial Information Definitions 69

42 40 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Note 1 Accounting and valuation principles Basis of preparation The consolidated financial statements of Husqvarna AB are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. As required by IAS 1, entities within Husqvarna apply uniform IFRS rules, as defined in the Husqvarna Accounting Manual. The policies set out below have been consistently applied to all years presented. Some additional information is disclosed based on the standard RR 30:05 from the Swedish Financial Accounting Standards Council. The Parent Company s financial statements are prepared in accordance with the Swedish Annual Accounts Act and the standard RR 32:06 from the Swedish Financial Accounting Standards Council. Principles applied for consolidation During the end of 2005 and first half of 2006 the Husqvarna business was transferred to Husqvarna AB as part of the process of AB Electrolux to spin-off the Husqvarna operations into a stand alone group. Combined historical financial statements have been prepared representing the financial position and results of operations and cash flows of Husqvarna AB and its subsidiaries and other entities historically included in the former Outdoor segment within the Electrolux Group. The statements include assets, liabilities, revenues and costs of doing business in the past, even if the amounts were not historically allocated to Husqvarna or do not appear in the historical financial statements of Husqvarna AB and its subsidiaries. The combined financial statements have been prepared as if the Husqvarna Group was formed as of 1 January The results and net assets of the entities within the Group, as well as related equity and provisions are aggregated. The extent of aggregation has gradually decreased as the Husqvarna entities have legally been transferred to Husqvarna AB. As of 1 June 2006, the Group s income statement, balance sheet, equity and cash flow statement represent 100% of the consolidated Group. Quarter 3, 2006 is the first single quarter with consolidated values and 2007 will be the first full financial year with consolidated values. For all entities transferred to Husqvarna from Electrolux as part of the above described spin-off, the acquisitions have been accounted for as transactions under common control, thus Husqvarna has accounted for the acquired assets and liabilities at the same values as was recognized within the Electrolux Group, the so-called predecessor basis. Husqvarna applies the purchase method to account for acquisitions of subsidiaries not under common control, whereby the assets, liabilities and contingent liabilities in a subsidiary on the date of acquisition are valued at fair value to determine the acquisition value to the Group. If the cost of the business combination exceeds the fair value of the identifiable assets, liabilities and contingent liabilities, the difference is recognized as goodwill. If the fair value of the acquired net assets exceeds the cost of the business combination, Husqvarna reassesses the identification and measurement of the acquired assets. Any excess remaining after that reassessment is recognized immediately in the income statement. The consolidated income for the Group includes the income statements for the Parent Company and its directly and indirectly owned subsidiaries after elimination of intra-group transactions and unrealized intragroup profits in stock, and depreciation and amortization of acquired surplus values. Definition of Group companies The financial statements include Husqvarna AB and all companies in which the Parent Company has the power to govern the financial and operating policies, generally accompanied by a shareholding of more than 50% of the voting rights referring to all shares and participations. The following applies to acquisitions of companies not under common control and to divestments: Companies acquired are included in the consolidated income statement as of the date when Husqvarna gains control. Companies divested are included in the consolidated income statement up to and including the date when Husqvarna loses control. No companies have been divested during the year. Transactions with minority interests are treated as transactions with external parties to the Group. Disposals to minority interests result in gains and losses recorded in the income statement. Purchases from minority interests result in goodwill, representing the difference between the consideration paid and share acquired of the carrying value of net assets in the subsidiary. At year-end 2006, the Group comprised 107 operating units, and 75 companies. Associated companies Associates are companies over which Husqvarna has significant influence but not control, generally accompanied by a shareholding of between 20% and 50% of the voting rights. Investments in associated companies have been reported according to the equity method. Husqvarna s share of income after taxes in an associated company is reported in the income statement. Husqvarna s investments in associates are of operational nature why the result is reported as part of the operating income. Investments in such a company are reported initially at cost, increased, or decreased to recognize Husqvarna s share of the profit or loss of the associated company after the date of acquisition. When Husqvarna s share of losses in an associate equals or exceeds its interest in the associate, Husqvarna does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Gains or losses on transactions with associated companies, if any, have been recognized in relation to the Group s participating interest in the associate. Related party transactions All transactions with related parties are carried out on an arm slength basis. Historically as part of the Electrolux Group transactions with closely related parties included Husqvarna operations financing and derivatives transactions with the Electrolux Group treasury function as well as certain other services in, for example, insurance management and legal advice. Transactions with Electrolux in connection with the establishment of the Group are described in Note 29 Combined Financial Statements and Pro forma Financial Information on page 67.

43 HUSQVARNA ANNUAL REPORT 2006 NOTES 41 Foreign currency translations Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. The financial statements are presented in SEK, which is the Parent Company s functional currency and the presentation currency of the Husqvarna Group. The balance sheets of foreign subsidiaries have been translated into Swedish krona at year-end rates. Income statements have been translated at the average rates for the year. On consolidation, exchange differences arising from the translation of net investments in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders equity. When a foreign operation is sold, exchange differences that were recorded in equity are recognized in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Segment reporting Husqvarna s primary segments (business areas) are based on the different business models for end-customers, consumers and professional users, which are the basis for identifying the predominant source and nature of risks and the differing rates of return facing the Group. The secondary segments are based on Husqvarna s sales per geographical market. The segments are responsible for the operating result and the net assets used in their businesses, whereas finance net and taxes as well as net borrowings and equity are not reported per segment. The operating results and net assets of the segments are consolidated using the same principles as for the total Group. The segments consist of separate legal units as well as divisions in multi-segment legal units where some allocations of costs and net assets are made. Operating costs not included in the segments are shown under Husqvarna s common costs, which mainly include costs for Husqvarna s corporate functions. Transactions between segments are carried out on strictly commercial terms, applying arm s-length principles. Accounting and valuation principles Revenue recognition Sales are recorded net of VAT (Value-Added Tax), specific sales taxes, returns, and trade discounts. Revenues arise almost exclusively from sales of finished products. Sales are recognized when the significant risks and rewards associated with ownership of the goods have been transferred to the buyer and the Group retains neither a continuing right to dispose of the goods, nor effective control of those goods and when the amount of revenue can be measured reliably. This means that sales are recorded when the goods have been placed at the disposal of the customers in accordance with agreed terms of delivery. Revenues from services are recorded when the service, such as product repairs, has been performed. Interest income is recognized on a time-proportion basis using the effective interest method. Dividend income is recognized when the right to receive payment is established. Government grants Government grants relate to financial grants from governments, public authorities, and similar local, national, or international bodies. These are recognized when there is a reasonable assurance that Husqvarna will comply with the conditions attaching to them, and that the grants will be received. Government grants relating to assets are included in the balance sheet as deferred income and recognized as income over the useful life of the assets. Government grants that relate to expenses are recognized in the income statement as a deduction of the related expense. Borrowing costs Borrowing costs are recognized as an expense in the period in which they are incurred. Taxes Taxes include current and deferred taxes applying the liability method (also known as the balance sheet liability method), meaning that deferred tax assets and liabilities are accounted for on all differences between the carrying amount of assets and liabilities in the balance sheet and the tax base. Deferred taxes are calculated using enacted or substantially enacted tax rates. Taxes incurred by Husqvarna are affected by appropriations and other taxable (or tax-related) transactions in the individual Group companies. They are also affected by utilization of tax losses carried forward referring to previous years or to acquired companies. This applies to both Swedish and foreign Group companies. Deferred tax assets on tax losses and temporary differences are recognized to the extent it is probable that they will be utilized in future periods. Deferred tax is not provided for on temporary differences arising on investments in subsidiaries and associates where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and deferred tax liabilities are shown net when they refer to the same taxation authority and when a company or a group of companies, through tax consolidation schemes, etc., have a legally enforceable right to set off tax assets against tax liabilities. Monetary assets and liabilities in foreign currency Monetary assets and liabilities denominated in foreign currency are valued at year-end exchange rates and the exchange-rate differences are included in the income statement, except when deferred in equity for the effective part of qualifying net-investment hedges. Intangible fixed assets Goodwill Goodwill is reported as an indefinite life intangible asset at cost less accumulated impairment losses. The value of goodwill is continuously monitored, and is tested annually for impairment or more regularly if there is an indication that the asset might be impaired. Goodwill is allocated to the cash generating units that are expected to benefit from the combination. Trademarks Trademarks are reported at cost after any accumulated amortization and accumulated impairment. All trademarks with limited

44 42 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated useful life are amortized on a straight-line basis during the useful life, estimated at 10 years. There are no trademarks identified as having indefinite life. Product development expenses Husqvarna capitalizes certain development expenses for new products provided that the level of certainty as to their future economic benefits and useful life is high. The intangible asset is only recognized if the product is sellable on existing markets and that resources exist to complete the development. Only expenditure, which is directly attributable to the new product s development, is recognized. Capitalized development costs are amortized over their useful lives, ranging between 3 to 5 years. The assets are tested for impairment annually or whenever there is an indication that the intangible asset may be impaired. Other intangible assets Other intangible assets include patents, licenses, computer software and other rights. These assets are recognized at the cost of the acquisition and are amortized on a straight-line basis during the estimated useful life, which varies between 3 5 years. Property, plant and equipment Property, plant, and equipment are stated at historical cost less accumulated depreciation, adjusted for any impairment charges. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount only when it is probable that future economic benefits associated with the item will flow to the Group and are of material value. All other repairs and maintenance are charged to the income statement during the period in which they are incurred. Land is not depreciated as it is considered to have an endless useful period, but otherwise depreciation is based on the following estimated useful lives: Buildings and land improvements years Machinery and technical installations 3 15 years Other equipment 3 10 years At each balance sheet date, the Group assesses the estimated useful lives and whether there is any indication that any of the company s fixed assets are impaired. Impairment of long-lived assets If there is an indication of impairment the company estimates the recoverable amount of the asset. The recoverable amount is the higher of an asset s fair value less cost to sell and value in use. An impairment loss is recognized by the amount of which the carrying amount of an asset exceeds its recoverable amount. The discount rates used reflect the cost of capital and other financial parameters in the country or region where the asset is in use. For the purposes of assessing impairment, assets are grouped in cash-generating units, which are the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or group of assets. The Group s cash generating units are Consumer North America, Consumer Rest of the world, Commercial Lawn and Garden, Forestry and Construction. Classification of financial assets Husqvarna classifies its financial assets according to the following categories: financial assets at fair value through profit or loss; loans and receivables; and available-for-sale financial assets. The classification depends on the purpose for which the investment was acquired. Management determines the classification of investments at initial recognition and reviews this designation at every reporting date. Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or if designated as such by management. Derivatives are also categorized as held for trading, presented under derivatives in the balance sheet, unless they are designated as hedges. Assets in this category are classified as current assets if they either are held for trading or are expected to be realized within 12 months of the balance sheet date. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets with the exception of maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets as financial assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Regular purchases and sales of investments (financial assets) are recognized on trade-date, the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Investments are derecognized when the right to receive cash flows from the investments have expired or have been transferred and when the Group has transferred substantially all the risks and rewards of ownership. Available-for-sale financial assets and financial assets recognized at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortized cost using the effective interest method less provision for impairment. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the income statement in the period in which they arise and reported as part of the operating result. Unrealized gains and losses arising from changes in the fair value of non-monetary securities classified as available-for-sale are recognized in equity. When securities classified as available-forsale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securities and reported as operating income.

45 HUSQVARNA ANNUAL REPORT 2006 NOTES 43 The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, the Group establishes fair value by utilizing different valuation techniques. These include the use of recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option-pricing models refined to reflect the issuer s specific circumstances. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. If any such evidence exists for available-forsale financial assets, the cumulative loss is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement are not reversed through the income statement. Leasing A financial lease is a lease that transfers substantially all the risks and rewards associated with ownership of an asset. Title may or may not eventually be transferred. Assets under financial leases in which the Group is a lessee are recognized in the balance sheet and the future leasing payments are recognized as a loan. Expenses for the period correspond to depreciation of the leased asset and interest cost of the loan. The Group s activities as a lessor are not significant. Apart from financial leases all other leases are categorized as operating leases. The payments made under operating leases are recognized in the income statement on a straight-line basis over the leasing period. Financial leases are capitalized at the inception of the lease at the lower amount of either the fair value of the leased property or the present value of the minimum lease payments. The leased assets are depreciated over their useful lifetime. If no reasonable certainty exists that the lessee will obtain ownership by the end of the lease term, the assets are fully depreciated over the shorter period of either the lease term or the useful life of the assets. Husqvarna generally owns its production facilities. The Group rents certain warehouses, office premises as well as certain office equipment under leasing agreements. Most leasing agreements in the Group are operational leases. Inventories Inventories and work in progress are valued at the lower amount of either the acquisition cost or the net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale at market value. The cost of inventories is assigned by using the weighted average cost formula. Appropriate provisions have been made for obsolescence. Trade receivables Trade receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that Husqvarna will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The change in the amount of the provision is recognized in Cost of goods sold. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, bank deposits and other short-term highly liquid investments with maturities of three months or less. Provisions Provisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized, as a provision is the best estimate of the expenditure required to settle the present obligation at the balance sheet date. Where the effect of time value of money is material, the amount recognized is the present value of the estimated expenditures. Provisions for warranties are recognized at the date of sale of the products covered by the warranty and are calculated based on historical data for similar products. Restructuring provisions are recognized when the Group has adopted a detailed formal plan for the restructuring and has either started the implementation of the plan or communicated its main features to those affected by the restructuring. Pensions and other post-employment benefits Pension and other post-employment benefit plans are classified as either defined contribution or defined benefit plans. Under a defined contribution plan, the company pays fixed contributions into a separate entity and will have no legal obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits. Contributions are expensed when they are due. All other pension and other post-employment benefit plans are defined benefit plans. The Projected Unit Credit Method is used to measure the present value of the obligations and costs. The calculations are made annually using actuarial assumptions determined close to the balance sheet date. Changes in the present value of obligations due to revised actuarial assumptions are treated as actuarial gains or losses and are amortized over the employees expected average remaining working lifetime in accordance with the so called corridor approach. Differences between expected and actual return on plan assets are treated as actuarial gains or losses. Net provisions for post-employment benefits in the balance sheet represent the present value of the Group s obligations at year-end less the market value of plan assets, unrecognized actuarial gains and losses and unrecognized past-service costs. Borrowings Borrowings are initially recognized at fair value net of transaction costs incurred. After initial recognition, borrowings are valued at amortized cost using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

46 44 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Accounting of derivative financial instruments and hedging activities Derivatives are initially recognized at fair value on the date that the derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either hedges of highly probable forecast transactions (cash-flow hedges), or hedges of net investments in foreign operations. When the hedges are entered into the Group documents at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at the hedging inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Fair-value hedge Changes in the fair value of derivatives that are designated and qualify as fair-value hedges are recorded as financial items in the income statement, along with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used, is amortized to profit or loss over the period of maturity. Currently there are no fair-value hedges in the Group. Cash-flow hedge The effective portion of change in the fair value of derivatives that are designated and qualify as cash-flow hedges are recognized in equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement as financial items. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial item (for example, inventory), the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. Net investment hedge Hedges of net investments in foreign operations are treated similarly to cash-flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in equity; the gain or loss relating to the ineffective portion is recognized immediately in the income statement as financial items. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of, or in the event of a partial disposal. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement as financial items. Share-based compensation IFRS 2 is applied for the share-based compensation program granted in The instruments granted are shares. An estimated cost of the granted instruments, based on the instruments fair value at grant date, and the number of instruments expected to vest is charged to the income statement over the vesting period. The fair value of the shares is the market value at grant date, adjusted for the discounted value of future dividends which employees will not receive. Husqvarna classifies its share-based compensation programs as an equity-settled program, which means that the cost of the granted instruments fair value at grant date is recognized over the vesting period (3 years). At each balance sheet date, the Group revises the estimates of the number of shares that are expected to vest. Husqvarna recognizes the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. In addition, the Group provides for employer contributions expected to be paid in connection with the share-based compensation program. The costs are charged to the income statement over the vesting period. The provision is periodically revalued based on the fair value of the instruments at each closing date. Cash flow The cash-flow statement has been prepared according to the indirect method. Parent Company s accounting and valuation principles The above described accounting principles are applied by the Parent Company Husqvarna AB with only a few exceptions and additions. Husqvarna Group applies IAS 19 Employee Benefits while the Parent Company applies the principles of FAR s recommendation No 4 Accounting of pensions liabilities and pension costs. The differences are described in note 21. In addition to the depreciation described above in Property, plant and equipment, the Parent Company reports additional fiscal depreciation, permitted by Swedish tax law, as appropriations in the income statement. In the balance sheet, these are included in untaxed reserves. Investments in associated companies are reported at historical cost. Group contributions are reported in accordance with URA 7 (Swedish Financial Accounting Standards Council s Emerging issues task force). Group contributions paid or received to reduce the Group s tax-burden are reported directly against retained earnings, after adjustment for current tax. New accounting principles as from 2006 The IASB has issued a number of new standards and interpretations as well as amendments to standards and interpretations applicable for Husqvarna as from Amendment to IAS 19 This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. The Group has not changed the accounting policy for recognizing actuarial gains and losses and the adoption of this amendment only impacts the format and extent of the disclosures presented in Note 21.

47 HUSQVARNA ANNUAL REPORT 2006 NOTES 45 Amendment to IAS 21 Net Investment in a Foreign Operation, which specifies the treatment of certain exchange differences. Amendment to IAS 39 Cash Flow Hedge Accounting of Forecast Intra-group Transactions, which stipulates that the foreign currency risk of a Highly probable forecast intra-group transaction may qualify as a hedged item in consolidated financial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into the transaction and the foreign currency risk will affect the consolidated income statement. Amendment to IAS 39 The Fair Value Option which permits, under certain conditions, an entity to designate certain instruments upon initial recognition at fair value through the income statement. Amendment to IAS 39 regarding financial guarantee contracts. This amendment defines financial guarantee contracts and states that financial guarantee contracts issued are under the scope of IAS39 and shall be initially at fair value and subsequently measured at the higher amount of either (a) the amount determined in accordance with IAS37, or (b) the amount initially recognized less, if applicable, cumulative amortisation recognized in accordance with IAS28. IFRIC4 Determining whether an Arrangement contains a lease. It requires an assessment of whether (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets, and (b) the arrangement conveys a right to use the asset. None of the above-mentioned amendments and interpretations has had any material impact on the Group s accounts. New accounting principles as from 2007 The following standards, amendments and interpretations have not yet come into effect. The Group is in the process of evaluating the complete effect of the implementation. IFRS 7 Financial Instruments: Disclosures. This standard supersedes IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and states principles for recognizing, measuring, and presenting financial assets and liabilities that complement those included in IAS 32, Financial Instruments: Presentation and IAS 39, Financial Instruments: Recognition and Measurement. IFRS 7 is effective for financial periods beginning on or after 1 January Amendment to IAS 1 Capital Disclosures requires that an entity shall disclose information that enables users of its financial statement to evaluate the entity s objectives, policies, and processes for managing capital. This amendment is effective for annual periods beginning on or after 1 January IFRIC 7 Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies, which provides guidance on how to apply the requirements of IAS 29 for a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when that economy was not hyperinflationary in the prior period. This interpretation is effective for annual periods beginning on or after 1 March IFRIC 7 will not have an impact on the Group s accounts. IFRIC 8 Scope of IFRS 2 which requires consideration of transactions involving the issuance of equity instruments where the identifiable consideration received is less than the fair value of the equity instruments issued to establish whether or not they fall within the scope of IFRS 2. This interpretation is effective for annual periods beginning on or after 1 May 2006 and is not expected to have any impact on the Group s accounts. IFRIC 9 Reassessment of Embedded Derivatives. IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. This interpretation is effective for annual periods beginning on or after 1 June 2006 and is not expected to have any impact on the Group s accounts. IFRIC 10 Interim Financial Reporting and Impairment. IFRIC 10 prohibits the impairment losses recognized in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. This interpretation is effective for annual periods beginning on or after 1 November IFRIC 11 IFRS2 Group and Treasury Share Transactions. The interpretation clarifies the treatment of the classification of sharebased payments when the company purchases treasury shares to settle commitments, and of the accounting of share option plans in subsidiaries applying IFRS. The interpretation is effective for annual periods beginning on or after 1 March IFRIC 12 Service Concession Arrangements. The interpretation is effective for annual periods beginning on or after 1 January The interpretation addresses the arrangements whereby a private operator is contracted to establish an infrastructure to supply public services for a specified period of time. The company receives payment for this service during the tenor of the agreement. This is not applicable for the Group. IFRS 8 Operating segments. The standard is effective for annual periods beginning on or after 1 January The standard addresses the division of the company s operations into different segments. According to the standard, the company is to base this division on its internal reporting structure and is to determine the reportable segments on the basis of this structure. Management is at present assessing whether any changes of its reportable segments will occur as a result of adopting this new standard. Critical accounting policies and key sources of estimation uncertainty Use of estimates Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities in order to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.

