SKF Year-end report 2003

SKF reports increased sales, measured in local currencies, compared to 2002 both for the fourth quarter and for the full year. The operating margin, excluding restructuring expenses and impairments of MSEK 487, reached 10.3% for the fourth quarter and 9.2% for the full year. Cash flow was also strong both in the fourth quarter and for the full year. SKF outperformed the market in a number of customer segments during the year. The Board proposes a dividend increase of 25% to SEK 10.00. The SKF Group reports a profit before taxes for the fourth quarter 2003 of MSEK 479 (979), and, excluding restructuring expenses and impairments, MSEK 966. The profit for the full year 2003 was MSEK 2 793 (3 542), and, excluding restructuring expenses and impairments in the fourth quarter, MSEK 3 280. ¡¤ Net profit for the fourth quarter 2003 was MSEK 405 (719). Net profit for the full year 2003 was MSEK 2 039 (2 466). ¡¤ Earnings per share for the fourth quarter 2003 were SEK 3.56 (6.34). Earnings per share for the full year 2003 were SEK 17.91 (21.67). ¡¤ Net sales for the fourth quarter 2003 was MSEK 10 245 (10 665). Net sales for the full year 2003 was MSEK 41 377 (42 430). The operating profit for the fourth quarter 2003 was MSEK 569 (1 121) and, excluding restructuring expenses and impairments, MSEK 1 056. The figure for the full year 2003 was MSEK 3 299 (4 022) and, excluding restructuring expenses and impairments in the fourth quarter, MSEK 3 786. The operating margin for the fourth quarter 2003 was 5.6% (10.5), and, excluding restructuring expenses and impairments, 10.3 %. The operating margin for the full year 2003 was 8.0% (9.5), and, excluding restructuring expenses and impairments in the fourth quarter, 9.2%. Cash flow, after investments before financing, for the fourth quarter 2003 was MSEK 812 (559), and for the full year 2003 MSEK 2 351 (2 644). The decrease in net sales for the fourth quarter 2003 compared to the fourth quarter 2002 was attributable to: structure 0.3%, volume 3.1%, price/mix 0.1% and currency effect -7.4%. A comparison between the full years shows: structure 0.3% volume 4.2%, price/mix 0.7% and currency effect -7.7%. Sales development Total sales, calculated in local currencies, for the SKF Group were up 3.5% in the fourth quarter and 5.2% for the full year. In Europe sales were unchanged in the fourth quarter 2003 compared to the same period last year. For the full year sales were slightly up. In North America sales were slightly lower for the fourth quarter but unchanged for the full year. In Asia sales were significantly higher for both the fourth quarter and the full year. Outlook The market demand for the Group's products and services is expected to improve during the first quarter 2004. In Europe it is expected to be slightly higher, while it will remain relatively flat in North America. Demand is expected to increase significantly in both Asia and Latin America. Manufacturing will, as is normal during the first half of the year, be increased slightly ahead of market demand to ensure a good service level throughout the summer period. The Group¡¯s financial net for the fourth quarter 2003 was MSEK -90 (-142) and for the full year 2003 MSEK -506 (-480). The lower level for the fourth quarter was mainly due to foreign exchange gains. Interest-bearing loans at year-end totalled MSEK 1 618 (2 409) while provisions for post-employment benefits amounted to MSEK 7 885 (1. At year-end, the Group had financial assets of MSEK 6 814 (1, including short-term financial assets of MSEK 6 342 (5 530). Additions to tangible assets for the fourth quarter 2003 totalled MSEK 520 (471), and for the full year MSEK 1 379 (1 442). Of the Group¡¯s total additions to tangible assets, approximately MSEK 70 (76) were invested in measures to improve the environment both internally and externally. Depreciation according to plan was MSEK 1 505 (1 588). In December 2003, SKF's equity to assets ratio was 43,1%, which is above the average objective for this ratio which is 35%. Three acquisitions were made in 2003: Scandrive Control AB, Rolling Stock Supply & Service Pty Ltd. and BFW Coupling Services Ltd. The acquisitions price for the three companies was MSEK 82 and total number of employees at acquisition 58. Compared with the year 2002, exchange rates for the full year 2003, including the effects of translation and transaction flows, had a negative