SKF

We enable a world of reliable and sustainable rotation

Our products and services are found everywhere in society. In fact, wherever there is movement, SKF’s solutions may be used. This means that we are an important part of the everyday lives of people and companies around the world. When have you relied on reliable rotation today?

CONTENTS

SKF OVERVIEW

This is the SKF Group 4
President's letter 10
Why invest in SKF 16

VALUE CREATION AND STRATEGY

How SKF creates value 18
Trends and drivers 20
SKF and climate changes 22
Objectives and results, financial, climate and social 24
SKF strategic focus areas 26
Digital sales 26
New business models 28
Innovation 30
World-class manufacturing 32
Future workforce 34
Cleantech 36

SKF'S GLOBAL PRESENCE

A leader on the world bearing market 40
SKF's global presence 2020 42
Europe 43
North America 44
Asia and Pacific 45
Latin America 46
Middle East and Africa 47
Risk management 50
The SKF share 52
Nomination of Board members and notice of Annual General Meeting 56
Financial position and dividend policy 56

FINANCIAL STATEMENTS

Consolidated income statements 58
Consolidated statements of comprehensive income 58
Consolidated balance sheets 60
Consolidated statements of cash flow 62
Consolidated statements of changes in equity 65
Notes to the consolidated financial statements 66

FINANCIAL STATEMENTS, PARENT COMPANY

Parent Company, AB SKF 98
Parent Company income statements 98
Parent Company statements of comprehensive income 98
Parent Company balance sheets 99
Parent Company statements of cash flow 100
Parent Company statements of changes in equity 101
Notes to the financial statements of the Parent Company 102
Proposed distribution of surplus 109

SUSTAINABILITY STATEMENTS

General disclosures 111
SKF's material topics 117
Economic category 117
Environmental category 119
Social category 125
Independent auditor's Limited Assurance Report on Sustainability Report and Report on the Statutory Sustainability Report 136
Auditor's Report 137

CORPORATE GOVERNANCE REPORT

Board of Directors 146
Auditor's Report on the Corporate Governance Report 149
Group Management 150

SKF GROUP

Seven-year review 152
Three-year review 153
Per-share data 153
Distribution of shareholding 153
Definitions 154
General information 155

REMUNERATION REPORT

A leading global supplier of reliable rotation

Our customers want assets that run faster, longer, cleaner and more safely. Solving this in the most effective and sustainable way by reducing friction contributes to our vision of a world of reliable rotation. Our mission is to become the undisputed leader in the bearing business, and we are today one of the world's largest supplier of bearings.

2020 in brief

Significant negative impact on demand from end of March as a result of the COVID-19 pandemic. Focus on ensuring the safety and wellbeing of employees and on implementing measures to reduce costs and increase flexibility.
Continued transformation of manufacturing with investments in Property, Plant and Equipment of around SEK 3.3 billion.
Updated long-term targets introduced at SKF's Capital Markets Day in November.
Already operating two carbon neutral factories, SKF announced the aim to achieve a fully carbon neutral manufacturing footprint by 2030.

SKF's long-term targets

The long-term targets were updated on 4 November 2020 and shall be achieved over a business cycle.

TARGET	2020 OUTCOME	TARGET	2020 OUTCOME
Operating margin^{1)}		Revenue growth^{1)}
14%	12.3%	5%	−10%
Net debt^{1)}/equity		ROCE^{1)}
<40%	9%	16%	12.7%
Dividend pay-out ratio		Carbon neutral by 2030
50%	66%	zero	−35%

Net sales

Operating margin

Cash flow

1) Adjusted for items affecting comparability

2) Including acquisitions, adjusted for divestments

3) Excluding pension liabilities

4) Absolute reduction in scope 1 and 2 emissions since 2015 base year

5) Net cash flow after investments before financing

SKF OVERVIEW

This is the SKF Group

We are experts around the rotating shaft

The rotating shaft, with all its associated technologies, is probably the most common application in the world. SKF is a leading global supplier of solutions around the rotating shaft including bearings, seals, lubrication management, condition monitoring and maintenance services.

SKF provides reliable rotation by combining hands-on industry experience with a vast product portfolio and in-depth knowledge across the SKF technology areas.