48 46 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated The discussion and analysis of Husqvarna s results of operations and financial position are based on the Group s financial statements, which have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU. The preparation of these financial statements requires management to apply certain accounting methods and policies that may be based on difficult, complex or subjective judgments by management or on estimates based on experience and assumptions determined to be reasonable and realistic based on the related circumstances. The application of these estimates and assumptions affects the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of net sales and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. Summarized below follows the accounting policies that require more subjective judgment of the management in making assumptions or estimates regarding the effects of matters that are inherently uncertain. Asset impairment All long-lived assets, including goodwill, are evaluated for impairment yearly or whenever events or changes in circumstances indicate that, the carrying amount of an asset may not be recoverable. An impaired asset is written down to its recoverable amount based on the best information available. Different methods have been used for this evaluation, depending on the availability of information. When available, market value has been used and impairment charges have been recorded when this information indicated that the carrying amount of an asset was not recoverable. In the majority of cases, however, market value has not been available, and the fair value has been estimated by using the discounted cash flow method based on expected future results. Differences in the estimation of expected future results and the discount rates used could have resulted in different asset valuations. Long-lived assets, excluding goodwill, are depreciated on a straight-line basis over their estimated useful lives. Useful lives for property, plant, and equipment are estimated between years for buildings, 3 15 years for machinery and technical installations and 3 10 years for other equipment. The net book value for property plant, and equipment within the Group 2006 amounted to SEK 3,575m. The net book value for goodwill at yearend amounted to SEK 1,780m. Management regularly reassesses the useful life of all significant assets. Management believes that any reasonably possible change in the key assumptions on which the assets recoverable amounts are based would not cause their carrying amounts to exceed their recoverable amounts. taxes. As of December 31, 2006, the Group had a net amount of SEK 61m recognized as deferred taxes and tax loss carry-forwards and other deductible temporary differences of SEK 510m, which have not been included in computation of deferred tax assets. Pensions and other post-employment benefits The Group sponsors defined benefit pension plans for some of its employees in certain countries. The pension calculations are based on assumptions about expected return on assets, discount rates and future salary increases. Changes in assumptions directly affect the service cost, interest cost and expected return on assets components of the expense. Gains and losses which result when actual returns on assets differ from expected returns, and when actuarial liabilities are adjusted due to experienced changes in assumptions, are subject to amortization over the expected average remaining working life of the employees using the corridor approach. Expected return on assets used in 2006 was 6.3% based on historical results. A reduction of 1% would have increased the net pension expenses in 2006 by approximately SEK 12m. The discount rate used to estimate liabilities at the end of 2005 and the calculation of expenses during 2006 was 4.4%. A decrease in this rate of 0.5% would have increased the service cost component of the expense by approximately SEK 8m. Claims reserves Husqvarna maintains third-party insurance coverage and insures itself through wholly-owned insurance subsidiaries (captives) for a variety of exposures and risks, such as property damage, business interruption and product liability claims. Claims reserves in the captives, mainly for product liability claims, are calculated on the basis of a combination of case reserves and reserves which have been incurred but not yet reported. Actuarial calculations are made to assess the adequacy of the reserves based on historical loss development experience, benchmark reporting and payment patterns. These actuarial calculations are based on several assumptions and changes in these assumptions could result in significant differences in the valuation of the reserves. Contingent liabilities The Group is involved in different disputes arising from time to time in its ordinary course of business. Husqvarna estimates that none of the disputes that Husqvarna presently is involved in or that have been settled recently have had, or may have, a material effect on Husqvarna s financial situation or profitability. However the outcome of complicated disputes is also difficult to foresee, and it cannot be ruled out that a disadvantageous outcome of a dispute may result in a material adverse effect on the Group s earnings and financial situation. Deferred taxes In the preparation of the financial statements, the Group estimates the income taxes in each of the taxing jurisdictions in which Husqvarna operates as well as any deferred taxes based on temporary differences. Deferred tax assets relating mainly to tax loss carryforwards and temporary differences are recognized in those cases when future taxable income is expected to permit the recovery of those tax assets. Changes in assumptions in the projection of future taxable income as well as changes in tax rates could result in significant differences in the valuation of deferred

49 HUSQVARNA ANNUAL REPORT 2006 NOTES 47 Note 2 Financial risk management The financial risk management for Husqvarna s entities has been made in accordance with the Husqvarna Group Financial Policy. Described below are the financial risk management principles that are applicable for Husqvarna. Husqvarna is exposed to a number of risks relating to financial instruments including, for example, liquid funds, trade receivables, trade payables, borrowings, and derivative instruments. The risks associated with these instruments are, primarily: Interest-rate risk on liquid funds and borrowings. Financing risks in relation to the Group s capital requirements. Foreign-exchange risk on earnings and net investments in foreign subsidiaries. Commodity-price risk affecting the expenditure on raw material and components for goods produced. Credit risk relating to financial and commercial activities. The Board of Directors of Husqvarna has approved a financial policy as well as a credit policy for the Husqvarna Group to manage and control these risks. These risks are to be managed by, amongst others, the use of derivative financial instruments according to the limitations stated in the Financial Policy. The Financial Policy also describes the management of risks relating to pension fund assets. The management of financial risks has largely been centralized to Husqvarna Group Treasury. Measurement of risk in Group Treasury is performed by a separate risk controlling function on a daily basis. Furthermore, there are guidelines in the Husqvarna Group s policies and procedures for managing operating risk relating to financial instruments by, e.g. segregation of duties and powers of attorney. Proprietary trading in currencies and interest-bearing instruments is permitted within the framework of the Financial Policy. The prime aims of such trading is to maintain a high quality information flow and market knowledge as well as to contribute to the proactive management of the Group s financial risks. Interest-rate risk on liquid funds and borrowings Interest-rate risk refers to the adverse effects of changes in interest rates on the Group s income. The main factor determining this risk is the interest-fixing period. Liquid funds Liquid funds consist of cash and cash equivalents, bank deposits and other short-term investments, including fair value derivative assets. Husqvarna s goal is that the level of liquid funds including unutilized committed credit facilities, shall correspond to at least 2.5% of rolling 12-month sales. In addition to this liquidity, the Group shall have enough liquid resources to finance the expected seasonal build-up in working capital during the next twelve months. Investments in liquid funds are mainly made in interest-bearing instruments with high liquidity and involve issuers with a long-term rating of at least A- as defined by Standard & Poor s or similar institutions. Interest-rate risk in liquid funds Group Treasury manages the interest-rate risk of the investments in relation to a benchmark position defined as a one-day holding period. Any deviation from the benchmark is limited by a risk mandate. Derivative financial instruments like Futures and Forward- Rate-Agreements are used to manage the interest-rate risk. The holding periods of investments are mainly short-term. The majority of investments are made with maturities of between 0 and 3 months. A downward shift in the yield curves of one-percentage point would reduce the Group s interest income by approximately SEK 7m (3). For more information, see Note 16 on page 55. Borrowings The debt financing of Husqvarna is managed centrally by Group Treasury in order to ensure efficiency and risk control. Debt is primarily raised at Parent Company level and transferred to subsidiaries as internal loans or capital injections. In this process, various swap instruments are used to convert the funds to the required currency. Short-term financing is also undertaken locally, mostly in countries where there are capital restrictions. The bulk of the Group s financing is currently conducted through a syndicated bank facility comprising two tranches, one SEK 8,000m revolving credit facility maturing in 2011 and one SEK 3,000m term loan maturing in July Interest-rate risk in long-term borrowings The Financial Policy states that the benchmark for the long-term loan portfolio is an average interest fixing period of six months. Group Treasury can choose to deviate from this benchmark on the basis of a risk mandate established by the Board of Directors. However, the maximum average fixed-rate period is three years. Derivatives, such as interest swap agreements, are used to manage the interest rate risk by changing the interest from fixed to floating or vice-versa. On the basis of 2006 volumes and interest fixings, a one-percentage point shift in interest rates would impact the Group s interest expense by approximately SEK +/- 43m (78) in This calculation is based on a parallel shift of all yield curves simultaneously by one-percentage point. Husqvarna acknowledges that the interest rates on different maturities and different currencies may not change uniformly. Financing risk Financing risk refers to the risk that the financing of the Group s capital requirements and refinancing of existing loans could become more difficult or more costly. This risk can be decreased by ensuring that maturity dates are evenly distributed over time, and that total short-term borrowings do not exceed available liquidity. The non-seasonal debt shall be long-term according to the Financial Policy. The Group s goals for long-term borrowings include an average time to maturity of at least two years, and an even spread of maturities. A maximum of SEK 2,000m in borrowings is normally allowed to mature in the next 12-month period. For more information, see Note 16 on page 55. Foreign-exchange risk Foreign-exchange risk refers to the adverse effects of changes in foreign-exchange rates on Husqvarna s income and equity. In order to manage such effects, the Group covers these risks within the framework of the Financial Policy. The Group s overall currency exposure is managed centrally.

50 48 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated The major currencies that Husqvarna is exposed to are the US dollar, the euro, the Canadian dollar, the British pound as well as the Swedish krona against a range of currencies. Transaction exposure from commercial flows The Financial Policy stipulates the hedging of forecasted sales in foreign currencies, taking into consideration the price fixing periods and the competitive environment. Normally % of the invoiced and forecast flows are hedged up to 6 months while forecast flows for 6 12 months are hedged between 50% and 75%. Group subsidiaries cover their risks in commercial currency flows mainly through Group Treasury. Group Treasury assumes the currency risks and covers such risks externally by utilizing currency derivatives, for which hedge accounting is applied. The table in Note 16 on page 56 shows the Group s major commercial currency flows. Translation exposure on consolidation of entities outside Sweden Changes in exchange rates also affect the Group s income on translation of income statements of foreign subsidiaries into Swedish krona. Husqvarna does not hedge such exposures. The translation exposure arising from income statements of foreign subsidiaries is included in the sensitivity analysis mentioned below. Foreign exchange sensitivity from transaction and translation exposure Husqvarna is particularly exposed to changes in the exchange rates of SEK and USD. Furthermore the Group has significant exposures to EUR, CAD, GBP and a number of other currencies. For example, a 10% increase or decrease in the value of the USD, EUR and CAD against the SEK would affect the Group s income before financial items and tax by approximately SEK +/- 285m for one year, using a static calculation. The model assumes the distribution of earnings and costs effective at the year-end 2006 and does not include any dynamic effects, such as changes in competitiveness or consumer behavior arising from such changes in exchange rates. Exposure from net investments (balance sheet exposure) The net assets and liabilities in foreign subsidiaries constitute a net investment in foreign currency, which generates a translation difference in connection with consolidation. In order to limit negative effects on Group equity resulting from translation differences, hedging is conducted based on borrowings and foreign exchange derivative contracts. This means that the decline in value of a net investment, resulting from a rise in the exchange rate of the Swedish krona, is offset by the exchange gain on the Parent Company s borrowings and foreign exchange derivative contracts, and vice versa. The Financial Policy stipulates the extent to which the net investments can be hedged and also sets the benchmark for risk measurement. Group Treasury is allowed to deviate from the benchmark under a given risk mandate. Commodity-price risks Commodity-price risk is the risk that the cost of direct and indirect materials could increase as underlying commodity prices rise on the global markets. Husqvarna is exposed to fluctuations in commodity prices through agreements with suppliers, whereby the price is linked to the raw material price on the world market. This exposure can be divided into direct commodity exposures, which refer to pure commodity exposures, and indirect commodity exposures, which are defined as exposures arising from part of a component only. Commodity-price risk is managed through contracts with the suppliers rather than the use of derivatives. Credit risk Credit risk in financial activities Exposure to credit risks arises from the investment of liquid funds, and through counterparty-risks related to derivatives. In order to limit exposure to credit risk, a counterparty list has been created which specifies the maximum permissible exposure in relation to each counterparty. Credit risk in trade receivables Husqvarna sells to a substantial number of customers including large retailers, buying groups, independent stores and professional users. Sales are made on the basis of normal delivery and payment terms. Customer Financing solutions are also normally arranged by third parties. The Credit Policy of the Group ensures that the management process for customer credits includes customer rating, credit limits, decision levels and management of bad debts. The Board of Directors decides on customer credit limits exceeding SEK 100m. Note 3 Segment information The segment reporting is divided into primary and secondary segments, where the business areas serve as primary segments and the geographical areas as secondary segments. Financial information for the Parent Company is divided into geographical segments since IAS 14 does not apply. Primary reporting format Business areas The operations are classified in two segments: Consumer Products and Professional Products. Consumer Products comprises garden equipment and light-duty chain saws. Professional Products comprises high performance chain saws, brush cutters, professional lawn and garden equipment, as well as power cutters, diamond tools and related equipment for cutting, e.g. concrete and stone. Financial information related to the above segments is reported below: Net sales Operating income Consumer Products 18,335 18,360 1,415 1,332 1) Professional Products 11,067 10,408 1,875 1,739 Total 29,402 28,768 3,290 3,071 Group common costs Total 29,402 28,768 3,121 2,898 1) In the Supplement to the Prospectus for listing of Husqvarna AB 2006, Group common costs included a cost of SEK 40m relating to the closure of an Italian plant within the Consumer Products segment. This cost is included in Consumer Products above.

51 HUSQVARNA ANNUAL REPORT 2006 NOTES 49 Depreciation/ Assets Liabilities Capital expenditure amortization Cash flow 2) Consumer Products 7,789 9,626 1,755 3, Professional Products 6,921 6,642 2,207 2, ,812 1,560 Total 14,710 16,268 3,962 5, , ,175 2,540 Other 1) , ,515 17,144 5,001 6, , ,140 2,299 Liquid funds Interest-bearing receivables Interest-bearing liabilities 5,090 8,187 Total equity 6,264 2,416 Acquisitions -558 Financial items Taxes paid Total 16,355 17,515 16,355 17, , ,736 1) Includes deferred taxes and common Group services such as Holding, Treasury and Risk Management. 2) Cash flow from operations and investments. The segments are responsible for the management of the operational assets and their performance is measured according to the same criteria, while the financing is managed by Husqvarna Group Treasury at Group or country level. Consequently, liquid assets, interest-bearing receivables, interest-bearing liabilities and equity are not allocated to the business segments. Secondary reporting format - Geographical areas Husqvarna business segments operate in three geographical areas of the world; Europe, North America and rest of the world. Sales by market are presented below and show Husqvarna s sales per geographical market, regardless of where the goods were produced. External sales, per geographical market Europe 11,589 10,644 North America 15,989 16,397 Rest of the world 1,824 1,727 Total 29,402 28,768 Assets and capital expenditure, per geographical area Assets Capital Expenditures Europe 7,385 6, North America 7,999 10, Rest of the world Total 16,355 17, ,259 Parent Company Information Net sales, Parent Company Europe 7,492 4,872 North America 1,152 1,287 Rest of the world Total 9,404 6,848 Note 4 Net sales and operating income Net sales for the Group amounted to SEK 29,402m (28,768). Net sales in Sweden amounted to SEK 944m (1,080). Exports from Sweden during the year amounted to SEK 8,859m (6,015), of which SEK 7,260m (4,444) was to entities within the Group. Revenue rendered from service activities amounted to SEK 3m (11) for the Group. Operating income for the Group amounted to SEK 3,121m (2,898). Operating income includes net exchange-rate differences which amounted to SEK 35m (67). Costs for research and development for the Group amounted to SEK 231m (305) and are included in Cost of goods sold. Depreciation for the year amounted to SEK 836m (827). Salaries, remuneration and employer contributions amounted to SEK 3,815m (3,865) and expenses for pensions and other postemployment benefits amounted to SEK 117m (112). Note 5 Other operating income Group Parent Company Gain on sale of Tangible fixed assets Operations and shares 1 6 Total Note 6 Other operating expenses Group Parent Company Loss on sale of Tangible fixed assets Total

52 50 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Note 7 Leasing At 31 December 2006, Husqvarna s financial leases, recognized as non-current assets, consisted of: Acquisition costs Buildings Machinery and other equipment 3 4 Closing balance, 31 Dec Accumulated depreciation Buildings 3 2 Machinery and other equipment 1 1 Closing balance, 31 Dec 4 3 Net book value, 31 Dec The future amount of minimum lease payment obligations is distributed as follows Present value Operating Financial of future financial leases leases lease payments Total Expenses for rental payments (minimum leasing fees) amounted to SEK 237m (256) in Operating leases There are no material contingent expenses or restrictions among Husqvarna s operating leases. Financial leases There are no financial non-cancellable contracts being subleased within Husqvarna. Neither are there any contingent expenses in the period s results, nor any restrictions in the contracts related to the leasing of facilities. The present value of the future lease payments is SEK 70m. Note 8 Financial income and expenses Group Parent Company Financial income Interest income from subsidiaries 352 from others Dividends from subsidiaries from others Total financial income Financial expenses Interest expense to subsidiaries to others Exchange-rate differences on hedges for foreign net investments 10 on loans and forward contracts Other financial expenses Total financial expenses Interest rate effects of forward contracts intended as hedges for foreign net investments in the amount of SEK -1m (0) are included in Interest expense to others (for the Group and the Parent Company). Note 9 Taxes Group Parent Company Current taxes Deferred taxes Total For the Parent Company 2006 calculated taxes on Group Contribution are included with SEK -98m (-391). The deferred tax assets in the Parent Company amounted to SEK 3m (15) and relate to temporary differences. The Group accounts include deferred tax liabilities of SEK -198m (-121) related to untaxed reserves in the Parent Company. Current taxes include costs of SEK -4m related to previous years. Theoretical and actual tax rates Group % Theoretical tax rate Losses for which deductions have not been made 2.6 Non-taxable income statement items, net -1.6 Timing differences -0.1 Utilized tax loss carry-forwards -0.4 Withholding tax 0.1 Other Actual tax rate

53 HUSQVARNA ANNUAL REPORT 2006 NOTES 51 The theoretical tax rate for the Group is calculated on the basis of the weighted total Group s net sales per country, multiplied by the local statutory tax rates. There were no major changes in statutory tax rates during Tax loss carry-forwards As of 31 December 2006, the Group had tax loss carry-forwards and other deductible temporary differences of SEK 510m (517), which have not been included in computation of deferred tax assets. Of those taxes, loss carry-forwards will expire as follows: And thereafter 32 Without time limit 464 Total 510 As of 31 December 2006, the Group had deferred taxes recognized in equity of SEK -29m (362). Deferred taxes recognized in the income statement amounted to SEK -185m (46). Exchangerate differences amounted to SEK 23m (-36). Changes in deferred taxes Net deferred tax assets and liabilities, 1 Jan Recognized in equity Fixed assets Other -8 Deferred tax assets and liabilities Group Assets Liabilities Net Fixed assets Inventories Current receivables Provisions for pensions and similar commitments Other provisions Financial and operating liabilities Other items ) Recognized unused tax losses Deferred tax assets and liabilities Set-off of tax Net deferred tax assets and liabilities ) Other items include tax allocation reserves of SEK -80m relating to the Parent Company and its subsidiaries in Sweden. Deferred tax assets amounted to SEK 628m, whereof SEK 31m will be utilized within 12 months. Deferred tax liabilities amounted to SEK 567m, whereof 86m will be utilized within 12 months. The above items mainly reflect the deferred tax effects of excessive depreciation, tax allocation reserves, fair value gains, provisions for pensions, provisions for restructuring, obsolescence allowance and tax losses. Recognized in the income statement Fixed assets Inventories Current receivables Provision for pensions and similar commitments Other provisions 30 4 Financial and operating liabilities Other items ) 82 Recognized unused tax losses Exchange-rate differences Fixed assets Inventories 7-11 Current receivables -1 2 Provision for pensions and similar commitments Other provisions -6 9 Financial and operating liabilities Other items 4-7 Recognized unused tax losses 0 0 Net deferred tax assets and liabilities, 31 Dec ) Other items include tax allocation reserves of SEK -80m relating to the Parent Company and its subsidiaries in Sweden.

