annual general meeting The Annual General Meeting will be held at SKF Kristinedal, Byfogdegatan 4, Göteborg, at 3.30 p.m. on Thursday April 27, 1995.

Transcription

1 Annual Report 1994

2 financial information and reporting AB SKF is publishing the following financial reports concerning 1995: Report on first quarter... April 27 Report on first six months... July 21 Report on first nine months... October 25 Report on 1995 operations... February 7, 1996 The Annual Report for 1994 will be published on April 5. The above reports are available in Swedish and English. In addition to these reports, an annual report, Form 20-F, is produced for the Securities and Exchange Commission, U.S.A. annual general meeting The Annual General Meeting will be held at SKF Kristinedal, Byfogdegatan 4, Göteborg, at 3.30 p.m. on Thursday April 27, In order to participate in the meeting, shareholders must be recorded in the shareholders register maintained by the Securities Register Centre (VPC AB) by Thursday April 13, and must notify the Company before noon Monday April 24, of their intention to attend (AB SKF, Group Legal, S Göteborg, Sweden, tel ), giving details of name, address, telephone and shareholding. payment of dividends The Board recommends that shareholders with holdings recorded in the register on May 3 be entitled to receive dividends for If this date is accepted by the Annual General Meeting it is expected that the Securities Register Centre will send out notices of payment to recorded shareholders and listed depositaries on May 10, To facilitate payment of dividends, shareholders who have changed address are recommended to inform VPC AB, S Solna, Sweden, well before May 3. This annual report is a translation of the Swedish original. partnership and product development are the keynotes of this year s pictorial theme Working closely with customers in the development and improvement of their products and processes, SKF personnel contribute their expertise in the field of bearings, seals and special steels. The Group s comprehensive resources in research and development play a significant role here. Cooperation and development work carried out with the customers often lead to new products or new solutions for improving existing products or processes. This year s pictures show a few examples of the results being achieved. contents The Chairman s Review...2 Letter from the President and Group Chief Executive...3 Board of Directors Report...4 Proposed distribution of surplus...10 Auditor s report...10 Consolidated income statements...11 Consolidated balance sheets...12 Consolidated statements of cash flow...13 Notes to the consolidated financial statements...14 Parent Company income statements...31 Parent Company balance sheets...32 Parent Company statements of cash flow...33 Notes to the Parent Company financial statements...34 Bearings and seals...40 Special steels...46 Parent Company Board of Directors...48 Group organization...50 Quality...51 Shares and shareholders...54 Seven-year review of the SKF Group...56 Aktiebolaget SKF, S Göteborg, Sweden. Telephone , Fax , Telex 2350, Cable KULLAGER Printed on Munken Cream environmentally friendly stock.

3 The SKF Group SKF is the world s leading company in the rolling bearing industry. The Company s share of the world market, excluding China and the former Comecon countries, is approximately 20 percent, making it twice as large as its nearest competitor. Wherever there is rotation, there is a need for some form of bearing. The function of a rolling bearing is to eliminate or reduce the friction between a fixed and a moving surface, and to carry a load. The life of a rolling bearing shall be compatible with the life of the application in which it is installed. Since the use of rolling bearings is a cost-effective solution, they are found in all types of engines, machines and wheels. A seal is a product that separates a machine component from the outside world, either by preventing penetration by foreign particles, or by ensuring that there is no leakage out. Rolling bearings and seals constitute the Group s core business. SKF s policy is to provide a full range of rolling bearings, to ensure that it is always able to offer the best solution to a customer s problem, regardless of the type of bearing required. Group policy also includes maintaining such a geographic presence either through its own sales companies, or through authorized distributors that SKF is always within reach of the customer. The steel from which rolling bearings are made is of decisive importance for the quality of the bearings. The precision in the analysis of the steel content and the extremely low rate of non-metallic inclusions are critical factors for the life of the bearing. SKF s subsidiary Ovako Steel is Europe s leading producer of rolling bearing steel, and the main supplier of steel to the Group s bearing production plants. More than 80 percent of the steel used by SKF today comes from Ovako Steel. SKF is aiming to further enhance its leading position in the core business Net sales, SEK m Income/loss after financial income and expense, SEK m Earnings per share, SEK Dividends per share, SEK 4.25* Number of employees registered * Dividend according to the Board s proposed distribution of surplus in brief employees engaged in quality-assurance training. Income after financial income and expense improved by SEK m. Production increased by 20 percent, without any significant new hirings. A joint venture agreement was signed with a Chinese partner to commence production of rolling bearings in China. SKF has a 60 percent ownership interest in the new company. The decision was made to invest in a technical upgrade of the Cajamar plant in Brazil and in the plant outside Buenos Aires in Argentina. The acquisition of the German company Goetze Elastomere strengthens SKF s position in the European seals market. Agreements signed with Volkswagen and Chrysler, among other companies, mean that new car models will be equipped with SKF bearings. Ovako Steel focus is now on rolling bearing steel. The corporate goal, that inventories should total less than 30 percent of annual sales, was achieved. A new goal of 25 percent has now been established. 3