effect on SKF¡¯s operating profit of MSEK 790. In the fourth quarter 2003, the corresponding negative effect was 150 MSEK. For the first quarter 2004 the estimated negative effect is MSEK 120 and for the full year 2004, based on current assumptions and exchange rates, is estimated to MSEK 500. Expenditure for research and development was MSEK 750 (767), which was 1.8% (1.8) of sales in 2003. Expenditure for research and development does not include expenditure for IT solutions and customized solutions. The number of first filings of patent applications was 151. The number in 2002 was 158. The average number of employees for the year 2003 was 37 632 (38 609) and the registered number of employees at the end of the year was 38 700 (39 739). At the end of December 2003, the Group¡¯s inventories amounted 20.4% (21.2) of annual sales. The return on capital employed for the 12-month period ended December 31, 2003 was 14.2% (17.1). Return on equity was 13.6% (15.6). During the year, the Group decided that all the factories within SKF should be certified according to the health and safety management standard OHSAS 18001 before the end of 2005. Recent acquisitions will be handled according to a separate programme. SKF has applied the new accounting principles for 2003 ¡°Employee benefits¡± and ¡°Segment reporting¡± in accordance with Swedish GAAP and IFRS. Dividend policy and pension obligations Based on the SKF Group's steady financial performance the Board of AB SKF has decided to change the dividend policy and to fund certain pension obligations. New dividend policy SKF¡¯s dividend policy is based on the principle that the dividend should be adapted to the trend of earnings and cash flow, taking into account the Group¡¯s development potential and financial position. The Board of Directors¡¯ view is that the dividend should amount to approximately one half of SKF¡¯s average net profit calculated over a business cycle. In the previous policy the dividend amounted to one third. (1 No comparable figure exist for 2002. "Employee benefits" was implemented as of January 1, 2003. Funding of pension obligations The Board has decided to establish pension foundations to fund approximately MSEK 3 000 of the pension obligations in Germany and Sweden, which are included in the total provisions for post-employment benefits of MSEK 7 885. This would mean that the financial assets used for this purpose would be netted against the corresponding provisions for post-employment benefits in the balance sheet. Funded obligations would have a slightly positive effect on SKF's profitability and key ratios. Restructuring expenses and impairments During the fourth quarter 2003 the cost for restructuring expenses was MSEK 282 and impairments was MSEK 205, which amounted to MSEK 487. MSEK 421 against cost of goods sold and MSEK 66 against selling and administrative expenses. They are related to the closure of the factories in Franklin in USA (Automotive Division), Thomery in France (Electrical Division) and the restructuring of Ovako Steel. In addition to these major activities, some smaller activities were also decided during the quarter. The details of how they affect the Divisions´ result is shown in the different division reports. Divisions Comments on sales per geographical region are based on local currencies and compared to the corresponding period for 2002. Industrial Division The operating result for the fourth quarter 2003 amounted to MSEK 373 (457), resulting in an operating margin of 9.7% (11.6) on total sales (sales and deliveries to external and internal customers). The operating result for the full year 2003 amounted to MSEK 1 434 (1 625), resulting in an operating margin of 9.3% (10.4) on total sales. The result has been affected by restructuring expenses and impairments amounting to MSEK 48 in the fourth quarter. The operating result for the full year, excluding these items, would have been MSEK 1 482 with an operating margin of 9.7%. External sales for the fourth quarter 2003 amounted to MSEK 2 336 (2 397), a decrease of 2.5%. External sales for the full year 2003 amounted to MSEK 9 714 (9 742), a decrease of 0.3%. Total sales for the fourth quarter were MSEK 3 849 (3 952) and for the full year MSEK 15 343 (15 650). Sales in Europe were relatively unchanged for both the fourth quarter and full year. In North America sales were higher for the fourth quarter and significantly higher