54 52 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Note 10 Intangible assets Group Parent Company Product Product development Goodwill development Other Total and other Acquisition costs Opening balance, 1 Jan , , Acquired during the year 5 5 Development Fully amortized -5-5 Exchange-rate differences Closing balance, 31 Dec , , Acquired during the year 4 4 Development Acquired companies Fully amortized -5-5 Exchange-rate differences Closing balance, 31 Dec , , Accumulated amortization Opening balance, 1 Jan Amortization for the year Fully amortized -5-5 Impairment 8 8 Exchange-rate differences Closing balance, 31 Dec Amortization for the year Fully amortized -5-5 Impairment 1 1 Exchange-rate differences Closing balance, 31 Dec Net book value, 31 Dec , , Net book value, 31 Dec , , Intangible assets with indefinite useful lives Husqvarna has assigned indefinite useful lives to goodwill with a total carrying amount of SEK 1,780m as per 31 December 2006, whereof SEK 1,040m relates to Consumer Products and SEK 740m to Professional Products. All intangible assets with indefinite useful lives are tested for impairment at least once every year and individual assets can be tested more regularly in cases where there are indications of impairment. The recoverable amounts of the operations have been determined based on value in use calculations. Value in use is estimated using the discounted cashflow model on the strategic plans that are established for each cash-generating unit covering the coming three years, i.e to 2009 in the plans used for the impairment tests made in the fall of The cash flow of the third year is normally used for the fourth year and onwards with no estimated growth rate included. The pre-tax discount rate used in 2006 was 10%. Management believes that any reasonably possible change in the key assumptions on which the cash-generating unit s recoverable amounts are based would not cause their carrying amounts to exceed their recoverable amount.

55 HUSQVARNA ANNUAL REPORT 2006 NOTES 53 Note 11 Property, plant and equipment Machinery Construction Land and land and technical Other in progress Group improvements Buildings installations equipment and advances Total Acquisition costs Opening balance, 1 Jan ,351 5, ,453 Acquired during the year ,111 Transfer of work in progress and advances Sales, scrap, etc Exchange-rate differences ,050 Closing balance, 31 Dec ,810 6, ,399 Acquired companies Acquired during the year Transfer of work in progress and advances Adjustment to opening balance Sales, scrap, etc Exchange-rate differences Closing balance, 31 Dec ,810 6, ,164 Accumulated depreciation Opening balance, 1 Jan , ,498 Depreciation for the year Sales, scrap, etc Exchange-rate differences Closing balance, 31 Dec , ,553 Depreciation for the year Adjustment to opening balance Sales, scrap, etc Exchange-rate differences Closing balance, 31 Dec , ,589 Net book value, 31 Dec ,156 1, ,846 Net book value, 31 Dec ,048 2, ,575 The book value for land was SEK 98m (101). The tax assessment value for the Swedish Husqvarna companies was SEK 205m (206) for buildings, and SEK 37m (44) for land. The corresponding book values for buildings were SEK 137m (142), and SEK 12m (13) for land. Accumulated impairments at year-end on buildings and land were SEK 8m (8) and SEK 0m (0) on machinery and other equipment.

56 54 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Machinery Construction Land and land and technical Other in progress Parent Company improvements Buildings installations equipment and advances Total Acquisition costs Opening balance, 1 Jan ,263 Acquired during the year Transfer of work in progress and advances Sales, scrap, etc Closing balance, 31 Dec ,298 Acquired during the year Transfer of work in progress and advances Sales, scrap, etc Closing balance, 31 Dec ,332 Accumulated depreciation Opening balance, 1 Jan Depreciation for the year Sales, scrap, etc Closing balance, 31 Dec Depreciation for the year Sales, scrap, etc Closing balance, 31 Dec Net book value, 31 Dec Net book value, 31 Dec The tax assessment value for the Parent Company was SEK 175m (175) for buildings, and SEK 32m (38) for land. The corresponding book values were SEK 118m (118) for buildings, and SEK 10m (11) for land. Note 12 Financial assets Group Parent Company Shares in subsidiaries 3, Long-term holdings in securities 1) Other long-term receivables Pension assets 2) Total , ) Available for sale financial assets are included with an amount of SEK 13m (8). 2) Pension assets are related to US, Sweden and Switzerland. See note 21 on page 58. A specification of shares and participations is provided in Note 28 on page 67. Note 13 Inventories Group Parent Company Raw materials 1,195 1, Products in progress Finished products 3,879 4, Advances to suppliers Total 5,165 6, The cost of inventories recognized as expense and included in cost of goods sold amounted to SEK 21,477m (21,128). Provisions for obsolescence are included in the value for inventory. Write-down amounts to SEK 13m and previous write-down is reversed with SEK 14m.

57 HUSQVARNA ANNUAL REPORT 2006 NOTES 55 Note 14 Other current assets Group Value added tax Miscellaneous short-term receivables Provision for doubtful accounts Prepaid expenses and accrued income Total Note 15 Trade receivables At year-end 2006, trade receivables, net of provisions for doubtful accounts, amounted to SEK 3,106m (3,325), representing the maximum possible exposure to customer defaults. The book value of trade receivables is considered to represent fair value. The total provision for bad debts at year-end was SEK 86m (89). Husqvarna has a significant concentration on a number of major customers primarily in the US and Europe. Receivables concentrated to customers with credit limits amounting to SEK 100m or more represent 25% (36) of the total trade receivables. Note 16 Financial instruments Financial instruments are defined in accordance with IAS 32, Financial Instruments: Disclosure and Presentation. Additional and complementary information is presented in the following notes to the Annual Report: Note 1, Accounting and valuation principles, discloses the accounting and valuation policies adopted and Note 2, Financial risk management, describes the Group s risk policies in general and Husqvarna s financial instruments in more detail. Note 15, Trade receivables, describes the trade receivables and related credit risks. The information contained in this note highlights and describes the Company s principal financial instruments having regard to specific important terms and conditions when applicable, as well as the exposure to risk and the fair values at year-end. Net borrowings At year-end 2006, the Group s net borrowings amounted to SEK 4,250m (7,816). The table below presents how the Group calculates net borrowings. Net borrowings Short-term loans Fair-value derivative liabilities Accrued interest expenses and prepaid interest income 10 9 Short-term loans Long-term loans 4,683 7,838 Total interest-bearing liabilities 5,090 8,187 Liquid funds Liquid funds as defined by the Group consist of cash in-hand, bank deposits and other short-term investments, the majority of which mature within three months. Liquid funds also include fair value derivative assets. The table below presents the key data of liquid funds. The book value of liquid funds is approximately equal to fair value. Liquidity profile Cash and cash equivalents Fair-value derivative assets Liquid funds Fixed-interest term, days 1 1 Effective yield, % (average per annum) Unused portion of revolving credit facility 6,350 0 % of net sales 1) 25 1 Net liquidity ) Liquid funds plus the unused portion of a revolving credit facility of SEK 8,000m. Liquid funds, including unused portions of a revolving credit facility of SEK 8,000m amounted to 25% (1%) of rolling 12-month sales in The net liquidity is calculated by deducting short-term loans from liquid funds. Interest-bearing liabilities At year-end 2006, the Group s total interest-bearing liabilities amounted to SEK 5,090m (8,187), of which SEK 4,683m (7,838) referred to long-term loans. Almost all long-term borrowings pertain to the syndicated bank facility which consists of two tranches, one SEK 8,000m revolving credit facility and one SEK 3,000m term loan. The unused portion of the revolving credit facility is SEK 6,350m. The majority of the total borrowings are raised at Parent Company level. In addition to the syndicated bank facility Husqvarna is in the process of setting up a SEK 5,000m Swedish Krona Medium Term Note program in order to diversify funding sources. Furthermore, the Group has uncommitted bilateral bank facilities. At year-end 2006, the average interest-fixing period for longterm borrowings was 0.20 years The average interest-rate at year-end for borrowings was 4.44%. Fair value of the loans has not been calculated, only nominal values have been used. At year-end the Group had not entered into any interest-rate derivatives in order to hedge its financial liabilities. The table below sets out the Group s interest bearing liabilities in more detail. Cash and cash equivalents Fair-value derivative assets Liquid funds Net borrowings 4,250 7,816

58 56 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Borrowings Total book value 31 Dec Issue/maturity date Description of loan Interest Currency Nominal value Bond loans floating rate Industrial Development Revenue Bond Floating USD Total bond loans Other long-term loans Pre spin off financing mainly from Electrolux cash pools Floating 7, Financial lease Fixed USD Other long-term bank loan Fixed Other Revolving Credit Facility Floating USD 224 1, Term Loan Floating USD 436 2,887 Total other long-term loans 4,614 7,759 Total long-term loans 4,683 7,838 Short-term loans Short-term bank loans in Brazil Floating BRL Short-term bank loans in China Floating CNY Short term, uncommitted borrowings Sweden Floating SEK Other short-term bank loans Floating Other Total short-term loans Total interest-bearing liabilities 4,976 8,032 Fair value of derivative liabilities Accrued interest and prepaid income 10 9 Total 5,090 8,187 The average maturity of the Group s long-term borrowings (including long-term loans maturing within 12 months) was 2.86 years (0.24), at the end of A net total of SEK 3,155m in loans, matured, or were amortized in 2006, and these originated principally from long-term loans. Short-term loans at subsidiary level mainly pertain to countries with capital restrictions. The table below presents the repayment schedule of long-term borrowings. Repayment schedule of long-term borrowings, as at 31 December Total Bond loans Bank and other loans 2,890 1,724 4,614 Total 2,890 1,793 4,683 Commercial flows The table below shows the forecasted transaction flows (imports and exports) for the 12-month period of 2007 and hedges at year-end The amounts hedged during 2007 depend on the hedging policy for each flow considering the existing risk exposure. Net hedging of flows in excess of 12 months, not shown in the table, amounts to SEK 211m. This hedging relates mainly to EUR/SEK. EUR USD CAD GBP PLN Other Total Gross transaction flow 2,442-1, ,600 3,849 Hedge -2,423 1, ,904 Net transaction flow The effect of hedging on operating income amounted to SEK -15m during At year-end 2006, unrealized exchange-rate profit on forward contracts amounted to SEK 10m, all of which will mature in Derivative financial instruments The table on page 57 present the fair value and nominal amounts of the Company s derivative financial instruments for managing financial risks.

59 HUSQVARNA ANNUAL REPORT 2006 NOTES 57 Derivatives at market value Nominal Nominal amount Assets Liabilities amount Assets Liabilities IR Forward derivatives 2, FX Forward derivatives 18, , Total 20, , The valuation of derivative financial instruments at market value, presented in the table above, is carried out using the most accurate market prices available. This means that instruments, which are quoted on the market, such as, for instance, the major bond and interest-rate futures markets, are all marked-to-market with the current spot mid-rate. The foreign-exchange spot mid-rate is then used to convert the market value into Swedish kronor, before it is discounted back to the valuation date. For instruments where no reliable price information is available on the market, cash flows are discounted using the deposit/swap curve of the cash-flow currency. In the event that no proper cashflow schedule is available, for instance as in the case of forwardrate agreements, the underlying schedule is used for valuation purposes. To the extent option instruments are used, the valuation is based on the Black-Scholes formula. All valuations are carried out at mid-price prices. Note 17 Assets pledged for liabilities to credit institutions Group Parent Company Real-estate mortgages Total All real estate mortgages are related to a pre-husqvarna bond financing issued by the local US Industrial Development Authority. Note 18 Other reserves Currency Total Hedging translation Other reserve reserve reserves Opening balance, 1 Jan Cash flow hedges Gain/loss taken to equity Exchange difference on translation of foreign operations Revaluation of opening balance Translation difference Transactions recognized directly in equity Closing Balance, 31 Dec Cash flow hedges Gain/loss taken to equity 5-5 Tax on gain Transferred to profit and loss on sale Exchange difference on translation of foreign operations Revaluation of opening balance Translation difference Equity hedge Tax on hedge Transactions recognized directly in equity Closing Balance, 31 Dec

60 58 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Note 19 Share capital and number of shares Share capital, SEKm 1) On 31 December 2006, the share capital comprised 9,502,275 A shares, par value SEK ,756,878 B shares, par value SEK Total 593 1) On 31 December 2005 the number of shares were 4,950,000 with a par value of SEK 100 equal to a total share capital of SEK 495m. The share capital in Husqvarna AB consists of A-shares and B-shares. An A-share entitles the holder to one vote and a B-share to onetenth of a vote. All shares entitle the holder to the same proportion of assets and earnings, and carry equal rights in terms of dividends. Note 20 Untaxed reserves, Parent Company 31 Dec 2006 Appropriations 31 Dec 2005 Accumulated depreciation in excess of plan on Brands Machinery and equipment Buildings Tax allocation reserve Other financial reserves Total Other financial reserves include fiscally permissible appropriations referring to receivables in companies in politically and economically unstable countries. Note 21 Employees and employee benefits Number of employees, salaries, other remuneration and employer contributions In 2006, the average number of employees was 11,412 (11,681), of whom 7,418 (7,593) were men and 3,994 (4,088) women. A detailed specification of the average number of employees by country will be submitted to the Swedish Companies Registration Office and is available on request from Husqvarna AB, Investor Relations. Average number of employees by geographical area Geographical area Europe 4,750 4,963 North America 5,923 6,068 Rest of the world Total 11,412 11,681 Salaries and remuneration for the Group amounted to SEK 3,033m (3,047), This includes salaries and remuneration to Board members and senior managers totaling SEK 94m (57). Employer contributions excluding pension costs for the Group amounted to SEK 782m (818). Salaries and remuneration for the Parent Company amounted to SEK 677m (660) and employer contributions excluding pension costs were SEK 262m (252). Of the Board members and senior managers in the Group, 96 were men and 10 women, of whom 13 men and 5 women were in the Parent Company. Employee absence due to illness Employees Employees in the All in the All Parent employees Parent employees % Company in Sweden Company in Sweden Total absence due to illness, as a percentage of total normal working hours Of which 60 days or more Absence due to illness, by category 1) Women Men years or younger years years or older ) % of total normal working hours within each category, respectively In accordance with the regulations in the Swedish Annual Accounts Act absence due to illness for employees in the Parent Company and its subsidiaries in Sweden is reported in the table above. The Parent Company comprises the Group s head office as well as a number of units and plants, and employs the main part of the Group s employees in Sweden. Pensions and other post-employment benefits Husqvarna sponsors pension plans in many of the countries in which it has activities. Pension plans can be defined contribution or defined benefit plans or a combination of both. Under defined benefit pension plans, the Company enters into a commitment to provide pension benefits based upon final or career average salary, employment period or other factors that are not known until the time of retirement. Under defined contribution plans, the Company makes periodic payments to independent authorities or investment plans and the level of benefits depends on the actual return on those investments. Some plans combine the promise to make periodic payments with a promise of a guaranteed minimum return on the investments. These plans are treated as defined benefit plans. In some countries, the companies make provisions for compulsory severance payments. These provisions cover Husqvarna s commitment to pay employees a lump sum at retirement age, or upon the employees dismissal or resignation. These plans are shown below as Other post-employment benefits. In addition to providing pension benefits, Husqvarna offers health-care benefits to some of its employees in the United States. These plans are unfunded and listed below as Other post-employment benefits. Husqvarna s major defined benefit plans which cover employees in the US, UK, Norway and Sweden, are all funded. Husqvarna also funds plans in Canada, Japan and Switzerland. The plans in Germany, France and Italy are unfunded.

61 HUSQVARNA ANNUAL REPORT 2006 NOTES 59 A small number of Husqvarna s salaried employees in Sweden are covered by a multi-employer defined benefit pension plan insured by Alecta. It has not been possible to obtain the necessary information for the accounting of this plan as a defined benefit plan, and therefore, it has been accounted for as a defined contribution plan. Set forth below are schedules showing the obligations of the plans in Husqvarna, the assumptions used to determine these obligations and the assets relating to the benefit plans, as well as the amounts recognized in the income statement and balance sheet. The schedules include reconciliations of the opening and closing balances of the present value of the defined benefit obligation, as well as opening and closing balances of the fair value of plan assets and of the changes in net provisions during the year. Husqvarna s policy for recognizing actuarial gains and losses is to recognize in the income statement that portion of the cumulative unrecognized gains or losses in each plan that exceeds 10% of the greater of the defined benefit obligation and the plan assets. This portion of gains or losses in each plan is recognized over the expected average remaining working lifetime of the employees participating in the plans. Specification of net provisions for pensions and other post-employment benefits recognized in the balance sheet Pensions, Other Pensions, Other defined post-em- defined post-embenefit ployment benefit ployment plans benefits Total plans benefits Total Present value of obligations for unfunded plans Present value of obligations for funded plans 1,534 1,534 1,664 1,664 Fair value of plan assets -1,342-1,342-1,296-1,296 Unrecognized actuarial gains/losses Unrecognized past-service cost Net provisions for pensions and other post-employment benefits Whereof reported as prepaid pension cost Provisions for pensions and other postemployment benefits Expenses for pensions and other post-employment benefits recognized in the income statement Current service cost Interest cost Expected return on plan assets Amortization of actuarial losses / gains 12 2 Amortization of past service cost Employee contributions Effect of any curtailments and settlements 13-1 Expenses for defined benefit plans and other post-employment benefits Expenses for defined contribution plans ) Total expenses for pensions and other post-employment benefits Actual return on plan assets ) 2005 figure restated, incorrectly stated in the Supplement to the Prospectus for listing of Husqvarna AB For Husqvarna, the total expenses for pensions and other post-employment benefits have been recognized as operating expenses and classified as manufacturing, selling or administrative expense depending on the function of the employee. Change in the present value of the defined benefit obligation Other Other Pen- post-em- Pen- post-emsion, ployment sions, ployment benefits benefits Total benefits benefits Total Opening balance 1, ,864 1, ,411 Current service cost Interest cost Actuarial losses (gains) 1) Plan amendments Curtailments -2-2 Settlements 2) Exchange differences on foreign plans Benefits paid Closing balance 1, ,746 1, ,864 1) Experience adjustment on plan liabilities equals SEK -3m (-8). 2) As per 31 December Husqvarna has a liability of SEK 48m to pay for settled liabilities in Sweden. Husqvarna will receive reimbursement from the Swedish pension foundation in the beginning of 2007.