One of our strengths is the ability to keep developing new technologies that are used to create value-adding solutions. This gives competitive advantages to customers, and at the same time, contributes to a sustainable global society.

We are everywhere

SKF's products and services may be used wherever there is movement. This means that they are used all over the world and in a large variety of applications, ranging from heavy industries, such as mining and metal working and pulp and paper, to renewable energy such as wind, as well as cars and commercial vehicles.

SKF's global presence page 42

Europe page 43

North America page 44

Asia and Pacific page 45

Latin America page 46

Middle East and Africa page 47

SKF Annual Report 2020

Our future is digital, electric and clean

The SKF strategy is the foundation from which we work towards our vision and mission. Sustainability is at the core of our strategy and is embedded in the business. Everyone working at SKF has a role to play in tackling the environmental challenges – and that is what “Striving for green” symbolizes.

The COVID-19 pandemic has changed the world and created a new normal. Our strategic direction remains but has been accelerated in many areas. The megatrends

of digitalization, climate crisis and the movement towards a regionalized world are strongly influencing SKF.

Six strategic focus areas help us to prioritize and focus on the right topics to realize the vision. At the same time, they will also help us to reduce our own and our customers' environmental impact and energy consumption, and to take a greater part in the circular economy.

We care about the world around us

SKF Care is our sustainability framework covering the business, environment, employee and community dimensions. It provides rules, principles and guidance on how we shall act as a global corporation. At SKF, we care about our customers, investors, colleagues, society and the environment over the short, medium and long terms. For decades, this has been at the foundation of who we are, and it is reflected in the SKF Care framework. SKF Care has four interdependent dimensions:

Business Care Assuring customer focus, financial performance and shareholder returns – with the highest standards of ethical behavior.

Employee Care Ensuring a safe working environment and promoting health, personal development and well-being of employees at SKF, as well as people in the supply chain.

Environmental Care Continually reducing the environmental impact from SKF's operations, and those of suppliers and customers.

Community Care Making positive contributions to the communities in which SKF operates.

SKF Annual Report 2020

SKF OVERVIEW

Industrial

SHARE OF NET SALES

73%

SHARE OF OPERATING PROFIT¹)

89%

SKF'S OFFERING

Supplying more than 40 industries globally with products and services, both directly and indirectly through a network of more than 7,000 distributors.
Broad product range of bearings, seals and lubrication systems.
Rotating shaft services and solutions for machine health assessment, reliability engineering and remanufacturing.

MARKET DRIVERS

Reliable rotation is crucial for many industries.
Climate change and the actions to address it influence most of SKF's customer industries.
Other drivers vary from application to application, e.g. low friction, low energy use, maintenance-free solutions and total cost of ownership.
Digitalization enables monitoring and predictive maintenance throughout the product life cycle.

MAIN COMPETITORS

Schaeffler Group, Timken, NSK, NTN, JTEKT, Rothe Erde, Wafangdian Bearing Group, Minebea Mitsumi and C&U.

SKF'S POSITION

A leading position in industries such as railway, heavy industries and industrial distribution market, and a prominent position in other industries.

MARKET CHARACTERISTICS

Fragmented global industrial OEM (Original Equipment Manufacturer) market, but in some industries, e.g. renewable energy and railway, a relatively small number of OEMs account for a large part of the market.
The distributor channel is also globally fragmented and varies from country to country.

MARKET VALUE² SEK BILLION

240–260

BEARINGS MARKET DEVELOPMENT 2020

-8% to -11%

1) Adjusted for items affecting comparability 2) Total value of accessible bearings market

SKF Annual Report 2020

Automotive

SHARE OF NET SALES

27%

SHARE OF OPERATING PROFIT¹)

11%

SKF'S OFFERING

Customized bearings, seals and related products for wheel-end, driveline, engine, e-powertrain, suspension and steering applications to manufacturers of cars, light and heavy trucks, trailers, buses and two-wheelers.
Supplying the vehicle aftermarket with spare parts, both directly and indirectly through a network of more than 10,000 distributors.

MARKET DRIVERS

The light vehicle market: energy efficiency, reduction of emissions and electrification.
The truck market: total cost of ownership, connectivity and integrated systems.
The aftermarket: changing buying patterns, new channels, product performance and cost optimization.