for the full year. Sales in Asia were significantly higher for both the fourth quarter and the full year. Growth was good and ahead of market development for SKF's sales to wind turbine manufacturers during the year. SKF participated actively during the year in the development of new megawatt turbines, mainly for the on- and offshore wind-energy business. SKF was deeply involved with Vestas Wind Systems, the globally leading manufacturer of wind turbines, in the early design stage of their new wind turbines which improve cost efficiency per MWh. During the year Scandrive Control AB, the leading Swedish manufacturer of integrated servo gears for the printing industry, was acquired. SKF also acquired Rolling Stock Supply & Service Pty Ltd., the leading railway bearing service company in Australia. Automotive Division The operating result for the fourth quarter 2003 amounted to MSEK 3 (93), resulting in an operating margin of 0.1% (2.6) on total sales. The result for the full year 2003 amounted to MSEK 434 (523), resulting in an operating margin of 3.0% (3.5) on total sales. The result has been affected by restructuring expenses and impairments amounting to MSEK 74 in the fourth quarter. The operating result for the full year, excluding these items, would have been MSEK 508 with an operating margin of 3.5%. External sales for the fourth quarter 2003 amounted to MSEK 3 110 (3 228), a decrease of 3.7%. External sales for the full year 2003 amounted to MSEK 13 108 (13 483), a decrease of 2.8%. Total sales for the fourth quarter were MSEK 3 451 (3 567) and for the full year MSEK 14 535 (14 930). Sales to the car and light truck industry in both Europe and North America were unchanged for the fourth quarter but higher for the full year. Sales to the heavy truck industry in Europe were higher both in the fourth quarter and for the full year. In North America, they were significantly higher in the fourth quarter but significantly lower for the full year. Sales to the vehicle service market in Europe were the same in the fourth quarter but higher for the full year. Sales in North America were significantly higher both in the fourth quarter and for the full year. In Asia, sales were the same both in the fourth quarter and for the full year. In the fast-growing market in China, SKF gained the wheel hub bearing units business for the Ford Mondeo during the year in addition to supplying other major manufacturers operating joint venture in China. To further support these customers the CR China factory in Wuhu was inaugurated in November, 2003. Through its subsidiary, Chicago Rawhide, SKF is a leading supplier of seals for front crankshaft modules and has now introduced the fourth generation of PTFE technology in this application. This helped SKF to win a major contract for both front and rear crankshaft seals for a new diesel engine to be released in mid 2005. Electrical Division The operating result for the fourth quarter 2003 amounted to MSEK -46 (141), resulting in an operating margin of -2.8% (8.3) on total sales. The result for the full year 2003 amounted to MSEK 215 (419), resulting in an operating margin of 3.3% (6.2) on total sales. The result has been affected by restructuring expenses and impairments amounting to MSEK 134 in the fourth quarter. The operating result for the full year, excluding these items, would have been MSEK 349 with an operating margin of 5.4%. External sales for the fourth quarter 2003 amounted to MSEK 445 (479), a decrease of 7.1%. External sales for the full year 2003 amounted to MSEK 1 856 (1 935), a decrease of 4.1 %. Total sales for the fourth quarter were MSEK 1 615 (1 693) and for the full year MSEK 6 486 (6 708). Sales in Europe were lower in the fourth quarter, but the same for the full year. Sales in Asia were higher both in the fourth quarter and for the full year. Production of deep groove ball bearings was started early in the year in a new SKF factory in Shanghai. The customer groups for these bearings are within the electrical industry, where high quality is required to support Chinese local demand as well as exports. New business was gained in the growing application area of electric?power steering systems, and also from the producers of electric motors for washing machines such as ACC and Emerson Ceset. Service Division The operating result for the fourth quarter 2003 amounted to MSEK 431 (426), resulting in an operating margin