62 60 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Change in the fair value of plan assets Pension, Pension, benefits benefits Opening balance 1, Expected return Acuarial gains (and losses) 1) Employer Contributions Employee Contributions 8 9 Exchange differences on foreign plans Benefits paid Closing balance 1,342 1,296 1) Experience adjustment on plan assets equals SEK -26m (59). The major categories of plan assets as a percentage of the total fair value of plan assets are: Defined benefit % pension plans Equity instruments 44.9 Debt instruments 52.1 Property 1.0 Other 2.0 Actual return on plan assets was SEK 50m (131). Principal actuarial assumptions at the balance sheet date (expressed as a weighted average) % 31 Dec Dec 2005 Discount rate Expected long-term return on assets Expected salary increases When determining the discount rate, AA-rated corporate bonds indexes are used which match the duration of the pension obligations. If no corporate bond is available government bonds are used to determine the discount rate. To determine the expected return, return on equity and equity related instruments are based on the historical risk premium for equities and current bond yields. Return on fixed income and fixed income related investments are based on current bond yields. The weighting of asset classes is determined by using the respective scheme s benchmark asset allocation, which for all major schemes is set out in the Group s financial policy. An increase or decrease with one percentage point in the assumed medical cost trend rate would not materially effect the Group s current service cost or post-employment benefit obligation. The company expects to make contributions of approximately SEK 41m to the plans during Reconciliation of changes in net provisions for pensions and other post-employment benefits Other post- Pensions, defined employment benefit plans benefits Total Net provision for pensions and other post-employment benefits, 31 Dec Pension expenses Employer contributions and benefits paid directly by the Company Exchange differences Net provision for pensions and other post-employment benefits, 31 Dec Parent Company According to Swedish accounting principles adopted by the Parent Company, defined benefit liabilities are calculated on the basis of officially provided assumptions, which differ from the assumptions used in the Group under IFRS. The pension benefits are secured by insurance policies, contributions to a separate fund or recorded as a liability in the balance sheet. The accounting principles used in the Parent company s financial statements differ from the IAS/IFRS principles, mainly in the following areas: The pension liability calculated according to the Swedish accounting principles does not take into account future salary increases The discount rate used in the Swedish calculations is set by the Swedish Financial Supervisory Authority. Changes in the discount rate and other actuarial assumptions are recognized immediately in the income statement and the balance sheet Deficit must be either immediately settled or recognized as a liability in the balance sheet Surplus cannot be recognized as an asset but may in some cases be refunded to the company to offset pension costs Change in the present value of the defined benefit pension obligations Funded Unfunded Opening balance, 1 Jan Current service cost 12 1 Interest cost 10 1 Benefits paid -3-1 Other increase of the present value 3 Closing balance, 31 Dec Current service cost 17 4 Interest cost 10 1 Benefits paid -4-1 Other increase/decrease of the present value -45 Closing balance, 31 Dec

63 HUSQVARNA ANNUAL REPORT 2006 NOTES 61 Change in the fair value of plan assets Funded Fair value of plan assets, 1 Jan Actual return on plan assets 40 Contributions and compensation to/from the fund 20 Effect of redemption and aquired/sold business Fair value of plan assets, 31 Dec Actual return on plan assets 9 Contributions and compensation to/from the fund 19 Effect of redemption and acquired/sold business Fair value of plan assets, 31 Dec Amounts recognized in the balance sheet Present value of pension obligations Fair value of plan assets Surplus Net provision for pension obligations Whereof reported as Provision for pensions 1) Other liabilities 1) In the balance sheet an additional debt of SEK 10m to the Swedish pension foundation is included in Provisions for pensions. Amounts recognized in profit or loss for pensions Current service cost Interest cost Actual return on plan assets Effect of redemption Expense of defined benefit pension plans Insurance premiums Expense of defined contribution plans Yield tax on pension capital Special payroll tax on pension costs 9 13 Cost for credit insurance Total pension expense for the year Compensation from the pension fund Total recognized pension cost according to Swedish GAAP The major categories of plan assets as a percentage of the total plan assets and return on these categories as a percentage % 2006 Return 1) Equity Debt Other 1 0 Total ) The return is measured from when the assets were transferred from Electrolux pension foundation to Husqvarna s pension foundation. Principal actuarial assumptions at the balance sheet date % 31 Dec Dec 2005 Discount rate Long-term incentive Long-term incentive program 2006 The Electrolux Annual General Meeting on 24 April 2006 approved the Husqvarna Board of Directors proposed long-term incentive program, which covers about 40 senior managers. The program is a performance-based share program based on value creation targets for Husqvarna that are established by the Board. If the set targets for value creation are reached or exceeded after a three-year period, shares of series B will be allocated. Allocation of shares under the program is determined on the basis of three levels of value creation, entry, target and stretch. If the entry level is not reached, no allocation will take place. If stretch level is reached, a maximum number of shares will be allocated and that number may not be exceeded regardless of the value created during the period. The number of shares allocated at stretch level is 50% greater than the number of shares that are allocated at target level. The shares will be allocated free of charge after the end of the three-year period. Participants are permitted to sell allocated shares to cover personal income tax, but the remaining shares must be held for at least two years. Participants in the program are divided in four groups; the President, other members of Group Management, and two groups of other senior managers and key employees. For each of the four groups a target value is set in SEK. Each target value is converted into a number of shares. The values are shown in the table below: Position/Group Target number of B-shares 1 ) Target value in SEK President and CEO 24,000 1,800,000 Other members of Group Management 12, ,000 Other senior managers, category A 8, ,000 Other senior managers, category B 6, ,000 Total target value and number of shares for all participants, approximately 2) 320,000 24,000,000 1) Each target value is subsequently converted into a number of shares. The conversion rate is SEK 75, based on the average last price paid for series B-shares during the 10 trading days on the Stockholm Stock Exchange preceding the date on which the offer of participation in the program was made (adjusted for the discounted value of future dividends). 2) The maximum number of shares that can be allocated in the program is 480,000 shares and is calculated as target value SEK 24,000,000 divided by 75 and multiplied by 1.5 (assuming that stretch level is reached). There are currently no hedging costs or similar costs for the program. There is no right for the participants or Husqvarna to renegotiate the conditions of the incentive program. Accounting principles The program is accounted for in accordance with IFRS 2 Sharebased Payment. The Group provides for the employer contributions that are expected to be paid when the shares are distributed. The provision is periodically revalued based on the share market price at each balance sheet date. The total cost charged to the income statement for 2006 amounted to SEK 9 m whereof

64 62 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated SEK 2m refers to employer contribution. The total provision for share-based compensation amounted to SEK 2m. Incentive Compensation Historically, Husqvarna operations have been included in the Electrolux Group. Over the years, Electrolux has implemented several long-term incentive programs (LTI) which senior managers (approximately 30) within Husqvarna have participated in. During 2006, before the spin off from Electrolux, all options in Electrolux that were held by Husqvarna s employees were exercised and no members of the Group Management or any other of Husqvarna s employees longer hold such options The Husqvarna Board has decided to compensate for the remaining shortfall periods existing after the split on 1 January 2006, of the old Electrolux Performance Share Programs (PSP) initiated in 2004 and Participation in PSP 2004 gives 1/3 of the award level for 2006 and participation in PSP 2005 gives 1/3 of the award level for 2006 and 1/3 for There are four award levels (SEK): 1,200,000 / 900,000 / 600,000 / 450,000. The Husqvarna Board has decided to use short-term incentive plans for 2006 and 2007 as compensation solution. These plans are based on Group value creation and the following principles. Employees covered must remain employed in Husqvarna until 31 December 2007 to be entitled. In addition to the original award level, 50% of said award level will be added as a retention bonus. Final payout for 2006 and 2007 will be made in the first quarter 2008, subject to the Husqvarna Board approval of actual Value Creation. Total cost for 2006 was approximately SEK 15m. The total cost charged for the Electrolux PSP 2005 amounted to SEK 13m. Note 22 Other provisions Group Parent Company Provisions for Warranty Warranty restructuring commitments Other Total commitments Other Total Opening balance, 1 Jan Provisions made Provisions used Unused amounts reversed Exchange-rate differences Closing balance, 31 Dec Current provisions Non-current provisions Provisions made Provisions used Unused amounts reversed Exchange-rate differences Closing balance, 31 Dec Current provisions Non-current provisions Provisions for restructuring represent the expected costs to be incurred in the coming years as a consequence of Husqvarna operations decision to close some factories, rationalize production and reduce personnel. The amounts are based on Husqvarna Management s best estimates and are adjusted when changes to these estimates are known. Provisions for warranty commitments are recognized as a consequence of Husqvarna s policy to cover the cost of repairing defective products. A warranty is normally granted for 1 to 2 years after the sale. The increase in other provisions is mainly due to the claims reserves in the captives. These reserves were not allocated to Husqvarna during 2005 (see Note 29). Note 23 Other liabilities Group Parent Company Accrued holiday pay Other accrued payroll expenses Prepaid income 2 2 Other accrued expenses Other operating liabilities Total 1,096 1, Other accrued expenses include accruals for fees, advertising and sales promotion, bonuses, extended warranties, rebates and other items.

65 HUSQVARNA ANNUAL REPORT 2006 NOTES 63 Note 24 Contingent liabilities Group Parent Company Guarantees and other commitments On behalf of internal counterparties 70 On behalf of external counterparties Total The major portion of the total amount of liabilities, guarantees and other commitments on behalf of external counterparties is related to US sales to dealers financed by external financing companies with a regulated buy-back obligation of Husqvarna products in the event of dealers bankruptcy and a pre-husqvarna bond financing issued by the local US Industrial Development Authority. In addition to the above contingent liabilities, guarantees for fulfilment of contractual undertakings are given as part of Husqvarna s normal course of business. There was no indication at year-end that payment will be required in connection with any contractual guarantees. Husqvarna is involved in different disputes arising from time to time in its ordinary course of business. Such disputes can prove to be costly and time-consuming and may disrupt the day-to-day business. The outcome of disputes is difficult to predict, and significant adverse effects on Husqvarna s earnings and financial position cannot be ruled out in the event of a disadvantageous outcome. Husqvarna continuously evaluates pending disputes, but is currently unable to give an assessment of the extent of the damage likely to result from such a negative outcome. However, on the basis of its knowledge in the present circumstances, Husqvarna estimates that none of the disputes that it is currently party to or that have been recently settled, has had, or may have, a significant effect on Husqvarna s financial position or profitability. Below follows a summary of significant matters that are unresolved. Gas explosion in Husqvarna Belgium S.A. s factory in Belgium A gas explosion, which occurred on Husqvarna Belgium SA s factory area in Ghislenghien, Belgium, caused the loss of 24 lives, more than 100 personal injuries and substantial property damage. The accident was caused by the bursting of a sub-surface industrial gas pipe. Neither the exact cause of the accident, nor the responsibility therefore has been determined. Husqvarna Belgium has, together with at least 20 other companies, authorities and persons, received notifications of potentially having contributed to the accident. Several parties have initiated claims for damages against, among others, Husqvarna Belgium. Husqvarna Belgium has denied all responsibility and has itself also initiated claims for damages against other parties involved. It may take several years to determine responsibility for the accident and whether any damages are payable. Based on the facts available and the substance of the claims, Husqvarna estimates that any liabilities arising for Husqvarna Belgium due to the accident will largely be covered by the relevant insurance policies. Alleged inaccurate specification of engine capacity in lawn mowers An attempted consumer class action lawsuit filed in Illinois, USA, alleges that the engine capacity in lawn mowers (some manufactured by Husqvarna), did not correspond with the engine capacity specified. The original lawsuit involved various engine manufacturers, lawn mower manufacturers and one retailer. The plaintiffs sought class certification of purchasers of lawn mowers manufactured or sold by the defendants. The plaintiffs are seeking an injunction against continued sales of the product on account of alleged inaccurate specification of engine capacity as well as compensatory and punitive damages and litigation costs. An amended complaint involves more plaintiffs, an additional defendant and includes a RICO count against all defendants. The proceedings are very early in the discovery process and the defendants continue to challenge the formation of a class. Husqvarna has denied liability and refutes the contention that consumers sustained a loss. Product liability especially regarding injuries involving contact with blades on garden tractors operated in reverse Husqvarna, in the course of its day-to-day business, is subject to claims and disputes involving product liability. Such disputes involve claims for compensation for material damage or personal injury and may sometimes involve claims for punitive damages. Among these lawsuits are disputes where product liability plaintiffs cite serious injuries sustained by children as a result of contact with the blades of a garden tractor operated in reverse. The circumstances differ from case to case, but all plaintiffs argue that garden tractors should not be able to travel in reverse with the mower deck engaged. Virtually all garden tractors in the industry are capable of operating in reverse with the blades engaged. Husqvarna tractors meet or exceed industry standards. Husqvarna assesses that it has ample insurance coverage for these cases. Whitesell contract dispute Whitesell, which is a fastener supplier, has filed a lawsuit against, among others, Husqvarna, containing various claims for alleged breach of an exclusive eight-year supply agreement. The agreement regulates, together with a settlement agreement and a Court Order between the parties, supplies to Husqvarna and one other party. It is early in the discovery process and therefore difficult to estimate any potential damages. Settlement discussions are ongoing between the parties and the parties continue to cooperate under the terms of the agreement.

66 64 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Note 25 Business Combinations Acquisitions of the Husqvarna Operations within Electrolux Before September 2005 Husqvarna AB did not legally own any of the subsidiaries within the Outdoor Products segment in Electrolux. In order to prepare for the distribution of the shares in Husqvarna AB the Outdoor Products operations were transferred to Husqvarna AB during September 2005 May In the first half of 2006 Husqvarna acquired the operations in Spain, Canada, Italy, Germany, Netherlands, Poland, Ireland, Hungary, France, Czech Republic and Argentina. In April 2006 the US operations were transferred to Husqvarna as an unconditional shareholder s contribution, and the establishment of the Group was finalized with the transfer of the Czech operation 31 May (see Note 29). All acquisitions were accounted for at predecessor values. Other acquisitions completed during 2006 In addition to the acquisitions from Electrolux, Husqvarna made a number of acquisitions included in the consolidated accounts in None of them have individually a material impact on the Group s financial statements. These acquisitions are described below: McOuat In March 2006 Husqvarna acquired the assets and liabilities of McOuat, a Canadian distributor. For many years McOuat has been the Group s major distributor in Canada for professional products for servicing dealers. McOuat is included in the consolidated accounts, within the Professional Products business area, as from 1 March 2006 and has contributed SEK 70m to the Group s net sales and SEK 35m to operating income. The acquisition price was SEK 193m. The goodwill arising from the acquisition amounts to SEK 121m and refer to synergies from including the distribution network in Husqvarna. Dixon In July 2006, Husqvarna signed an agreement to acquire the assets and liabilities of Dixon Industries Inc in the US. Dixon manufactures zero-turn riding lawn movers. Dixon is included in the consolidated accounts as from 31 July 2006 and contributed SEK 74m to the Group s net sales while having an impact of SEK -18m on operating income. The acquisition price for Dixon was SEK 240m and the operations is included in the Group s Professional Products business area. The goodwill recognized in connection with the acquisition refer to synergies arising by combining the Husqvarna operations with Dixon operations. In addition to goodwill amounting to SEK 146m, other intangibles amounting to SEK 58m have been recognized, mainly consisting of the Dixon trademark. Joint venture with Hebei Jikai Industrial Co Ltd In December 2006, Husqvarna established a joint venture with Hebei Jikai Industrial Co Ltd in China. The joint venture acquired Jikai s Diamond tools operation. Husqvarna owns 80% of the company. The acquisition price for Jikai was SEK 125m. The assets and liabilities were acquired at fair value and the goodwill amounts to SEK 35m. The joint venture, which is consolidated (with a 20% minority interest) in Husqvarna s accounts as from 31 December 2006, has not had any impact on the Group s Income statement for The acquired operation is included in the Professional Products business area. If all of the above acquisitions would have occurred on 1 January 2006, Group Net Sales would have been impacted by approximately SEK 560m and Operating Income by approximately SEK 55m. Details of the total net assets acquired and goodwill Cash paid, including acquisition costs 558 1) Fair value of net assets acquired 256 Goodwill 302 1) Corresponds to the impact on the Group s cash flow. Fair value adjustment and purchase Fair value Book value price acquisition SEKm acquisition allocation balance Non-current assets Inventories Trade receivables Other operating assets 3 3 Trade payables Other operating liabilities Acquired Net Assets Agreements and acquisitions during 2007 Klippo AB In January 2007, Husqvarna signed an agreement to acquire Klippo AB, the largest producer of petrol-driven walk-behind lawn mowers for the Swedish market. The acquisition will be included in the Group s financial statements as from 1 February The operation will be included in the Group s Professional Products business area. The acquisition price amounts to SEK 221m on a debt free basis and a preliminary acquisition analysis indicates that goodwill and other intangibles amount to approximately SEK 195m. Gardena AG In late December 2006 the Group signed an agreement to acquire Gardena AG of Germany. Gardena is the leader in the European consumer market for irrigation products, and has a leading position in garden tools, garden ponds and pumps, as well as electric garden products. In the fiscal year ending September 2006, the company reported sales of approximately SEK 3,800m (EUR 422m). About half of Gardena s sales refer to Germany and neighboring countries, and the remainder mainly to other European markets. Gardena s products are sold in more than 80 countries. Irrigation products account for more than two thirds of sales. Production is based in Germany and the Czech republic and the company has approximately 2,900 employees. The purchase price amounts to approximately SEK 6.5 billion (EUR 730m) on a debt-free basis. The acquisition is expected to be completed during the first quarter of 2007, subject to approval by relevant authorities. Gardena is expected to contribute positively to Husqvarna s net income in The operation will be integrated in the Group s Consumer Products operation.

67 HUSQVARNA ANNUAL REPORT 2006 NOTES 65 Komatsu Zenoah s outdoor-products operation At the end of January 2007, Husqvarna signed a final agreement for acquisition of the outdoor products operation within Komatsu Zenoah Co of Japan. Komatsu Zenoah is a leading producer of portable outdoor power products, and is the market leader in Japan. The product range comprises mainly brush cutters, chainsaws, trimmers and blowers. Sales for this operation in the latest fiscal year ending 31 March 2006 amounted to approximately SEK 1,200m (approximately JPY 19 billion), of which about half were in Japan. The number of employees was approximately 700. Production is based in Japan and China. The purchase price is approximately SEK 1,100m (approximately JPY 18.2 billion) on a debt-free basis. The acquisition is expected to be completed in the beginning of April 2007, subject to approval by the relevant authorities. The operation will be consolidated in the Group s accounts within Professional Products. Note 26 Remuneration to the Board of Directors, the President and other members of Group Management Remuneration to Board members Remuneration to Board members for 2006 was authorized by the Electrolux Annual General Meeting and distributed by the Board to members who are not employed by the Company. Information on remuneration to Board members is provided in the table below. Remuneration to the President and other members of Group Management is proposed by the Remuneration Committee and authorized by the Board. Authorized remuneration to the Board of Directors for the period January 2006 until the 2007 AGM Ordinary remun- Remun- eration for Remuneration the period eration for the period from the for Total January-April 2006 AGM Committee remun- SEK (2006 AGM) 2007 AGM work eration Lars Westerberg 300,000 1,500,000 50,000 1,850,000 Bengt Andersson Peggy Bruzelius 90, ,500 75, ,500 Robert F Connolly 437, ,500 Börje Ekholm 90, , , ,500 Tom Johnstone 90, , ,500 Anders Moberg 90, ,500 50, ,500 Gun Nilsson 90, ,500 75, ,500 Peder Ramel 90, , , ,500 Annika Ögren Malin Björnberg Total 840,000 4,562, ,000 5,927,500 The remuneration payable to the current Board of Husqvarna AB was resolved at an Extraordinary General Meeting in February The Board members have been elected for the period from January 2006 until the end of the Annual General Meeting in 2007, and the remuneration resolved upon covers this entire period. There are no agreements in place governing severance pay to Board members. Remuneration Committee The task of the Remuneration Committee is to provide the Board of Directors with proposal for remuneration to members of Group Management regarding targets and criteria for variable remuneration, the relationship between fixed and variable salary, changes in fixed or variable salary, long-term incentives, pension terms and other benefits. The Committee consists of three Board members: Peder Ramel (Chairman), Anders Moberg and Lars Westerberg. At least two meetings shall be held annually. General principles for remuneration to Group Management The overall principles for remuneration to senior managers are that it should be based on the position held, individual and team performance and competitive in the country of employment. The overall remuneration package for senior managers comprises fixed salary, variable salary in the form of short-term incentives based on annual performance targets, long-term incentives and other benefits such as pension and insurance. Husqvarna aims to offer competitive and performance based remuneration. Variable remuneration may constitute a significant proportion of total remuneration, but could also be zero if entry level is not achieved or capped if stretch level is attained. Variable remuneration to the President and Group Management is based on the Group s value creation. Terms of employment for the President The remuneration package for the President, who is also the CEO, comprises fixed salary, variable salary based on annual targets, a long-term incentive program, pension and insurance benefits. The remuneration is reviewed annually per 1 January. The President was employed as President and CEO as of 1 June 2006 with a fixed annual salary of SEK 5,000,000. The variable salary is based on an annual target for value created within the Group. The variable salary is 50% of the fixed salary at target level and capped at 100% at stretch level. The President participates in the Group s long-term incentive program which has an award value of SEK 1,800,000 at target level. In addition to this program, the President is covered by a short-term incentive program that is to compensate for the remaining shortfall periods of the Electrolux Performance Share Programs, initiated in 2004 and The program provides the President with SEK 879,600 for For more information on these programs, see Note 21 on page 58. The notice period for termination is 12 months on the part of the Company, and 6 months on the part of the President. There is no agreement on severance pay. The President is not entitled to fringe benefits such as a company car or housing. Pension terms for the President Retirement age for the President is 65. The President is covered by the collective bargaining ITP-plan and a supplementary individual defined benefit pension plan. The supplementary benefit is based on an annual employer contribution of 105% of fixed salary. Actuarial bases for calculation are used to transform the contribution at year end into a pension benefit. In the case of disability the President is entitled to a disability benefit of 45% of fixed salary.