MAIN COMPETITORS

Schaeffler Group, Timken, NSK, NTN, JTEKT, Iljin, C&U and Wanxiang Qianchao.

SKF'S POSITION

One of the leaders in, e.g. wheel-end solutions and the development of components for automotive electrification.
Strong position in application-driven powertrain solutions.
Strong global position in the aftermarket with an extensive distribution network.

MARKET CHARACTERISTICS

Consolidated automotive OEM market with a small number of large companies.
Fragmented vehicle aftermarket.
OEM manufacturers account for about 80% of the total bearings market, while the independent vehicle aftermarket accounts for the remainder.

MARKET VALUE² SEK BILLION

120–140

Bearings
MARKET
DEVELOPMENT 2020
-13% to -16%

1) Adjusted for items affecting comparability

2) Total value of accessible bearings market

SKF Annual Report 2020

SKF OVERVIEW

RAILWAY

Partnership to improve train performance

SKF and the German rail operator Nordbahn are partnering to reduce train downtime and to improve train maintenance intervals and operations.

This is achieved amongst other things through SKF Insight Rail asset condition monitoring and remote analysis, bearing refurbishment, and intelligent stock planning as part of a fee-based agreement that takes performance KPIs into consideration.

AUTOMOTIVE

Victorious two-wheeler sealings

Within the two-wheeler segment, sales of SKF's seals has been booming during the worldwide crises in 2020, beating the record numbers of 2019 despite lockdowns around the world. As an example, the dual compound fork seal for the motorcycle aftermarket exceeded sales expectations by a factor of two.

SKF is present in the premium segment and is a preferred partner to many OEMs and in racing thanks to the aftermarket offer. In the 2020 mountain bike World Championships, SKF's fork seals was featured on all podium positions in every discipline with front suspension. Within the motorcycle segment, SKF scored in all podium positions in various disciplines, such as Dakar Race, MotoGP and Supercross series.

ENERGY

Increased efficiency

Bearings within wind turbine generators are exposed to punishing environmental conditions and high frequency electrical currents.

Using insulated bearings from SKF's INSOCOAT range gives an added protection that helps to extend bearing lifetime and prevent machine downtime – boosting the economy and efficiency of wind turbine energy generation.

LUBRICATION MANAGEMENT

Increased productivity in tough applications

Lubrication performance is an important key to machine performance. The new SKF Lincoln SL-6 injector, the latest addition to SKF's lubricant injector range, contributes to increased productivity in tough applications, including in dump trucks, excavators, and other mining and construction equipment.

SKF Annual Report 2020

We are SKF

Vanja Winblad

Chief Marketing Officer, SKF RecondOil, Sweden

"SKF will continue to stay at the forefront of innovation by listening to our customers, but also by acquiring start-ups with solutions the customers don't yet know that they need. RecondOil, and our value proposition of circular use of oil, is an example of that mindset."

Carlos Lahura

Director Industrial Business Development, Latin America

"During 2020 we implemented more than 15,000 wireless vibration and lubrication devices in Latin America. By successfully implementing, and not only developing, technology we take SKF to the next level. To work together, across continents, cultures and roles, facing challenges, is what drives me."

Jerry Stiles

Channel Lead, Sumter North America

"As channel lead, I ensure the flow of production and push the factory to be world class. I enjoy seeing my team come together and solve problems or achieve a set goal. And I think that the way everyone works together, is what will ensure SKF's continuous growth, in business and technology."

Chaiya Cheybumrung

General Manager, Industrial Distribution Business, Thailand

"SKF is the clear market leader in Thailand, delivering disruptive services beyond customer expectation. We are able to deliver what we have committed to, to the economic system and society, and being part of that is truly motivating."

Olga Rossinsky

Lead Data Scientist, SKF Center of AI Excellence, Israel

"I joined SKF through the purchase of a small start-up, developing a predictive maintenance auto-machine learning solution. Our goal is to have 40 million connected bearings by 2025 and we're working to make our solution automated, scalable and generic. I really enjoy exploring the data itself."

Yoshita Negi

Assistant Manager Marketing Communications, India

The people strategy was a major part of Yoshita's decision to join SKF.

"There's space and opportunity to grow. We have a very open culture, leaders and colleagues worldwide are curious to listen and support each other. And even more important – as a parent, I experience real work-life balance."