of 11.1% (10.5) on total sales. The result for the full year 2003 amounted to MSEK 1 420 (1 418), resulting in an operating margin of 9.7% (9.4) on total sales. The result has been affected by restructuring expenses and impairments amounting to MSEK 45 in the fourth quarter. The operating result for the full year, excluding these items, would have been MSEK 1 465 with an operating margin of 10.0%. External sales for the fourth quarter 2003 amounted to MSEK 3 508 (3 644), a decrease of 3.7%. External sales for the full year 2003 amounted to MSEK 13 111 (13 501), a decrease of 2.9%. Total sales for the fourth quarter were MSEK 3 888 (4 061) and for the full year MSEK 14 643 (15 040). Sales in Western Europe were slightly higher in the fourth quarter but unchanged for the full year. Sales to Central and Eastern Europe and in Asia were significantly higher both in the fourth quarter and for the full year. Sales in North America were significantly lower in the fourth quarter and also lower for the full year. Sales to Latin America were significantly higher both in the fourth quarter and for the full year. DEI, the Aberdeen-based branch of SKF Reliability Systems, was awarded a contract for the provision of condition-monitoring services to Sigma 3, a joint venture serving the North Sea interests of Shell Exploration and Production. In 2003, the Division launched a global programme to address the changing market needs and to strengthen its core Industrial Distribution business. Called ¡°More with SKF,¡± the programme helps create a long-term sustainable business model and development process for the SKF distributors. SKF's e-business, based on endorsia.com and PTplace.com, increased in number of order lines by nearly 30% in 2003 as global implementation continued to expand. Three major supplier awards were received in the year in recognition of outstanding logistic and technical support; from Siemens in Germany, from Mondi in South Africa and from Cagill in Turkey. Aero and Steel Division The operating result for the fourth quarter 2003 amounted to MSEK -234 (60), resulting in an operating margin of -16.3% (3.9) on total sales. The result for the full year 2003 amounted to MSEK -167 (213), resulting in an operating margin of -2.8% (3.4) on total sales. The result has been affected by restructuring expenses and impairments amounting to MSEK 242 in the fourth quarter. The operating result for the full year, excluding these items, would have been MSEK 75 with an operating margin of 1.2%. External sales for the fourth quarter 2003 amounted to MSEK 837 (906), a decrease of 7.6%. External sales for the full year 2003 amounted to MSEK 3 551 (3 741), a decrease of 5.1%. Total sales for the fourth quarter were MSEK 1 435 (1 558) and for the full year MSEK 6 016 (6 321). Orders were received for prototypes for main shaft and gearbox bearings involving the GE-Pratt Alliance and the Rolls-Royce engines for the A380 programme. The helicopter business remained strong throughout the year. The new XLNT bearing produced by Ampep Plc., a subsidiary in UK, has been widely accepted by the helicopter industry. Ampep is the first company to successfully incorporate ceramic coating into self-lubricating bearings. Ovako Steel reported external sales of MSEK 1 660 (1 579). Total sales were MSEK 2 956 (2 963). The operating result was MSEK -307 (20). The result has been affected by restructuring expenses and impairments amounting to MSEK 230 in the fourth quarter. Excluding these items the operating result for the full year would have been MSEK -77 with an operating margin of -2.6%. The result in 2003 was adversely affected by a sharp increase in the cost of raw materials, especially steel scrap, a continued weak demand for steel and a negative currency effect. Price increases and surcharges were implemented during the year in order to offset some of the steady increase in raw material prices. Towards the end of the year, Ovako Steel launched the Ovahydä steel grade ¨C a new variant of the Ovatec™ air-hardening steel ? for exacting hydraulic applications. Sale of shares During the month of January 2004 SKF sold its 40% holding in Momentum, a Swedish industrial distributor, for MSEK 88. The deal is expected to be concluded during the first quarter of 2004 and the capital gain is estimated to MSEK 20. Stock option programme The Board decided that there will not be a stock option programme for 2004.