68 66 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Terms of employment for other members of Group Management Like the President, other members of Group Management receive a remuneration package that comprises fixed salary, variable salary based on annual targets, a long-term incentive program, pension and insurance benefits. The remuneration is revised annually per 1 January. For the Group s sector heads, variable salary is based on value creation in each sector. The variable salary for sector heads is 40 50% of fixed salary at target level and capped at %. For Group staff heads, the variable salary is based on value creation for the Group. The variable salary is 25 40% of fixed salary at target level and capped at 50 80%. Members of Group Management participate in the Group s long-term incentive program which has an award value of SEK 900,000 at target level. In addition to this program, the members of Group Management are covered by a short-term incentive program that is to compensate for the outstanding shortfall periods of the Electrolux Performance Share Programs initiated in 2004 and The program gives the member of Group Management from SEK 384,000 to 660,000 for 2006 depending on former position within Electrolux. For more information on these programs, see Note 21 on page 58. The notice period for termination is 12 months on the part of the Company and 6 months on the part of the Employee. There is no agreement on severance pay. Pension terms for other members of Group Management The retirement age is 65. The members of Group Management that are employed in Sweden (7 out of 8) are covered by the collective bargaining ITP-plan. They can choose whether they would like to stay within the regular plan or whether to opt for an alternative ITP plan. The Husqvarna alternative ITP plan is a defined contribution pension plan with a contribution of 20, 30, 35 or 40%, depending on age, of the Pensionable salary between 7.5 (SEK 333,750) and 30 (SEK 1,335,000) base amounts. For the portion of salary that is above 30 base amounts, the contribution is 20%. The Pensionable salary is calculated on the basis of current fixed salary plus the average variable salary over the last three years. One member of Group Management is covered by a supplementary defined benefit pension plan in addition to the regular ITP-plan. The target pension benefit is 32.5% of the portion of Pensionable salary between 20 and 30 base amounts, 50% of the portion between 30 and 100 base amounts and 32.5% of the portion above 100 base amounts. The plan also includes a disability benefit, in the event of illness, and a survivor s benefit. The disability benefit is of a corresponding size to the described retirement benefit and the survivor s benefit is 50 % of the retirement benefit. The member of Group Management that is employed in the US is covered by the Group s company pension plans in the US. Remuneration to Group Management 2006 Long- Incentive Fixed Variable Pension term Compen- SEKt salary salary cost incentive 2) sation Total President 3,298 1) 767 4, ,236 Other members of Group Management 18,321 2,975 6,292 2,400 3,793 33,781 Total 21,619 3,742 10,983 3,000 4,673 44,017 1) Fixed salary paid by Husqvarna AB as from May ) Award per year at target level. 3) Other members of Group Management comprise eight persons. The table below intends to show remuneration for a full-year for comparative purposes as the Group was established in June 2006 Long- Incentive Fixed Variable Pension term Compen- SEKt salary salary cost incentive 1) sation Total President 5, , ,847 Other members of Group Management 19,087 2,975 6,900 2,400 3,793 35,155 Total 24,087 3,742 12,500 3,000 4,673 48,002 1) Award per year at target level. Note 27 Fees to auditors PricewaterhouseCoopers (PwC) are appointed auditors for the period until the 2010 Annual General Meeting. Fees to PwC Group Parent Company SEKm PwC Audit fees 1) Other fees 2) Total fees to PwC ) Audit fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor reasonably can provide, and include the Company audit; statutory audits and comfort letters and consents. 2) Other fees consist of fees billed for assurance and related services, as well as fees billed for tax services.

69 HUSQVARNA ANNUAL REPORT 2006 NOTES 67 Note 28 Shares and participations Participation in associated companies Opening balance 9 8 Operating result 0 2 Dividend -2-1 Exchange difference 0 0 Other -1 Closing balance 6 9 In Participation in associated companies is at 31 December 2006, goodwill included with the amount of SEK 2m (3). In the beginning of 2006 the Group acquired additional 26% in the associated company Manson Tool AB. Therefore Manson Tool AB is included as a Group company with a minority interest of 25% in the accounts for The Group s share of the associated companies, which all are unlisted, were as follows: Associated companies 2005 Relation to Husqvarna Group 1) P & L Balance sheet Participation, Book Total SEKm % value Receivables Liabilities Sales Purchases Income Net result Total assets Liabilities Diamant Boart, Argentina Manson Tool, Sweden A/O Khimki, Russia Diamant Boart, the Philippines Total ) Viewed from Husqvarna s perspective Relation to Husqvarna Group 1) Income Statement Balance sheet Participation, Book Total SEKm % value Receivables Liabilities Sales Purchases Income Net result Total assets Liabilities Diamant Boart, Argentina A/O Khimki, Russia Diamant Boart, the Philippines Total ) Viewed from Husqvarna s perspective. Other companies Holding, % Book/Fair value, SEKm Firefly Energy Inc., USA Major Group Companies Subsidiaries Holding, % Belgium Diamant Boart International S.A. 100 France Husqvarna France SAS 100 Canada Husqvarna Canada Corp. 100 Finland Oy Husqvarna Ab 100 Germany Husqvarna Germany GmbH 100 Norway Husqvarna Norge AS 100 Sweden Husqvarna Holding AB 100 United Kingdom Husqvarna UK Ltd 100 US Husqvarna 100 Professional Outdoor Products. Inc. US Husqvarna Outdoor Products.Inc. 100 A detailed specification of Group companies is available on request from Husqvarna AB, Investor Relations. Note 29 Combined Financial Statements and Pro forma Financial Information The Electrolux Annual General meeting on 24 April 2006 decided in accordance with the Board of Director s proposal to distribute all shares in the wholly owned subsidiary Husqvarna AB to the shareholders in Electrolux. The shares were distributed on 12 June 2006 and the Husqvarna share was listed on the Stockholm Stock Exchange on 13 June Prior to September 2005 Husqvarna AB did not legally own any of the subsidiaries within the Outdoor Products segment in Electrolux. In order to prepare for the distribution, the Outdoor Products operations in a large number of countries were transferred to Husqvarna AB during September December Additional operations were transferred primarily during January The transfers were completed with the US operation effective as of 30 April 2006 and the Czech operation effective as of 31 May For all entities transferred to Husqvarna from Electrolux, the acquisitions have been accounted for as transactions under common control. Accordingly, Husqvarna has accounted for the acquired assets and liabilities at the same values as was recognized within the Electrolux Group, the so called predecessor basis.

70 68 NOTES HUSQVARNA ANNUAL REPORT 2006 Amounts in SEKm, unless otherwise stated Reports for the Husqvarna Group shall therefore be prepared in the form of combined financial statements. In order to better describe the Husqvarna Group and its operations on a stand-alone basis consolidated Pro forma Financial Information has also been prepared. The differences between the Combined Financial Statements and Pro forma Financial Information are described below. On 15 May Husqvarna AB received an unconditional shareholder contribution of SEK 4,250m in order to adjust the Group s capital structure. The establishment of the Group was finalized by the transfer of the Czech operation 31 May and as from 1 June the Group s income statement, balance sheet, equity statement and cash flow statement represent the 100% consolidated Group. The third quarter 2006 is the first single quarter with consolidated values and 2007 will be the first full financial year with consolidated values. This implies that the third quarter 2007 will be the first single quarter, which will have comparative consolidated figures, and 2008 will be the first financial year with comparative consolidated figures. Combined financial statements The combined financial statements prepared represent the financial position and results of operations and cash flows of Husqvarna AB, its subsidiaries and other entities included in the former Outdoor Products segment within the Electrolux Group, including assets, liabilities, revenues and costs of doing business in the past, even if the amounts were not historically allocated to the Husqvarna operations or do not appear in the historical financial statements of Husqvarna AB and its subsidiaries. The combined financial statements have been prepared as if the Husqvarna operations were formed 1 January The results and net assets as well as related share capital and provisions are aggregated. In the preparation of the combined financial statements for the Husqvarna operations, a number of allocations and other assumptions, have been made, which management believes are reasonable. These allocations and other assumptions are not necessarily indicative of the costs and expenses that would have resulted if the Husqvarna operations had been operating as a separate entity. The following describes the most significant allocations and assumptions made during 2005 and 2006: Allocations and assumptions relating to 2005: Allocations of certain group common services provided by Electrolux including financial, legal, human resources and other support functions. The risk management activities of Electrolux including the captive solutions for insurance were not allocated to the Husqvarna operations since the Husqvarna operations have been charged with insurance premiums, which were deemed to be at arm s-length. Employees working within the Husqvarna operations, participated in various Electrolux Group pension, health care, defined contribution, other benefit plans and incentive programs. The pro-rata costs based on the identified number of Husqvarna employees related to these plans were allocated and included in the combined financial statements. Electrolux Group did not allocate liquid funds, loans and equity on divisions, and assumptions regarding the capitalization of the Husqvarna operations that were not separate legal units were made. In preparing the combined financial statements, minor divisions have been assumed to be financed by loans. Major divisions were assumed to be capitalized according to the debt/equity ratio in the respective legal unit. Interest has been charged to the finance net taking into account the varying need for capital during the year by using average net assets. Derivative contracts with Electrolux Group Treasury, made by the Husqvarna operations, relating to hedging of transaction exposure, have been treated as external in the combined financial statements and marked to market as from 1 January, Hedge accounting was applied since Electrolux Group applied hedge accounting for these contracts. Allocations and assumptions relating to 2006: Assumptions regarding the capitalization of the Husqvarna operations that were not separate legal units were made. Minor divisions were assumed to be financed by loans. Major divisions were assumed to be capitalized according to the debt/equity ratio in the respective legal unit. Interest has been charged to the finance net taking into account the varying need for capital during the year by using average net assets. The extent of aggregation has gradually decreased when the Husqvarna entities have legally been transferred to Husqvarna AB. As a result of the establishment and capitalization of the Husqvarna Group there are no adjustments or allocations made as from 1 June Pro forma Financial Information In order to better describe the Group and its operations on a stand-alone basis consolidated Pro forma Financial Information has been prepared for 2005 and The pro forma information is prepared as if the Husqvarna Group had been established and capitalized as of 1 January 2005 for the pro forma income statement, and 31 December 2005 for the pro forma balance sheet. Allocations and assumptions relating to 2005: The Group Common costs have been adjusted to equal actual costs for 2006 excluding an insurance provision of SEK 25m relating to the Group s captive insurance companies. Financial costs referring to financing of borrowings have been adjusted to better reflect the cost the Group will incur as an independent Group. The actual tax rate has been estimated at approximately 33% of the Group s income. The pro forma balance sheet has been adjusted for insurance provisions, which were previously reported in captive companies wholly owned by Electrolux. Further deferred tax assets and liabilities are included in the balance sheet as if Husqvarna had been a separate Group at that time. The equity of the Group has been adjusted with the unconditional shareholder contribution from Electrolux and the remaining part of the financing has been assumed to be based on borrowings. In addition, borrowings have been redistributed between short-term and long-term borrowings. Allocations and assumptions relating to 2006 The income statement has been adjusted for financial costs referring to financing of borrowings, which the Group incurs as an independent Group. The balance sheet represents consolidated values of the Group and no adjustments have been made. For more detailed information about the adjustments and assumptions that form the basis for the pro forma financial information, see the prospectus for the distribution of shares in Husqvarna AB that was published in early April 2006.

71 HUSQVARNA ANNUAL REPORT 2006 NOTES 69 Difference between Combined Financial Statements and Pro forma Financial Information The primary differences are: The Combined Financial Statements include historical transactions which were not reported in the Husqvarna Group but which would have been included in order to reflect the actual historical costs of operations. The Pro forma Financial Information reflect the historical impact of certain transactions that occurred subsequent to the closing date. From an investor perspective it can be appropriate to reverse these transactions to reflect their financial impact. For Husqvarna the transactions mainly refer to, as regards to the income statement, administrative costs, financial costs for borrowing in connection to the capitalization of the new Group as well as tax charges. As regards to the balance sheet, the difference mainly comprises the capitalization of the Group. Consolidated income statement 1 Jan 31 Dec Jan 31 Dec 2005 Combined Adjustments Pro forma Combined Adjustments Pro forma Net Sales 29,402 29,402 28,768 28,768 Gross operating income 7,925 7,925 7, ,659 Operating Income 3,121 3,121 2, ,927 Income after financial items 2, ,692 2, ,448 Income for the period 1, ,862 1, ,641 In the Combined financial statements for 2005 presented in the Supplement to the prospectus for listing of Husqvarna AB 2006 transfers of earnings to Electrolux units within countries with tax consolidation were treated as paid dividends with no tax effect. In order to facilitate comparison and better reflect the Group s actual tax rate the tax expense for 2005 have been adjusted to include tax on these items and equity has been correspondingly adjusted. The restated tax rate for 2005 is 30.0%. Consolidated balance sheet 31 Dec Dec 2005 Actual Combined Adjustment Pro forma Total noncurrent assets 6,746 6,959 6,959 Total current assets 9,609 10, ,289 Total assets 16,355 17, ,248 Total equity 6,264 2,416 2,339 4,755 Total non-current liabilities 6,090 8,878-1,313 7,565 Total current liabilities 4,001 6, ,928 Total equity and liabilities 16,355 17, ,248 Note 30 Definitions Capital indicators Net assets Total assets exclusive of liquid funds and interest-bearing financial receivables less operating liabilities, non-interest-bearing provisions and deferred tax liabilities. Operating working capital Inventories and trade receivables less trade payables. Working capital Current assets exclusive of liquid funds and interest-bearing financial receivables less operating liabilities and non-interestbearing provisions. Net borrowings Total interest-bearing liabilities less liquid funds. Liquid funds Cash and cash equivalents, short term investments as well as fair value derivative assets. Net debt/equity ratio Net borrowings in relation to total adjusted equity. Equity/assets ratio Equity as a percentage of total assets. Capital employed Total liabilities and equity less non-interest bearing debt including deferred tax liabilities. Other key ratios Earnings per share Income for the period divided by the number of shares. Net sales growth Net sales as a percentage of the preceding period. Gross margin Gross operating income as a percentage of net sales. Operating margin Operating income as a percentage of net sales. Return on equity Income for the period as a percentage of average equity. Return on capital employed Operating income plus financial income as a percentage of average capital employed. Operating cash flow Total cash flow from operations and investments, excluding acquisitions and divestment of operations. Capital expenditure Property, plant and equipment and capitalization of product development and software. Value creation Operating income less the weighted average cost of capital (WACC) on average net assets: (Net sales operating costs = operating income) (WACC x average net assets).

72 70 HUSQVARNA ANNUAL REPORT 2006 Proposed Distribution of Earnings Thousands of SEK Retained earnings 6,706,882 Net income for ,783 Total 7,516,665 The Board of Directors has proposed that the Annual General Meeting 2007 resolve that the above sum be disposed of as follows: A dividend to the shareholders of SEK 2.25 per share 1) 666,583 To be carried forward 6,850,082 Total 7,516,665 1) Calculated on the number of outstanding shares as of 21 February The Board is of the opinion that the proposed dividend is justifiable on both the Company and the Group level with regard to the demands on the Company and Group equity imposed by the type, scope and risks of the business and with regard to the Company s and the Group s financial strength, liquidity and overall position. The Company s equity would have been SEK 6,152 thousand higher if the assets and liabilities had not been valued at the fair value in accordance with Chapter 4 section 14 a of the Swedish Annual Accounts Act. The Board of Directors and the President and CEO declare that, to the best of our knowledge, the annual report has been prepared in accordance with generally accepted accounting principles for stock market companies, that the information contained in the annual report is in accordance with factual circumstances and that it contains no omission likely to affect the representation of the company which is established by the annual report. Stockholm 22 February 2007 Lars Westerberg Chairman of the Board Peggy Bruzelius Robert F. Connolly Börje Ekholm Tom Johnstone Anders Moberg Gun Nilsson Peder Ramel Malin Björnberg Annika Ögren Bengt Andersson President and CEO

73 HUSQVARNA ANNUAL REPORT Auditors Report To the annual meeting of the shareholders of Husqvarna AB (publ) Corporate identity number We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the managing director of Husqvarna AB for The company s annual accounts are included in the printed version on pages The board of directors and the managing director are responsible for these accounts and the administration of the company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the managing director and significant estimates made by the board of directors and the managing director when preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the managing director. We also examined whether any board member or the managing director has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with international financial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the group s financial position and results of operations. The statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent company be dealt with in accordance with the proposal in the administration report and that the members of the board of directors and the managing director be discharged from liability for the financial year. Stockholm 28 February 2007 PricewaterhouseCoopers AB Anders Lundin Authorized Public Accountant Auditor in charge Christine Rankin Johansson Authorized Public Accountant