SKF Annual Report 2020

PRESIDENT'S LETTER

CEO Alrik Danielson

"Together, we are realizing the circular economy"

In a fast-changing world, everyone needs to innovate, adapt, anticipate and transform to stay ahead. This is also true for SKF; increasingly so during recent years.

We are far from done, yet the progress has been significant. It can be seen in many ways; in our customer-centricity, in our innovations, in our simplified management structure and in our manufacturing. You can see it in our uncomplicated and speedy decision processes, in our financial strength and in our results. SKF is now in pole position to take the next steps on the transformation journey and become the natural partner to most industries, making their environmental ambitions come true. Together, realizing the circular economy.

Transforming how we bring value to customers

SKF is providing reliable rotation to industries all over the world. Their common objective is to maximize existing resources, with undisrupted use of machines and processes, running faster and more efficiently. For a business to be productive, competitive and profitable, efficient and unbroken, supply chains are crucial. This puts higher demands on the bearings. They are used more and more, and need to last longer without downtime. Downtime is fatal for businesses today.

With a fee-based business model, customers buy productivity (uptime) and peace of mind. Through digital processes and monitoring the bearings, we can help customers keep their production going. More and more customers see the benefits of this model, with our Rotating Equipment Performance (REP) contracts today representing one billion SEK per annum.

Our investments in world-class manufacturing are another important success factor for delivering increased customer value at a lower cost. The truth is that we can produce perfect, round bearings at nano-level. This means that a bearing becomes a super-precision bearing. At our world-class manufacturing sites, the entire manufacturing flow is fully automated, driven by robots, offering precise adjustments.

Increased productivity with less environmental impact is a logical consequence of minimizing waste in the value chain; requiring fewer resources to keep processes going. The bearings do not need to go to waste at the end of life but instead go back to the factory to be remanufactured and given a new life. Remanufactured bearings reduce energy consumption by 80% in the production phase and also reduce material consumption.

Naturally, it reduces costs for customers too. With the help of artificial intelligence (AI), we have been able to make it tremendously more efficient. Today, our algorithms can drive these processes without human involvement.

SKF Annual Report 2020

> CE

By 2030 we will be carbon neutral. It is not a goal; it is a commitment.

SKF Annual Report 2020 11

PRESIDENT'S LETTER

Investing in future technologies for a circular economy

We're at the dawn of the fourth industrial revolution, with AI already being a key competence area. In SKF we are currently working on connecting our processes – we're developing a simulation tool able to analyze every step of a process and every need that emerges, to address them in real time. Signals from bearings at our customers' sites connect with our manufacturing units that produce bespoke components for each customer setting. Production starts just-in-time to be ready to deliver the part to the customer, ensuring a smooth replacement without disruption to their processes. In short, the bearing itself signals that it needs replacing in X days, so now is the time to start production or remanufacturing.

In a circular economy, there is no conflict between economic growth, social prosperity and environmental protection. With our solutions, we have a huge potential to reduce environmental impact at customer level. Thanks to digitalization and AI, we can be flexible and offer highly customized solutions without

“Knowing our customers and gathering data on how they use (and abuse!) our products is increasingly important. It informs how we can improve services and offerings back to them.”

adding cost. The integrated, connected process that we are building allows us to extend our cleantech offer to all our customers, regardless of industry.

Rotation-as-a-service, remanufacturing and reconditioned oil are all part of our cleantech offer that is generating increased productivity and improved environmental performance. As a practical example, take SKF RecondOil, why do machines break down? Well, usually it is simply because of dirt. With clean, recycled SKF RecondOil, we provide the conditions for the machine to operate flawlessly. No downtime, as well as a cleaner production environment.

The transformation within the bearings business

Digitalization, together with cost-effective and accessible equipment monitoring, based on sensor technology, has accelerated the transformation within the bearing business. However, going from a linear model of take, make and waste, to a circular economy where we take responsibility for our products throughout their entire lifetime, puts new and challenging demands on our capabilities. Not only on our mindset and our technologies, but also on our financials since the circular economy demands a different revenue model.

SKF's relentless customer focus gave us a head start in this transformation. Knowing our customers and gathering data on how they use (and abuse!) our products is increasingly important. It informs how we can improve services and offerings back to them. It is a virtuous circle.