74 CORPORATE GOVERNANCE 72 REPORT 2006 HUSQVARNA ANNUAL REPORT 2006 Corporate Governance Report 2006 Husqvarna AB is a Swedish public limited liability company. Husqvarna s overall objective is to create long-term value for its shareholders and other stakeholders. The Group is governed on the basis of the Articles of Association of Husqvarna AB, the Swedish Companies Act, the listing agreement with the Stockholm Stock Exchange including the Swedish Code of Corporate Governance and other relevant Swedish and foreign laws and regulations. Husqvarna applies the Swedish Code of Corporate Governance and does not report any deviations from the code. This report has not been reviewed by the Group s auditors. The Group s governance structure is illustrated below. Listing in June Husqvarna s operations previously comprised the Outdoor Products segment within the Electrolux Group. Following a proposal by the Electrolux Board of Directors in February 2005 and a decision by the Electrolux AGM in April 2006, the Outdoor Products operation was spun off as a separate company under the name of Husqvarna. All shares in Husqvarna were distributed to the shareholders in Electrolux. The Husqvarna Board of Directors subsequently applied for a listing of the company s shares on the Stockholm Stock Exchange. The first day of trading was 13 June. Ownership structure As all shares in Husqvarna were distributed to the shareholders in Electrolux on a 1:1 basis, Husqvarna initially had the same ownership structure as Electrolux. Changes in the ownership structure since the spin-off refer mainly to a reduction in the number of shares held by UK and US institutions, and an increase in the number of shares held by Swedish institutions and mutual funds. The proportion of the Highlights of 2006 On 19 January the Electrolux Board announced its proposal for board members of Husqvarna, which was prepared in cooperation with the Electrolux Nomination Committee. The Husqvarna Board members were elected at an Extraordinary General Meeting on 27 January, to serve until the AGM in PricewaterhouseCoopers were appointed as auditors until the AGM in In February the Electrolux Board proposed that all shares in Husqvarna AB be distributed to Electrolux shareholders. A prospectus was published in the beginning of April. Electrolux shareholders adopted the Board s proposal at the AGM on 24 April. Trading in Husqvarna shares started on 13 June. share capital owned by Swedish investors had thus increased from approximately 60% to approximately 70% at the end of According to the share register at VPC AB (the Swedish Central Securities Depository & Clearing Organization) as of 31 December 2006, Husqvarna had a total of approximately 66,000 shareholders, of whom 63,000 in Sweden. The shares held by the ten largest owners corresponded to approximately 37% of the total share capital and approximately 50% of the Governance structure External Audit Shareholders by the AGM Nomination Committee Audit Committee Board of Directors Remuneration Committee Internal Audit CEO and Group Management Sector Management Major external regulations affecting governance of Husqvarna: Swedish Companies Act (2005:559) Listing agreement with the Stockholm Stock Exchange Swedish Code of Corporate Governance Example of internal policies and codes: Board of Director s/working procedures Husqvarna s Code of Business Conduct Policies for Communication, Finance and Credit etc. Process for internal control and risk management

75 HUSQVARNA ANNUAL REPORT 2006 CORPORATE GOVERNANCE REPORT votes. Approximately 30% of the share capital was owned by foreign investors. Major shareholders 1) in Husqvarna as of 31 December 2006 Share of capital, % Voting rights, % Investor AB Robur Investment Funds Alecta Mutual Pension Insurance AFA Insurance Fourth Swedish National Pension Fund SEB Investment Funds SHB/SPP Investment Funds AMF Pension Investment Funds Franklin-Templeton Investment Funds Lannebo Investment Fund Total Board and Group Management, total ) Source: SIS Ägarservice. Most of the shares owned by foreign investors are registered through trustees, which means that owner identity is not obtainable from VPC. Share capital and voting rights The number of shares in Husqvarna amounts to 296,259,153, of which 9,502,275 A- and 286,756,878 B-shares. One series A-share entitles the holder to one vote and one series B-share to one-tenth of a vote. A trading lot comprises 100 shares of each series. All shares entitle the holders to the same proportions of assets and earnings, and carry equal rights in terms of dividends. Proposal for change of share structure The Board proposes that the General Meeting of shareholders decides on an increase of the share capital by way of a bonus issue of 88,877,745 A-shares. According to the proposal, ten existing shares of series A as well as B, shall entitle the holder to three new A-shares. After the bonus issue, the number of A-shares, correspond to approximately 25.5% of the total number of shares and approximately 77.4% of the votes, compared to 3.2% of the total number of shares and 24.9% of the votes presently. For more information, see the Report by the Board of Directors under section Proposals to the Annual General Meeting in General Meetings of shareholders The decision-making rights of shareholders in Husqvarna are exercised at General Meetings of shareholders. Participation in decision-making requires the shareholder s presence at the meeting, either personally or through a proxy. In addition, the shareholder must be registered in the share register as of a prescribed date prior to the meeting, and must provide notice of participation in due course. Decisions at the meeting are normally made by simple majority. However, for some matters the Swedish Companies Act stipulates that a proposal must be approved by a higher proportion of the shares and votes represented at the meeting. Individual shareholders who wish to have a specific issue included in the agenda of a shareholders meeting can request the Board to do so by sending an to the address below, which is also posted on the Group s web site, well in advance of the meeting. According to the Swedish Companies Act, the Annual General Meeting must be held within six months of the end of the accounting year. The Annual General Meeting decides on dividends, adoption of the annual report, election of Board members and auditors when required, remuneration to Board members and auditors and other important matters. An Extraordinary General Meeting can be held at the discretion of the Board of Directors or if requested by the auditors or by shareholders owning at least 10% of the shares. Shareholders may communicate in writing with the Board regarding matters that pertain to the AGM by sending an e- mail to the Secretary of the Board at board@husqvarna.se. The shareholder should indicate whether the letter is addressed to the Board as a whole or to an individual member. Nomination procedure for election of Board members and auditors At an Annual General Meeting in Husqvarna in March 2006, it was decided that a Nomination Committee would be appointed in anticipation of the Annual General Meeting in The Nomination Committee consists of the Chairman of the Board and representatives of the four largest shareholders in terms of voting rights. The names of these representatives and the shareholders they represent will be announced publicly at least six months before the AGM. Selection of the four shareholders is based on known holdings of voting rights immediately prior to the announcement. If the identity of major shareholders changes in the course of the nomination process, the composition of the Nomination Committee may be changed accordingly. The Nomination Committee s tasks include preparing a proposal to the AGM 2007 regarding the following issues: Board members Chairman of the Board Chairman of the AGM Remuneration for Board members, including the Chairman, as well as remuneration for committee work Auditors fees Nomination Committee for next year. The Nomination Committee is also tasked to make proposals for the election of auditors when such matters are to be decided by the AGM. The Nomination Committee is then assisted by the Audit Committee which, among other things, informs the Nomination Committee of the results of the evaluation of the audit work. Shareholders may submit proposals for nominees to the Nomination Committee. The committee s proposal shall be announced publicly in connection with or prior to the notice of the AGM. Nomination Committee for the AGM 2007 The Nomination Committee for the AGM 2007 consists of the following members: Johan Forssell, Investor AB, Chairman of the Nomination Committee Ramsay J. Brufer, Alecta Mutual Pension Insurance Marianne Nilsson, Robur Investment Funds Thomas Halvorsen, Fourth Swedish National Pension Fund Lars Westerberg, Chairman of Husqvarna

76 CORPORATE GOVERNANCE 74 REPORT 2006 HUSQVARNA ANNUAL REPORT 2006 The names of the shareholders representatives were announced in a press release on 19 October 2006 and in a press release on 16 November 2006, after one representative had been replaced following changes in the ownership structure. The Nomination Committee has prepared proposals for the AGM in 2007, including proposals for Board members, fees to the Board members, fees to the auditors, and the tasks and composition of the Nomination Committee for the AGM in The Nomination Committee s proposals as well as a report on how the Committee has conducted its work will be publicly announced no later than the date of notification of the AGM, which is expected to be published on 19 March The Board of Directors The main task of the Husqvarna Board of Directors is to manage the Group s affairs so as to satisfy the owners interests in terms of a good long-term return on capital to the greatest possible extent. The Board s work is governed by rules and regulations that include the Swedish Companies Act, the Articles of Association, the Swedish Code of Corporate Governance and the working procedures established by the Board. The Board decides on issues related to the Group s main goals, strategic orientation and major policies, and on other important issues related to financing, investments, acquisitions and divestments. The Board monitors and deals with, inter alia, follow-up and control of Group operations, Group communication and organization, including evaluation of the Group s operative management. The Board also has the overall responsibility for establishing an effective system of internal control and risk management. Working procedures and meetings The Board has determined working procedures, which shall be reviewed annually and when necessary. The working procedures include allocation of tasks to Board members, including the Chairman. The Chairman shall organize and delegate the Board s work, and also ensure effective implementation of the Board s decisions as well as annual evaluation of the Board s work. The working procedures also identify the areas of responsibility for the committees appointed by the Board. In addition, the working procedures include detailed instructions to the President and various corporate functions regarding issues that require the Board s approval, as well as the financial reports and other information that is to be submitted to the Board. Among other things, these instructions specify the maximum amounts that various decision-making functions within the Group are authorized to approve regarding credit limits, investments and other outlays. The working procedures stipulate that the meeting for formal constitution of the Board shall be held directly after the AGM. Decisions at this meeting include authorization to sign for the Company. The Board normally meets on five to six other occasions during the year. Four of these meetings are held in connection with publication of the Group s annual and interim reports. One or two meetings are held in connection with visits to subsidiaries. At one of the meetings the Board evaluated the performance of the President and CEO without the presence of any member of Group Management. Additional meetings, including telephone conferences, are held when necessary. Ensuring quality in financial reporting The working procedures include detailed instructions regarding the type of financial and other reports that shall be submitted to the Board. In addition to interim reports and the annual report, the Board reviews and evaluates comprehensive financial information. The Board also reviews, primarily through the Group s Audit Committee, the most important accounting principles applied by the Group in financial reporting, as well as major changes to these principles. The tasks of the Audit Committee also include reviewing reports regarding the Group s internal control for financial reporting, as well as audit reports submitted by the Internal Audit function. The Group s external auditors report to the Board as necessary, but at least once a year. At least one of these meetings is held without the presence of the President and CEO or any other member of Group Management. The external auditors also attend meetings of the Audit Committee. The Audit Committee reports to the Board after all its meetings. Minutes are taken at all meetings of the Committee and are available to all Board members and the auditors. See Report on Internal Control over Financial Reporting 2006 on page 79. Evaluation of the Board s activities The Board evaluates its activities annually with regard to working procedures and the working climate, the alignment of the Board s work, and access to and need for special competence. A specially developed form is used for the evaluation, which is followed up by personal feedback meetings with the chairman. The results of the evaluation are reported to the Nomination Committee and comprise input for the nomination procedure, in which the Nomination Committee evaluates the composition of the Board, remuneration to members, and other matters. The work of the Board Chairman is also evaluated separately under the management of the Chairman of the Remuneration Committee. Composition of the Board The Husqvarna Board of Directors shall consist of not less than five and not more than ten members with not more than three deputies, all of whom are elected by the Annual General Meeting for a period of one year. The Husqvarna Board currently comprises nine members elected by the Annual General Meeting. Two additional members, with deputies, are appointed by the Swedish employee organizations, in accordance with Swedish labor laws. The members of the Board in Husqvarna were appointed in January 2006, after recommendations from the Electrolux Nomination Committee. The goal in appointing members was to achieve a mix of competence and experience in terms of e.g. management of international companies, finance, sale and marketing of consumer goods, and knowledge of retailing. With the exception of the President and CEO, the members of the Board are non-executives. Two of the members elected by the General Meeting of shareholders are not Swedish citizens, and two are women. Remuneration to Board members Remuneration to Board members is authorized by the AGM. Information on remuneration to Board members is given in the

77 HUSQVARNA ANNUAL REPORT 2006 CORPORATE GOVERNANCE REPORT Board of Directors Audit Remuneration Inde- No. of Born Nationality Elected Committee Committee pendent B-shares 1) Lars Westerberg Board Chairman 1948 Swedish 2006 Member Yes 80,000 Bengt Andersson President and CEO 1944 Swedish 1991 No 40,000 Peggy Bruzelius Member 1949 Swedish 2006 Member Yes 6,000 Robert F. Connolly 2) Member 1943 American 2006 Yes 0 Börje Ekholm Member 1963 Swedish 2006 Chairman No 28,000 Tom Johnstone Member 1955 British 2006 Yes 1,200 Anders Moberg Member 1950 Swedish 2006 Member Yes 9,200 Gun Nilsson Member 1955 Swedish 2006 Member Yes 4,200 Peder Ramel Member 1955 Swedish 2006 Chairman Yes 2,000 Malin Björnberg Employee representative 1959 Swedish Annika Ögren Employee representative 1965 Swedish Carita Spångberg Deputy employee representative 1968 Swedish Fredrik Währborg Deputy employee representative 1974 Swedish Total 170,900 1) Holdings in Husqvarna, both own and those held by closely related persons, as of 31 December ) Elected in May table on page 76. Board members who are not employed by Husqvarna do not participate in the Company s long-term incentive program. The Board s work in 2006 During 2006, the Board held seven scheduled meetings, one extraordinary meeting and three per capsulam meetings. Six of the ordinary meetings were held in Stockholm and one in Huskvarna. The Board dealt with a number of issues related to the establishment of Husqvarna as an independent company and the listing on the stock exchange, particularly during the first half of the year. During the second half, the focus shifted to issues related to the Group s strategic development, such as criteria and opportunities for acquisitions and the potential for improvement of the production structure etc. During the year the Board approved five acquisitions. Major issues dealt with by the Board included: Authorization of the Board s rules of procedures, including agendas for Board meetings, instructions for reporting of financial information, instructions for the Remuneration and Audit Committees, investment policy, credit policy and financial policy, as well as instructions for the President and guidelines for internal control Authorization of communication policy, code of conduct, insider policy and risk management policy Appointment of the President and Executive Vice-Presidents Appointment of members of the Remuneration and Audit Committees Implementation of long-term incentive program for senior managers Adoption of the 2005 Annual Report and quarterly reports Approval of the prospectus and supplementary prospectus Application for listing A credit facility for SEK 11 billions was obtained Approval of Medium Term Note Program Corporate Governance Report Approval of five acquisitions At each scheduled Board meeting the President and CEO reviewed the Group s results and financial position as well as the outlook for the next quarter and the rest of the year. The meetings also dealt with the Group s investments. The Board decides on all investments that exceed SEK 50m, and receives reports on all investments that exceed SEK 25m. Heads of various business sectors also attended the meetings and reviewed their operations. The Group s auditors participated in the Board meeting on 27 February 2006, at which the Annual Report for 2005 was approved. All Board meetings during the year followed an approved agenda, which together with documentation for each item was sent to all Board members. Olle Wallén, Head of Group Staff Legal Affairs, was the secretary at all Board meetings. Committees The Board has established a Remuneration Committee and an Audit Committee, whose main tasks are preparatory and advisory. In addition, the Board may delegate decision-making powers on specific issues to the Committees. Remuneration Committee The main task of the Remuneration Committee is to propose principles for remuneration to members of Group Management. The Remuneration Committee presents proposals to the Board of Directors regarding targets and criteria for variable remuneration, the relationship between fixed and variable salary, changes in fixed or variable salary, long-term incentives, pension terms and other benefits. The Committee comprises three Board members: Peder Ramel (Chairman), Anders Moberg and Lars Westerberg. At least two meetings shall be held annually. Audit Committee The primary task of the Audit Committee is to support the Board in overseeing the accounting and financial reporting processes, including the adequacy and the effectiveness of internal controls as well as the effectiveness of disclosure controls and procedures for financial reporting.

78 CORPORATE GOVERNANCE 76 REPORT 2006 HUSQVARNA ANNUAL REPORT 2006 The Audit Committee also assists the Board of Directors in overseeing the audit of the financial statements, including related disclosures. This includes reviewing the objectivity and independence of the external auditors, overseeing their work, evaluating their performance and if necessary recommending their replacement. In addition, the Audit Committee is tasked with supporting the Nomination Committee in preparing proposals regarding election of external auditors and auditor s fees. In addition, the Audit Committee reviews the Group s Internal Audit function regarding organization, staffing, budget, plans, results, and reports. The Audit Committee comprises three Board members: Börje Ekholm (Chairman), Peggy Bruzelius and Gun Nilsson. At least three meetings shall be held annually. Attendance at Board and Committee meetings during 2006 Audit Remuneration Board Committee Committee Number of meetings in Lars Westerberg 8 2 Bengt Andersson 8 Peggy Bruzelius 8 5 Robert F. Connolly 1) 5 Börje Ekholm 8 5 Tom Johnstone 6 Anders Moberg 7 2 Gun Nilsson 8 4 Peder Ramel 8 2 Annika Ögren 8 Malin Björnberg 7 1) Elected in May Independence of Board members The Board as a whole is considered to be in compliance with the requirements for independence stipulated by the Stockholm Stock Exchange and the Swedish Code of Corporate Governance. With the exception of the President and CEO Bengt Andersson, the Board members are not Group executives. The Nomination Committee s assessment of whether each of the proposed Board members is in compliance with these independence requirements shall be published together with the Nomination Committee s proposal. The President has no major shareholdings, nor is he a partowner in companies that have significant business relations with Husqvarna. Independent in relation Independent in relation Board member to company and management to major shareholders Lars Westerberg Yes Yes Bengt Andersson No, President Yes of Husqvarna Peggy Bruzelius Yes Yes Robert F. Connolly Yes Yes Börje Ekholm Yes No, President of Investor Tom Johnstone Yes Yes Anders Moberg Yes Yes Gun Nilsson Yes Yes Peder Ramel Yes Yes External auditors At an Extraordinary General Meeting on 27 January 2006 PricewaterhouseCoopers AB (PwC) was appointed as the Company s external auditor, with Anders Lundin as auditor-in-charge, for the period until the Annual General Meeting in PwC provides an audit opinion on the financial statements for Husqvarna AB, the consolidated financial statements for the Husqvarna Group, the administration of Husqvarna AB, and the financial statements of Husqvarna s subsidiaries. The audit is conducted in accordance with the Swedish Companies Act and generally accepted Swedish auditing standards issued by FAR, which are based on international auditing standards issued by the International Federation of Accountants (IFAC). Audits of local statutory financial statements for legal entities outside of Sweden are performed in accordance with laws or other applicable regulations in the respective countries, and in accordance with IFAC GAAS, including issuance of audit opinions for the various legal entities. For information on the auditors and their other audit assign- Authorized remuneration to the Board of Directors for the period January 2006 until the 2007 AGM Remuneration for Ordinary remuneration the period for the period from the Remuneration for Total SEK January April (2006 AGM) 2006 AGM 2007 AGM Committee work remuneration Lars Westerberg 300,000 1,500,000 50,000 1,850,000 Bengt Andersson Peggy Bruzelius 90, ,500 75, ,500 Robert F. Connolly 437, ,500 Börje Ekholm 90, , , ,500 Tom Johnstone 90, , ,500 Anders Moberg 90, ,500 50, ,500 Gun Nilsson 90, ,500 75, ,500 Peder Ramel 90, , , ,500 Annika Ögren Malin Björnberg Total 840,000 4,562, ,000 5,927,500 Remuneration to the current Board of Husqvarna AB was decided at an Extraordinary General Meeting in February The Board members have been elected for the period from January 2006 until the end of the Annual General Meeting in 2007, and the remuneration decided covers this entire period. Remuneration is paid quarterly. There are no agreements for severance pay to Board members. For information on remuneration to the Board of Directors and the President, see Note 26.

79 HUSQVARNA ANNUAL REPORT 2006 CORPORATE GOVERNANCE REPORT ments, see page 80. For fees paid to the auditors and their nonaudit assignments in the Group, see Note 27 on page 66. Husqvarna s business mission and goals Husqvarna s business mission is to develop, manufacture and market mainly power products for forestry and lawn and garden maintenance, as well as cutting equipment for the constructionand stone industries. The product range includes products for both consumers and professional users. The company culture is non-bureaucratic and enables rapid decision-making. It features a focus on cost-efficiency, products, customer care and a passion for products. Husqvarna s main goal is to create value for shareholders and other stakeholders through continued good growth and high profitability. To achieve this goal Husqvarna shall be the global market leader in the product areas and market segments in which the Group operates. Husqvarna shall maintain a strong capital base and a debt burden that will secure access to capital in order to enable this growth. The Group s financial goals The Group s major financial goals are given below. Within the framework of these goals, each business sector establishes appropriate goals for its operations. Growth in net sales Husqvarna s long-term goal is to achieve annual organic growth of approximately 5% over the course of a business cycle. Husqvarna also aims at growth through complementary acquisitions. Operating margin Husqvarna s long-term goal is to achieve an operating margin of more than 10% over the course of a business cycle. Capital structure The goal is that Husqvarna s capital structure should correspond to the requirements of a long-term credit rating of at least BBB in accordance with the credit rating principles applied by Standard & Poor s or similar institutions. It is considered that this currently requires that the long-term seasonally adjusted net debt in relation to operating income before depreciation and amortization (EBITDA) does not exceed a multiple of 2.5. Dividend policy It is the Board s intention to give shareholders a dividend that reflects a good direct yield as well as dividend growth, and to implement a policy in which the level of the dividend is linked to Husqvarna s earnings, financial position and other factors which the Board considers to be relevant. In the long term the annual dividend should correspond to 25 50% of the Group s income for the period. Management and Company structure Husqvarna s operations comprise two business areas, Consumer Products and Professional Products and five business sectors. Group Management In addition to the President and CEO, Group Management includes four sector heads and four Group staff heads. The President is responsible for ongoing management of the Company in accordance with the Board s guidelines and instructions. The sector heads have complete responsibility for the results and balance sheets of their respective sectors. The overall management of the sectors is implemented through operative meetings, which are held quarterly. These meetings are chaired by the President, and are attended by the heads of the sectors. Group Management holds monthly meetings to review the previous month s results, update forecasts and plans, and discuss strategic issues. Principles for remuneration to senior managers The principles for remuneration to senior managers in Husqvarna have been the same as Electrolux. The general principles for remuneration to Group management are based on the position held, the individual performance, income for the period, and competitive remuneration in the country of employment. The overall remuneration package for senior managers comprises fixed salary, variable salary in the form of short-term incentives based on annual performance targets, long-term incentives and benefits such as pensions and other benefits. Husqvarna aims at offering fair and competitive total remuneration with an emphasis on pay for performance. Variable remuneration represents a significant proportion of total remuneration. The variable salary for the President is based on an annual target for value created within the Group. For the Group s sector heads, variable remuneration is based on value created in each sector. For Group staff heads, the variable salary is based on value created for the Group. For more information on remuneration, see Note 26. Remuneration to Group Management 2006 Long- Incentive Fixed Variable Pension term compen- 000 SEK salary salary cost incentive 2) sation Total President 3,298 1) 767 4, ,236 Other members of Group Management 3) 18,321 2,975 6,292 2,400 3,793 33,781 Total 21,619 3,742 10,983 3,000 4,673 44,017 1) Fixed salary paid by Husqvarna AB as from May ) Award per year at target level. 3) Other members of Group Management comprise eight persons.

80 CORPORATE GOVERNANCE 78 REPORT 2006 HUSQVARNA ANNUAL REPORT 2006 Organization President and CEO Bengt Andersson Chief Financial Officer Bernt Ingman Legal Affairs Olle Wallén Communications & Investor Relations Åsa Stenqvist Human Resources Lars Worsøe-Petersen Consumer Products Professional Products North America Robert E. Cook Rest of the world Hans Linnarson Forestry Bo Andreasson Commercial Lawn and garden Hans Linnarson Construction Anders Ströby Group Management Position Born Nationality Employed 1) No. of B-shares 2) Bengt Andersson President and CEO 1944 Swedish ,000 Bo Andreasson Head of Forestry, Executive Vice-President 1951 Swedish ,971 Robert E. Cook Head of Consumer Products North America, 1943 American ,000 Executive Vice-President Hans Linnarson Head of Consumer Products Rest of the world, 1952 Swedish ,179 Head of Commercial Lawn and garden, Executive Vice-President Anders Ströby Head of Construction, Executive Vice-President 1953 Swedish ,441 Bernt Ingman Chief Financial Officer 1954 Swedish ,000 Åsa Stenqvist Head of Group Staff Communications 1947 Swedish ,650 and Investor Relations Olle Wallén Head of Group Staff Legal Affairs Husqvarna Board Secretary 1953 Swedish ,761 Lars Worsøe-Petersen Head of Group Staff Human Resources 1958 Danish ,265 Total 260,267 1) Year of employment by Electrolux, except for Bernt Ingman. 2) As per 31 December 2006 holdings in Husqvarna, both own and those held by closely related persons. Value creation Variable remuneration to the President and Group Management is based on the Group s value creation. Value created is measured by business area, sector, product line and region. Value created links operating income and asset efficiency with the cost of the capital employed in operations, and is measured as operating income less the weighted average cost of capital (WACC) on average net assets. Proposal for new guidelines The Board of Directors proposes that the Annual General Meeting in 2007 approves new principles for remuneration of Group Management, see Proposals to the Annual General Meeting in 2007, page 32. Long-term incentive program for 2006 On 24 April 2006, the Electrolux Annual General Meeting approved a long-term incentive program for Husqvarna for 2006, as proposed by the Husqvarna Board of Directors. The program is performance-based with reference to value creation targets, and involves allocation of Husqvarna B-shares free of charge after three years if targets have been met or exceeded. The program covers about 40 senior managers. For more information, see Note 26. Proposal for new program for 2007 The Board of Directors proposes that the Annual General Meeting resolves to adopt a new performance based incentive program for approximately 50 senior managers. Principles for the new program have been changed as compared to the 2006 program in that it will be based on earnings per share for the Group, and that the participants will have to invest in B-share at market value. For more information on the new proposals see Proposals to the Annual General Meeting in 2007, page 33.

81 HUSQVARNA ANNUAL REPORT 2006 CORPORATE GOVERNANCE REPORT Report on Internal Control over Financial Reporting 2006 This report is issued in accordance with the Swedish Code of Corporate Governance and is limited to a description of how internal control over financial reporting is organized. The report is not part of the formal 2006 financial statements and has not been reviewed by the company s auditors. Husqvarna applies the COSO* framework for internal control, defining internal control in terms of five components: control environment, risk assessment, control activities, information and communication, and monitoring. This report describes how each of the five components is addressed within Husqvarna in relation to internal control over financial reporting. * Committee of Sponsoring Organizations of the Treadway Commission. Control environment The Board has established an Audit Committee primarily for the purpose of assisting the Board in overseeing the accounting and financial reporting processes and ensuring the quality of these reports and processes. The Audit Committee s responsibility is supervisory. Responsibility for maintaining an effective control environment and operating the system for risk management and internal control of financial reporting is delegated to the President and CEO. Managers at various levels are responsible within their respective areas. Responsibility and authority are defined in the Board s instructions to the President and CEO, policies, procedures and codes. The Board approves the Group s most important policies on communication, credit, finance and risk management, as well as the Code of Business Conduct. Group Management approves other policies and procedures and responsible Group functions issue guidelines and supervise the application of all policies and procedures. The Group s accounting rules and procedures for the financial reporting are set out in an accounting manual that is available to all financial personnel. Together with laws and other regulations, the organizational structure and the internal guidelines form the control environment. Risk assessment Items in the financial statements that depend on judgemental evaluations or are generated through complex processes are relatively more exposed to potential errors than are other items. A comprehensive risk assessment aimed at identifying these items and quantifying the associated risk was coordinated by the Group s internal audit function during Control activities Control activities are aimed at preventing, detecting and correcting errors and irregularities. They are integrated in Husqvarna s process for accounting and reporting and include procedures for attestation and approval, reconciliation, analysis of results, segregation of incompatible duties, controls within the IT-systems and controls of the basic IT environment. During 2006, Husqvarna has implemented Internal Control Standards (ICS), i.e. standards for control activities related to financial reporting. The objective of the standards is to assure and maintain a uniform level of internal control over financial reporting throughout the Group. Information and Communication Husqvarna maintains information and communication systems to ensure that financial reporting is correct and complete. The accounting manual and other instructions for reporting are updated when necessary and are reviewed at least once annually. Together with other policies relevant for internal control over financial reporting, such as capital expenditure policy and credit policy, these documents are available on the company s intranet to all relevant personnel. Changes in accounting procedures are communicated and explained in a quarterly internal newsletter from the Group accounting function. Monitoring Husqvarna uses a comprehensive financial reporting system to monitor performance, which enables detection of possible anomalies in financial reporting at an early stage. Husqvarna applies uniform IFRS rules as defined in the Husqvarna Accounting Manual. The Accounting manual includes accounting and valuation principles as well as reporting instructions and have to be strictly followed by all Husqvarna companies. The manual is updated and reviewed each quarter. The adherence to the accounting manual is continuously monitored on Group and Sector level. Detailed monthly financial data are reported from about 100 units. The financial data are analyzed and monitored at sector and Group level, and at other operating levels. The Group s internal audit function performs independent reviews aiming at evaluating and improving the efficiency of the internal control. The function has also conducted special investigations during the year. The internal audit function reports its findings and recommendations for improvement in internal control of financial reporting to the Audit Committee. A so-called Control Self Assessment (CSA), in which reporting units are requested to attest to compliance with the Internal Control Standards has been completed during The CSA addressed the twenty most critical control activities, encompassing all major business processes and requested company controllers to either confirm compliance with the ICS or explain compensating controls. The responses to the CSA will be followed up by the internal audit function during Financial reporting and disclosure Husqvarna provides the market with information about the development of the Group and its financial position on an on-going basis. On 31 January 2006 the Board adopted an Information Policy that complies with the requirements for an information policy in the Listing Agreement with the Stockholm Stock Exchange. Financial information is issued regularly in the form of: Interim reports, published as press releases. The Husqvarna Annual Report. Press releases on all important matters which could materially affect the share price. Presentations and telephone conferences for analysts, investors and media representatives on the day of publication of the quarterly and full-year results, and in connection with release of important news. Presentations for financial analysts and investors in connection with Capital Market days, Road Shows, etc. All reports, presentations and press releases are published simultaneously at

82 80 BOARD OF DIRECTORS HUSQVARNA ANNUAL REPORT 2006 Board of Directors and Auditors Lars Westerberg Chairman Born M. Sc. Eng., MBA. Elected Member of the Remuneration Committee. President and CEO and Board Member of Autoliv Inc. Other major assignments: Board member of Haldex AB, Plastal Holding AB and SSAB. Previous positions: Senior management positions in Esab President and CEO of Esab President and CEO of Gränges AB Holding in Husqvarna: 80,000 B-shares. Bengt Andersson President and CEO Born Mech. Eng. Elected Other major assignments: Board member of KABE AB, Chairman of Jönköping University Foundation, Sweden. Previous positions: Joined Electrolux in Sector manager in Facit-Addo Senior management positions within Electrolux Outdoor Products since Product-line Manager for Outdoor Products North America Productline Manager for Forestry and Garden Products 1991, and Flymo Head of Professional Outdoor Products and Executive Vice-President of Electrolux Head of Consumer and Professional Outdoor Products and Senior Executive Vice- President of Electrolux Holding in Husqvarna: 40,000 B-shares. Peggy Bruzelius Born M. Econ., Hon. Doc. in B.A. Elected Member of the Audit Committee. Other major assignments: Board Chairman of Lancelot Asset Management AB. Deputy Chairman of Electrolux. Board member of Axfood AB, Industry and Commerce Stock Exchange Committee, Axel Johnson AB, Ratos AB, Scania AB, Syngenta AG and the Association of the Stockholm School of Economics. Previous positions: President and CEO of ABB Financial Services AB Executive Vice- President of SEB, Skandinaviska Enskilda Banken AB, Holding in Husqvarna: 6,000 B-shares. Robert F. Connolly Born B.A. Elected Other major assignments: Previous positions: Positions in merchandising as well as Executive Vice-President, Montgomery Ward & Company Inc and Positions in merchandising and marketing, Wal-Mart Stores Inc and , including Executive Vice- President and Corporate Head Merchant Executive Vice-President and Chief Marketing Officer Holding in Husqvarna: 0 shares. Börje Ekholm Born M. Sc. Eng., MBA. Elected Chairman of the Audit Committee. President and CEO and Board member of Investor AB. Other major assignments: Board member of AB Chalmersinvest, Greenway Medical Technologies Inc. and Telefon AB L M Ericsson. Previous positions: Joined Investor in 1992, senior management positions in the Investor Group since 1995, Executive Vice-President of Investor AB 1997, responsible for New Investments 1999, President of Investor Growth Capital Inc Holding in Husqvarna: 28,000 B-shares. Tom Johnstone Born M.A., Hon. Doc. in B. A. Elected President and CEO and Board member of SKF. Other major assignments: Previous positions: Senior management positions within SKF since President of Automotive Division and Executive Vice-President of AB SKF Holding in Husqvarna: 1,200 B-shares. Anders Moberg Born Elected Member of the Remuneration Committee. President and CEO of Royal Ahold. Other major assignments: Board Chairman of Clas Ohlson AB. Deputy Chairman of ICA AB. Board member of DFDS A/S and Velux A/S, Denmark. Previous positions: Various positions in the IKEA Group , President and CEO 1986, Division President International, Home Depot, USA, Holding in Husqvarna: 9,200 B-shares. Gun Nilsson Born M. Econ. Elected Member of the Audit Committee. Executive Vice- President, Deputy CEO and Head of Corporate Development in Duni AB. Other major assignments: Board member of LFV-Group. Previous positions: Finance Director of Bonnier Affärsinformation Senior management positions within Duni AB since 1993, CFO 1993, responsible for Corporate Communications Holding in Husqvarna: 4,200 B-shares. Peder Ramel Born M. Econ. Elected Chairman of the Remuneration Committee. President and CEO of 3 Scandinavia. Other major assignments: Board member of MACAB AB. Previous positions: Various positions in Electrolux , Regional manager in Electrolux International 1983, Head of Marketing in Electrolux Direct Sales AB Senior management positions in Modern Times Group AB , President of Viasat AB President of B2Bredband AB Holding in Husqvarna: 2,000 B-shares. Employee representatives Members Malin Björnberg Born Representative of the Federation of Salaried Employees in Industry and Services. Holding in Husqvarna: 100 B-shares. Annika Ögren Born Representative of the Swedish Confederation of Trade Unions. Holding in Husqvarna: 0 shares. Deputy members Carita Spångberg Born Representative of the Swedish Confederation of Trade Unions. Holding in Husqvarna: 0 shares. Fredrik Währborg Born Representative of the Federation of Salaried Employees in Industry and Services. Holding in Husqvarna: 200 B-shares. Auditors At an Extraordinary General Meeting held on 27 January 2006 PricewaterhouseCoopers AB was appointed auditors for a four-year period until the Annual General Meeting Anders Lundin Price Waterhouse Coopers AB Born Authorized Public Accountant. Partner in Charge. Other audit assignments include: AarhusKarlshamn, Axis, Bong Ljungdahl, Industrivärden, Melker Schörling AB and Säkl. Holdings in Husqvarna: 0 shares. Christine Rankin Johansson PricewaterhouseCoopers AB Born Authorized Public Accountant. Other audit assignments include: Deputy auditor Haldex AB. Holdings in Husqvarna: 0 shares. Holdings as of 31 December 2006.

83 HUSQVARNA ANNUAL REPORT 2006 BOARD OF DIRECTORS 81 Lars Westerberg Bengt Andersson Peggy Bruzelius Robert F. Connolly Börje Ekholm Tom Johnstone Anders Moberg Gun Nilsson Peder Ramel Malin Björnberg Annika Ögren Carita Spångberg Fredrik Währborg

84 82 GROUP MANAGEMENT HUSQVARNA ANNUAL REPORT 2006 Group Management Bengt Andersson President and CEO Born Mech. Eng. Joined Electrolux in Sector manager in Facit-Addo Senior management positions within Electrolux Outdoor Products since Product-line Manager for Outdoor Products North America Product-line Manager for Forestry and Garden Products 1991, and Flymo Head of Professional Outdoor Products and Executive Vice-President of Electrolux Head of Consumer and Professional Outdoor Products and Senior Executive Vice- President of Electrolux Other major assignments: Board member of KABE AB. Chairman of Jönköping University Foundation, Sweden. Holding in Husqvarna: 40,000 B-shares. Bo Andreasson Head of Forestry Born M. Sc. Eng. Research Engineer in combustion engine technology at Chalmers University of Technology Joined Electrolux in 1982 as automotive engineer in Professional Outdoor Products. Various management positions in research, development and product planning Head of Accessory Operations Head of Forestry Executive Vice-President of Husqvarna AB Holding in Husqvarna: 1,971 B-shares. Robert E. Cook Head of Consumer Products North America Born Graduate in Law. Joined Electrolux in 1989 as President of American Yard Products, USA. Head of Major Appliances and Outdoor Products in North America and Executive Vice-President of Electrolux Executive Vice-President of Husqvarna AB Other major assignments: Board member of Volvo Trucks North America Inc. and Mack Trucks Inc. Holding in Husqvarna: 150,000 B-shares. Hans Linnarson Head of Consumer Products Rest of the world and Commercial Lawn and garden Born M. Sc. Eng. President of AB CTC Parka President of Asko Cylinda AB Joined Electrolux in Head of Materials Handling product line Various management positions in product development, marketing and production within Major Appliances, Europe Head of Consumer Products Rest of the world within Electrolux Outdoor Products Executive Vice-President of Husqvarna AB Other major assignments: Board member of Beijer Electronic AB and Nibe AB. Holding in Husqvarna: 7,179 B-shares. Anders Ströby Head of Construction Born M. Sc. Eng. Joined Electrolux and Professional Outdoor Products in Marketing and Sales Manager for the chainsaw product area in Canada Head of Product Planning in Professional Garden Equipment Head of Jonsered and Partner Industrial Products Head of Sales and Marketing for the Husqvarna and Jonsered brands Head of Garden Equipment and Construction Executive Vice-President of Husqvarna AB Holding in Husqvarna: 17,441 B-shares. Related parties: 3,000 B-shares. Bernt Ingman Chief Financial Officer Born M. Econ. Administrative Director of Götaverken Energy Systems AB CFO of National Elektro Svenska AB CFO of Celpap International Administrative Director of Calor Vanadis AB Finance Director and Executive Vice-President of Metric Group Executive Vice- President of Inter Scan Group Executive Vice- President and CFO of Munters AB Other major assignments: Board member of G & L Beijer AB. Holding in Husqvarna: 18,000 B-shares. Åsa Stenqvist Head of Group Staff Communications and Investor Relations Born B.A., Degree in Communications. Joined Electrolux in 1982 in the Central Communications and Marketing department. Head of Investor Relations and Financial Information in Group Staff Mergers & Acquisitions Head of Group Staff Investor Relations Head of Investor Relations and Financial Information in Group Staff Communications and Branding Holding in Husqvarna: 4,684 B-shares. Related parties: 966 B-shares. Olle Wallén Head of Group Staff Legal Affairs, Husqvarna Board Secretary Born M. of Laws. Attorney at law with Styrbjörn Gärdes Advokatbyrå Corporate Legal Counsel in Nordstjernan/ NCC AB Joined Electrolux in 1993 as Corporate Legal Counsel. General Counsel for Electrolux operations in the US General Counsel for Electrolux Major Applicances, Europe Holding in Husqvarna: 10,761 B-shares. Lars Worsøe-Petersen Head of Group Staff Human Resources Born M. Econ. Head of Organization and Management development in Andelsbanken A/S , Senior Management Consultant in Unibank A/S Joined Electrolux in Head of Human Resources in Electrolux operations in Denmark , Head of Human Resources in Electrolux Major Appliances in Europe Head of Electrolux Holding A/S, Denmark Head of Human Resources in Electrolux Major Appliances in North America Holding in Husqvarna: 6,265 B-shares. Holdings as of 31 December 2006.