COVID-19 – a catalyst for change

Besides the deeply saddening suffering that so many people and businesses have had to endure, the pandemic has also proven to be a catalyst for change and the use of digitalization. What would typically take five years, is now happening in less than a year. In our R&D-department, we asked our engineers to put themselves in our customers' shoes and solve problems for them now. Not in five years, but now! That unleashed a burst of creativity that spawned several new products and tools. Among them, an app that makes anyone a specialist. These tools solved real customer problems during an exceptionally difficult time.

Across the industry, we saw that in organizations where decisions were made further from the customers, the ability to adapt to the changed circumstances has been much slower.

SKF Annual Report 2020

SKF Annual Report 2020 13

> “I am incredibly proud to see people within SKF stepping up and taking responsibility with a kind of “founders’ mentality” to safeguard their creation.”

I am incredibly proud to see people within SKF stepping up and taking responsibility with a kind of “founders’ mentality” to safeguard their creation. There are so many examples across the organization of colleagues taking responsibility and initiating action not only to protect from the virus, but also to accelerate the development of the company and our colleagues.

Circular economy with an agile organization

SKF has a lean organization today with approximately 41,000 employees; a significant reduction during the last six years. The circular economy eliminates waste and makes certain types of work superfluous, as well as freeing up time for people to focus on other tasks and develop their work and skills. With our passionate and talented people, we are well-positioned to assist businesses, as well as society, to develop in a positive and more sustainable direction.

As I write this, I’m on the 5th floor of Götaholm, our new global headquarters in Gothenburg. Götaholm is a building, that years ago, used to be our central warehouse. It has since been “remanufactured” and given a new life as a state-of-the-art, sustainable office building focusing on the circular economy.

It was also the very first building in Sweden to be awarded the Leed Platinum environmental certification according to the new standard. A signal that we practice what we preach. By 2030, we will be carbon neutral. It is not a goal. It is a commitment. We have already reduced CO₂ emissions by more than 35% since 2015; proof that our transformation into a circular economy, where economic growth is decoupled from emissions, is successfully on track.

The preferred partner in the circular economy

SKF is well positioned for future developments in the rotation business. Changes will happen fast and will require the right decisions for SKF to stay ahead. We have laid the foundations to leverage on a resilient, high margin cleantech business, and we have an organization full of talent, ambition and passion. We recently updated our long-term targets to reflect our increased ambitions and I am confident that SKF’s role at the heart of rotation will bring substantial and sustainable value for every stakeholder for a long time to come.

I have spent over 25 years with SKF, the last six of which I had the privilege of serving as CEO. These have been some of the best and most formative years of my life. It goes without saying that it’s the interactions with all our fantastic people, customers and suppliers that will remain my fondest memories. In Rickard Gustafson, the Board could not have selected a better person to take over as CEO. Rickard is a great business leader and, more importantly, a great leader of people. I know he is the right person to continue to lead the work of all our colleagues; making SKF stronger, helping our customers improve their machine performance and, most importantly, realizing the circular economy.

Alrik Danielson
President and Chief Executive Officer

Read more about SKF’s new President and CEO
Rickard Gustafson on page 150.

SKF OVERVIEW

SKF Annual Report 2020

Early failure predictions at a pulp and paper mill

AI saving hundreds of thousands of US-dollars

Suzano, a major Brazilian pulp and paper company, experienced recurring unexpected failures on motor pumps which are crucial for the production process. The pumps were becoming a production bottleneck, and the mill urgently needed to reduce unscheduled downtime and its associated costs.

Artificial Intelligence (AI) provides the opportunity to apply pretrained machine learning algorithms to real-time sensor data to identify evolving asset failure. Suzano wanted to pilot the SKF Enlight AI solution to receive early failure predictions and attain greater visibility into asset process data. In this case, Suzano wanted to evaluate the solution's effectiveness by testing it out on process data from existing failures.

Two pump failures were used to assess SKF Enlight AI capabilities. The failure on the first pump was detected during a visual inspection on 26 December. It was determined non-critical with an operational cost for a planned shutdown of USD 150,000. The second pump failed unexpectedly on 31 December, two days after vibration analysis had first detected an evolving fault. The operational cost of this unscheduled downtime was estimated at USD 250,000.

These failures increased maintenance costs and disrupted routine work orders over the course of several weeks. However, SKF Enlight AI detected anomalous asset behavior in the historical data of both pumps from mid-December. This means that there would have been enough time to schedule the necessary resources and spare parts and execute a planned shutdown and maintenance at the end of December to fix problems in both pumps, before the unexpected failure of the second pump.

By avoiding unscheduled shutdowns, operator safety risks are reduced. In addition, the wasted energy, resources and associated $\mathrm{CO}_{2}$ emissions typical with an unplanned breakdown are also avoided.

SKF Annual Report 2020

SKF OVERVIEW

Why invest in SKF

An investment in SKF should not just be financially rewarding. It should also support transition to a climate resilient growth and a circular economy.

The changes made since 2015 ...

Optimization of the business portfolio
Divestments of non-core assets
Prioritizing customer focus

DIVESTED CAPITAL
SINCE 2015, SEK
6.5 billion

... have transformed the company ...

From cyclical to non-cyclical, focusing on 40 global customer segments, and delivering stable margins regardless of the business climate.
From industrial heavyweight to agile cleantech.
To offer our customers new products and services and new ways of working.

... successfully put to the test in extraordinary times.

"The new reality" with COVID-19 has brought many challenges for SKF's customers, making the Group's connected monitoring and lubrication offers even more relevant. With remote analysis and AI-based maintenance, SKF has been able to continue to help customers' machines rotate, without the need for on-site support. And the profitability stayed strong in 2020, the year of the pandemic, despite a large drop in sales.

ADJUSTED OPERATING
MARGIN 2020
12.3%
SALES 2020, SEK
75 billion

SKF Annual Report 2020

SKF Annual Report 2020 17

We will keep making rotation more reliable and sustainable ...

SKF's products and services are applied to machinery everywhere. SKF keeps the wheels of the world spinning – with less friction, cleaner and for longer. Striving for green is striving for prosperity. SKF will:

Drive development around the rotating shaft through digitalization,
Bring solutions and products that are part of a circular economy,
Continue to invest in innovation and automation, increasing productivity and reducing CO₂ emissions,
Act with speed and purpose to reduce the climate impact across the entire value chain, from the raw material we buy, achieving carbon neutral SKF operations by 2030, to the customer's use, and beyond.

... bringing higher shared value – to SKF, customers and the environment.

Delivering both environmental and economic value is key to SKF's strategy. SKF will grow and gain market shares by offering superior value and making smart acquisitions.
SKF leads the way for circular business models, underlining the Group's strong commitment to a sustainable economy.
By creating and capturing customer value through the productivity of reliable rotation, SKF and customers strive towards the same goals – reducing costs, waste, risks, and environmental impacts.
Remanufacturing and fee-based business models allow SKF to capitalize on its leading know-how, superior quality, and longer-lasting components.
Altogether, this will make SKF even stronger, a resilient high margin cleantech business.

VALUE CREATION AND STRATEGY

How SKF creates value

Resources

Financial

Assets SEK 90.6 billion
New investments SEK 3.3 billion
R&D investments SEK 2.5 billion

Social

Customers in 40 industries
More than 17,000 distributors
40,963 employees
730 application engineers
2,800 service engineers

Environmental

1,561 GWh energy
459,000 tonnes metal

Physical

91 manufacturing units
15 technology centres
30 Industrial Service Centres
14 REP Centres

Vision

A world of reliable rotation

Mission

The undisputed leader in the bearing business

A strong and complete offering …

Products

The product value proposition meets customers' product application needs and performance requirements of specific parameters such as speed, load, noise or physical environment.

Rotating Equipment Performance

The Rotating Equipment Performance (REP) value proposition meets the needs of customers who operate critical machinery by maximizing performance.

... for increased customer value with SKF as partner ...

SKF Annual Report 2020

... contributing to the circular economy

The REP value proposition is a commercial relationship where SKF provides the customer with functionality at a fixed recurring fee, leveraging the full SKF portfolio: bearings, seals, lubrication systems, condition monitoring, machine health analysis, remanufacturing, oil regeneration and many other engineering services. In this business model, the needs and ambitions of the customers and SKF are aligned where both benefit by improving productivity and eliminating waste in the production process.

More about SKF's strategy and strategic focus areas on pages 26–37.