85 HUSQVARNA ANNUAL REPORT 2006 GROUP MANAGEMENT 83 Bengt Andersson Bo Andreasson Robert E. Cook Hans Linnarson Anders Ströby Bernt Ingman Åsa Stenqvist Olle Wallén Lars Worsøe-Petersen

86 SUSTAINABLE 84 DEVELOPMENT HUSQVARNA ANNUAL REPORT 2006 Sustainable development Husqvarna s operations shall be conducted in a responsible way in the interest of sustainable economic, social and ecological development. The responsibility covers all of the company s activities and processes and is aimed at creating long-term value for Husqvarna s stakeholders the players and interests affecting or affected by the company s operations. Husqvarna was established as a stand-alone listed company in June Prior to the listing, the Board of Directors adopted an overall Group Code of Business Conduct. In addition, policies were established within a number of areas. The goal for 2007 is to establish a policy for the environment and social responsibility. The Code of Business Conduct The Code of Business Conduct sets overall guidelines for conducting operations and applies for all employees irrespective of position or country. Husqvarna requires that suppliers to the Group commit themselves to observance of the code. The Code of Business Conduct includes the following requirements: Operations shall be conducted in all respects in accordance with prevailing laws and regulations, and shall contribute to sustainable development. Accurate accounts and transparency concerning all financial transactions. Fair and equal treatment in relationships with customers and other business partners. Strict neutrality with regard to political interests. Avoidance of conflicts of interest. Respect for human rights. Consideration of the health and safety of end-users and employees. Freedom of association, prohibition of both child labour and discrimination on religious, ethnic, cultural or other grounds. The Code of Business Conduct is available at: Husqvarna Code of Business Conduct. Employees Husqvarna has established fundamental Group-wide principles regarding relationships with Group employees - Husqvarna s People Process. These principles support managers with regard to recruitment and selection, evaluation of work, career development, and remuneration. The process is also aimed at ensuring that people who contact the company are treated fairly. Husqvarna has a well-developed process for Talent Management, in order to develop and secure access to future leaders. Environmental work Husqvarna s environmental responsibility is anchored in all operations and covers everything from production processes, consumption of material and energy, product features such as exhaust emissions, noise levels, and packaging to the recyclability of products. The product range is dominated by engine-powered products. The majority of them are petrol-powered, while the others are powered by electricity and/or batteries. Husqvarna performs analyses such as life-cycle analyses (Life Cycle Assessments) in order to evaluate the potential environmental impact of products and services. These analyses show that the Group s total environmental impact results chiefly from energy consumption and exhaust emissions when products are used. Accordingly, a central part of Husqvarna s environmental work is focused on reducing these effects. The products are subject to criteria for environmental impact and other effects which are generated during use and recycling. These criteria often refer to minimum levels for undesirable effects, and are stated in international, national and regional laws as well as regulations and directives. Product development Husqvarna s research and development efforts are focused on creating products that combine higher performance with improvements in terms of energy consumption, exhaust emissions, safety, noise levels, ergonomics, user-friendliness, recycling and easeof-service. According to Husqvarna s quality policy, customer expectations regarding the Group s products and services shall always be met or surpassed. This means that compliance with prevailing regulations and standards is seen as a necessary but insufficient condition for fulfilling customer-related and social needs and preferences. The strategy involves developing technology and products which surpass legislated minimum standards. Energy consumption Husqvarna has long experience of development of two-stroke engines and works intensively to reduce fuel consumption on the basis of new engine technology. For the newly developed twostroke engines, which are chiefly used in chainsaws, brush saws and lawn mowers, a reduction in fuel consumption of approximately 15% was achieved in Husqvarna uses fourstroke engines in e.g. lawn mowers, which normally have somewhat lower fuel consumption than two-stroke engines. Exhaust emissions Since the mid-1990 s, criteria for emissions from petrol-powered products have gradually become stricter, and it is expected that this trend will continue. The Group has developed new engines for its portable petrol-powered products which comply well with these criteria and also provide better performance. Exhaust emissions, mainly hydrocarbons, from the Group s chainsaws have been reduced by about 25% since The Group has a number of important patents in this area and is well-prepared to meet future emission criteria. Husqvarna also participates actively in negotiations with authorities regarding future criteria. Ergonomics and safety R&D at Husqvarna is also focused on enhancing both ergonomics and product safety. The Group works continuously on improving information about the correct use of products.

87 HUSQVARNA ANNUAL REPORT 2006 SUSTAINABLE DEVELOPMENT 85 CO 2 per added value kg/ksek Treated water per added value m 3 /ksek Energy consumption per added value kwh/ksek Energy consumption per used area kwh/square meter 45 0, , , Since the degree of environmental impact depends on output, certain indicators are calculated in relation to the added value. The added value is defined as the difference between total cost of production and the cost of direct material. Noise levels Husqvarna works actively to reduce the noise levels of its products. Within about three years, considerably more of the Group s product categories are expected to become subject to noiseemission regulations. The company actively monitors developments and takes account of stricter future regulations in the product development process. Recycling The Group manages recycling locally in each country and has systems for reporting to regulatory authorities in accordance with relevant requirements. Husqvarna is actively participating in the creation of an ISOstandard for determining the recycling rate for products within the Group s areas. Materials used in production Husqvarna aims at selecting materials with the least possible environmental impact. The Group continually replaces materials with new and more environmentally compatible alternatives when such materials are developed. The EU s RoHS Directive went into effect 1 July Husqvarna modified electrical products in cooperation with its suppliers well in advance, in order to be in a position to phase out the prohibited materials. Examples of new products The products described below were developed by Husqvarna during the past three years with particular focus on environmental compatibility, ergonomics and safety, and meet stricter criteria than the prescribed minimum standards: Husqvarna chainsaws with enhanced engine performance A new generation of chainsaws with the patented X-TORQ technology. Enhanced performance, better ergonomics and lower petrol consumption. Comply with current and known future emission criteria, in both North America and Europe. Husqvarna clearing saws in the 35 cc class Several models with Husqvarna E-tech engines, featuring lower exhaust emissions and up to 20% lower fuel consumption. Comply with current and known future emission criteria, in both North America and Europe. Jonsered chain saws Several models between cc and one in the 85 cc class, all with centrifugal air cleaning, rapid acceleration and efficient vibration-damping. Special features for varying needs, e.g. heated handles for winter use. Husqvarna and Jonsered clearing saws in the 45 cc class A total of nine models, of which five are Husqvarna- and four Jonsered-branded. Many unique features e.g. heated handles and specially developed load-absorbing harnesses for long working sessions. Husqvarna leaf blower New back-pack blower for professional users features the lowest noise level in its class on the market (64dB(A) complying with (ANSI B175.2), high blowing power and high blowing speed (>79 m/s). Lower vibrations thanks to an integrated vibration-damping system and the Husqvarna E-tech low-emission engine. Husqvarna lawn mowers for professional users A series of four new lawn mowers for professional use. Very low vibrations, high reliability and optimum mowing results. Husqvarna and Jonsered Riders A series of riding lawn mowers with Husqvarna s unique steering system. Articulated steering in combination with hydrostatic transmission, two-wheel or four-wheel drive and front mountedcutting decks provide optimum control, optimum mowing results and minimum need for trimming afterwards. Power cutters A new generation of power cutters with new engine technology delivers enhanced performance and lower fuel consumption. These products also offer higher reliability and reduced vibration levels. Complies with current and known future environmental criteria in both North America and Europe. Suppliers Purchasing costs for raw materials and components correspond to approximately 50% of the Group s net sales. An efficient purchasing function is accordingly of critical importance. The Group has a process and an organization for purchasing which combines overall Group requirements and opportunities with knowledgeable local buyers.

88 SUSTAINABLE 86 DEVELOPMENT HUSQVARNA ANNUAL REPORT 2006 The most important raw materials purchased by the Group are steel, plastic, metallic powder, aluminium and magnesium. In terms of components, petrol engines account for the largest share of purchasing. The share of purchasing from low-cost countries as defined by The World Bank is currently 18% of which China represents around half. In three years time, Husqvarna aims at increasing the share of purchasing from such countries to approximately 25%. During 2006, the Group arranged supplier days in both China and India. The participants received training in the Group s Code of Business Conduct, fundamental values and processes, among other things. Husqvarna has a comprehensive set of requirements that must be met by companies that want to become suppliers to the Group, including: Observance of Husqvarna s Code of Business Conduct Certification according to ISO 9001:2000 (quality management system) or equivalent Certification according to ISO 14001:1996 (environmental management system) or equivalent Compliance with Husqvarna s Restricted Materials List (RML) Production Mos of the Group s production is in own factories in Sweden, the US, the UK and Belgium. There are 14 major plants, of which five are in North America, seven in Europe and one each in Latin America and China. At year-end of 2006, the equivalent of 84% of the Group s production area was certified to ISO 9001, the international standard for quality-management systems, and the equivalent of 91% of the production area was certified to ISO 14001, the international standard for environmental management systems. Work on certifying additional units is ongoing. The goal is for all plants to be certified. Environmental performance indicators for production As part of its environmental work, the Group regularly measures a number of performance indicators at production units. All of the Group s plants are included in the data shown in the graphs on page 85. The Group works continuously on reducing energy and water consumption at production units and achieving a high utilization rate of purchased materials and components. Environmental aspects regarding acquisitions In connection with agreements for acquisition of companies or operations with production facilities, Husqvarna performs an environmental-risk audit. In particular, the audit covers permits for current operations, and includes interviews with management. When necessary, inspections are performed by qualified experts. Direct material balance, % Finished products, incl. packaging , External material and energy recycling , Waste to landfill (non-hazardous) , Hazardous waste , Emissions to air , Emissions to water , Total direct material , The above chart shows utilization of material in the Group s manufacturing units. Key directives and legislation impacting the Group s products Environmental issue Legislation Product area Exhaust emissions* California: California Code of Regulations Internal combustion engine Rest of USA and Canada: EPA 40 CFR Part 90 powered products under 19 kw EU-Directive 2002/88/EC Safety EU-Directive 2001/95/EC (GPSD) All products and services Noise level EU-Directive 2000/14/EC (noise emission) In principle all Husqvarna s products EU-Directive2003/10/EC (physical agents) Products at workplaces Producer responsibility EU-Directive2002/96/EC (WEEE) Electric and electronic products Material composition EU-Directive 2002/95/EC (RoHS) Electric and electronic products EU-Directive 1907/2006/EC (REACH) Import and manufacture of chemicals California Code of Regulations, Proposition 65 List of chemicals with restricted/prohibited use Husqvarna s products are covered by regulations concerning environmental impact and other effects which arise on use and recycling. Often, it is about defined minimum levels of undesired effects. There are international, national and regional laws, regulations and directives. * A common factor of the legislation relating to exhaust emissions shown above is that it is based on the American EPA regulations stage 2, issued by the american federal environmental authority, the U.S. Environmental Protection Agency (EPA). In summary, the regulations involve demands for a 55 80% reduction in emissions of hydrocarbons, depending on engine category, compared to what previously applied for non-exhaust controlled hand-held engines. The main body of the requirements shall be fully introduced in 2007, but certain transitory provisions apply until Application of similar requirements with the same limit values as EPA is ongoing with the EU.

89 HUSQVARNA ANNUAL REPORT 2006 THE HUSQVARNA SHARE 87 The Husqvarna share Listing and trading volume The Husqvarna shares were listed on the Stockholm Stock Exchange on 13 June The total volume of shares traded during the year was approximately 268 million, corresponding to an average daily trading volume of approximately 1.9 million. ADR Program In connection with the distribution of Husqvarna shares to the shareholders in Electrolux, an ADR program for Husqvarna s B- shares was established in the US. The ADRs are traded on the American over-the-counter ( OTC ) market. The Bank of New York is the ADR Depositary Bank. One ADR is equivalent to two ordinary B-shares. Share-price trend in 2006 During 2006 Husqvarna s A-share rose by 27% and the B-share by 35%. The index of Stockholm Stock Exchange rose by 32% between 13 June and 31 December The year-end closing price was SEK 116 for the A-share and SEK 107 for the B-share. The market capitalization at year-end was approximately SEK 31.8 billion. The highest closing price for the A-share was SEK 118 on December 28, and the lowest closing price was SEK 81 on August 7. The highest closing price for the B-share was SEK 107 on 29 December, and the lowest was SEK on 7 September. Ownership structure The number of shareholders at year-end was 66,289. Non- Swedish investors represented approximately 24% of the voting rights and approximately 30% of the capital. Shareholder distribution in Husqvarna Shareholders by country Other, 13.4% USA, 14.2% UK, 2.7% Sweden, 69.7% Source: SIS Ägarservice as of 31 December Number of shares Number of shareholders % of shareholders 1 1,000 57, ,001 10,000 7, ,001 20, , Total 66, % Share capital and voting rights Each share has a par value of SEK 2. The share capital as of 31 December 2006 consisted of 9,502,275 A-shares and 286,756,878 B-shares, totaling 296,259,153 shares. The share capital amounted to SEK 592,518,306 at year-end. A-shares carry one vote and B- shares one-tenth of a vote. A trading lot consists of 100 shares. Share price and trading volume 13 June 31 December 2006 Share price, B-share, SEK 110 Weekly volume in thousands of shares ,000 16,000 12, ,000 4, June July Aug Sep Oct Nov Dec Weekly volume Husqvarna B OMX S PI Findata

90 88 THE HUSQVARNA SHARE HUSQVARNA ANNUAL REPORT 2006 Major shareholders in Husqvarna AB Total number Shareholders Number of A-shares Number of B-shares of shares Capital, % Votes, % Investor AB 8, ,074,100 32,827, Robur Investment Funds 12,250,555 12,250, Alecta Mutual Pension Insurance 443,000 10,392,800 10,835, AFA Insurance 9,231,452 9,231, Fourth Swedish National Pension Fund 9,186,340 9,186, SEB Investment Funds 8,662,413 8,662, SHB/SPP Investment Funds 8,198,355 8,198, AMF Pension Investment Funds 6,210,200 6,210, Franklin-Templeton Investment Funds 5,795,949 5,795, Lannebo Investment Funds 4,665,100 4,665, Total, 10 largest shareholders 9,195,971 98,667, ,863, Other shareholders 306, ,089, ,395, Total all shareholders 9,502, ,756, ,259, Of which Board of Directors and Group Management 390, , Source: SIS Ägarservice as of 31 December Most of the shares owned by foreign investors are registered through trustees, which means that owner identity is not obtainable from VPC. At year-end 2006 about 55% of the total share capital was owned by Swedish institutions and mutual funds, about 30% by foreign investors, and about 15% by private Swedish investors. Dividend and dividend policy The Board of Directors has decided to propose a dividend of SEK 2.25 for the fiscal year This corresponds to 35% of income for the period according to the Combined financial statements. The long-term goal is for the dividend to correspond to 25 50% of income for the period. Data per share 2006 Earnings per share 1), SEK 6.29 Dividend 2), SEK 2.25 Dividend yield 3), % 2.1 Dividend 4), % 35 Year-end trading price, B-share, SEK 107 Highest trading price, B-share, SEK 107 Lowest trading price, B-share, SEK Equity, SEK Number of shareholders 66,289 Key facts Listing 1) : Stockholm Number of shares: 296,259,153 Market capitalization at year-end: SEK 31.8 billion Ticker codes: Bloomberg HUSQA SS, HUSQB SS; Reuters HUSQa.ST, HUSQb.ST; Stockholm Stock Exchange HUSQ A, HUSQ B ISIN code: A-share SE , B-share SE ) The ADRs in Husqvarna are traded on the American over-the-counter ( OTC ) market. The Bank of New York is the ADR Depositary Bank for Husqvarna. One ADR is equivalent to two ordinary B-shares. 1) Pro forma. 2) Proposed by the Board. 3) Dividend per share divided by trading price at year-end. 4) As percentage of income for the period according to the Combined financial statements.

91 HUSQVARNA ANNUAL REPORT 2006 ANNUAL GENERAL MEETING 89 Annual General Meeting The Annual General Meeting of Husqvarna AB will be held at 4 pm on Thursday 19 April 2007, at the Elmia Congress Centre, the Hammarskjöld Hall, Elmiavägen, Jönköping. Participation Shareholders who intend to participate in the Annual General Meeting must be registered in the share register kept by VPC AB (the Swedish Central Securities Depository) on Friday 13 April 2007, and give notice of intent to participate, thereby stating the number of assistants attending, to Husqvarna no later than on Friday 13 April Notice of participation Notice of intent to participate can be given by mail to Husqvarna AB, Dept. EM-LA, Box 30224, SE Stockholm, Sweden by telephone at between 9 am and 1 pm weekdays on the Group s website: Factors affecting forward-looking statements This report contains forward-looking statements in the sense referred to in the American Private Securities Litigation Reform Act of Such statements comprise, among other things, financial goals, goals of future business and financial plans. These statements are based on present expectations and are subject to risks and uncertainties that may give rise to major deviations of the result due to several aspects. These aspects include, among other things: consumer demand and market conditions in the geographical areas and lines of business in which Husqvarna operates, the effects of currency fluctuations, downward pressure on prices due to competition, a material reduction of sales by important distributors, any success in developing new products and in marketing, outcome of any product responsibility litigation, progress when it comes to reach the goals set for productivity and efficient use of capital, successful identification of growth opportunities and acquisition objects, and to integrate these into the existing business and successful achievement of goals to make the supply chain more efficient. Production: Husqvarna AB and Intellecta Communication AB. Photos: Stefan Berg, Tomas Magnusson and Husqvarna AB. Print: Intellecta Tryckindustri AB. Copyright 2007, Husqvarna AB, Stockholm, Sweden. Notice should include the shareholder s name, registration number, if any, address and telephone number. Information provided together with the notice will be made subject to data processing and will be used solely for the Annual General Meeting Shareholders may vote by proxy, in which case a power of attorney should be submitted to Husqvarna prior to the Annual General Meeting. Shares registered by trustee Shareholders, whose shares are registered through banks or other trustees, must have their shares temporarily registered in their own names on Friday 13 April 2007, in order to participate in the Annual General Meeting. Dividend The Board of Directors has proposed a cash dividend of SEK 2.25 per share and Wednesday 24 April 2007 as record date for the dividend. With this record date, it is expected that dividends will be paid from VPC on Friday 27 April The last day for trading in Husqvarna shares including the right to dividend for 2006 is Thursday 19 April Matters at the AGM Information about other proposals, for example, a proposed bonus issue and a proposed authorization for the Board to issue new shares, will be sent to all shareholders. For further information, see the section on proposals to the AGM in the Board report.

92 Profile of Husqvarna Husqvarna produces outdoor power products for forestry and lawn and garden care, as well as cutting equipment and diamond tools for the construction and stone industries. The product range includes products for consumers* as well as professional users. SEKm, unless otherwise stated Net sales 29,402 28,768 Operating income 3,121 2,927 Operating margin, % Average number of employees 11,412 11,681 Net sales, SEK m 28,768 29,402 Operating income, SEK m 2,927 3, Consumer Products Product range LAWN AND GARDEN Lawn mowers, garden tractors, trimmers, leaf blowers, hedge cutters, chainsaws and snow throwers Professional Products Product range LAWN AND GARDEN Lawn mowers, specialty turf-care equipment, trimmers, hedge cutters and leaf blowers FORESTRY EQUIPMENT Chainsaws, clearing saws and accessories * White goods under the Husqvarna brand are produced and sold by the Electrolux Group.

93 Net sales by business area, 2006 Operating income by business area, 2006 Net sales by geographical area, 2006 No. of employees by geographical area, 2006 Consumer Products, SEK 18,335m Professional Products, SEK 11,067m Consumer Products, SEK 1,415 m Professional Products, SEK 1,875 m Rest of the world, 6% Europe, 40% North America, 54% Rest of the world, 6% Europe, 42% North America, 52% Market position World s largest producer of lawn mowers and chainsaws, as well as portable petrol-powered garden equipment such as trimmers and leaf blowers. One of the largest in garden tractors. Market position CONSTRUCTION INDUSTRIES Floor saws, tile and masonry saws, wall and wire saws, drill motors and stands, power cutters and diamond tools Husqvarna and Jonsered are two of the top three leading brands for professional chainsaws in the global market, with a combined market share of approximately 40%. World leader in diamond tools and cutting equipment for the construction and stone industries.