4 The Chairman s Review Business trends in the Western World improved during Favorable economic growth continued in North America and a gradual improvement was noted in European market demand. Growth remained strong in Asia and certain countries in South America. Prospects for increased world trade were enhanced by the completion of the Uruguay Round during The agreement is based on further elimination of commercial trade barriers between countries. In parallel, regionalization of world markets is increasing. Mercosur, the free trade region comprising Argentina, Brazil, Paraguay and Uruguay, is one example. During 1994, the North American Free Trade Agreement (NAFTA) was created, covering Canada, the United States and Mexico. This growing trend is important to SKF s future production strategies. Freedom to transport products from one country to another, is a basic requirement for optimal utilization of the Group s production resources. Geographical concentration will continue, and SKF s goal is to be competitive both globally and regionally, with leading market positions in our primary business sectors. Special attention has been directed towards rapidly growing markets, as shown in the Board of Directors Report. SKF s high level of business activities in Asia has strengthened the Group s position in the region and provides a strong foundation for continued growth. Another SKF goal is to further improve customer service, quality and cost efficiency, thus resulting in better profitability. Business activities will continue to be concentrated on rolling bearings and seals. Based on various programs now in progress, I feel confident about the Group s future. SKF has gone through a difficult period. The recession and tough competition resulted in financial deficits for the years 1991, 1992 and A comprehensive restructuring program including sales of Group units and further concentration on primary business activities combined with measures to increase quality and productivity, have increased our competitive strength. Combined with 4 increased volumes, these measures enabled the Group to improve its income after financial income and expense in 1994 by close to SEK m, compared with A decision was made at the 1993 Annual General Meeting to suspend dividend payments due to the Group s negative results. The Board of Directors made it clear that it intended to propose the resumption of dividend payments as soon as possible. Based on the trend of earnings and conditions during the years immediately ahead, the Board has decided to propose to the 1995 Annual General Meeting that a resumed dividend of SEK 4.25 per share be paid. In future, the dividend should be adapted to reflect the trend of earnings and cash flow, with consideration also given to the Company s opportunities for development and its financial position. It is the Board s view that the dividend to shareholders should correspond to approximately one third of average net income during an economic cycle. SKF s financial position needs to be strengthened after the prolonged recession. However, we also see many interesting investment projects with considerable potential for profitability. Highest priorities during the years immediately ahead have thus been placed on strong cash flow, which would enable us to pursue our investment program, restore financial stability and at the same time provide shareholders with dividend payments based on the model described above. In conclusion, on behalf of the Board of Directors, I want to thank Group Management and all our employees for their exceptional efforts. The strong improvement in Group earnings during 1994 was the result of hard work and considerable sacrifice.

5 Letter from the President and Group Chief Executive received optimum grades in a comprehensive quality audit by MELCO before it was approved as a qualified supplier. Efforts were continued in Korea to develop SKF s market for Hub Units. A licensing agreement was reached with Hanwha Machinery Co. Ltd., which will start production of SKF s first generation Hub Units in Korea was a quality year for SKF. We taught our quality philosophy to Group employees and invested SEK 100 m in training programs. And our efforts are continuing. During 1995, we plan to invest an additional SEK 50 m in training programs. All employees will participate in our quality training. The results have been gratifying. Claims have been cut by 30 percent and we are approaching our objective of zero mistakes in the workplace was a good year in terms of results, and earnings rose sharply. Income after financial income and expense totaled SEK 1.8 billion. The increase was attributable to lower costs, higher volumes, some improvement in prices and weaker exchange rates for SEK. Effects of the latter were estimated at SEK 500 m, or approximately one-fifth of the increase. Group earnings will continue to improve in was a breakthrough year with regard to inventories. Initially, we achieved our objective during the first quarter of the year to limit inventories to less than 30 percent of annual sales and then made strides toward reaching the new goal of 25 percent. At year-end, inventories corresponded to 25.9 percent of annual sales. We will reach our goal in 1995, which will be sooner than anticipated was a year characterized by several turning points in the Asian market. Prolonged negotiations concerning a majority shareholding in a manufacturing company in China were completed in December. Production of rolling bearings in Shanghai will start during the autumn of SKF s focus on the Japanese market was successful in several respects. Deliveries were started from the Group s plant in Malaysia to the Mitsubishi Electric Corporation, MELCO, and other customers. Mitsubishi is well-known for its high demands on quality, and the Malaysia plant Further improvements were made to the Channel concept during the year, leading to greater flexibility and higher productivity. Investments in 1994 increased approximately 45 percent, compared with 1993, and will be increased further during SKF s production plants always receive top grades and the Group plans to strengthen its favorable image even more. To enable the Group to implement technology improvements and engage in restructuring work, investments will be in the range of seven to eight percent of annual turnover during boom periods. Our highly sophisticated manufacturing plants produce rolling bearings for a demanding market. Skilled and welltrained employees are needed to maximize output from our channels. SKF today is able to meet growing demand with less machinery, employees and production plants, a trend that will be continued. It is gratifying, therefore, that our industrial college in Göteborg, Sweden, has been so well received. With three applicants for every available place, SKF has quickly assumed a leadership position in this field as well. SKF made a further advance in the seals industry during 1994 through the acquisition of Goetze in Germany. Seals represent a product group closely related to rolling bearings. A good rolling bearing requires a good seal. Continued growth is planned in this field. SKF s overall financial objective is to provide shareholders sustained and satisfactory returns in terms of dividend and value increment which, in the Board s opinion, should exceed the risk-free interest rate by some percentage units. This goal will be reached by focusing our financial strength on cash flow, profitability and capital management. The bearings industry is characterized by high refinement value and capital intensity. Consequently, financial strength and solid credit are required to offset the sharply fluctuating business trends. SKF s objective for solvency is 35 percent during an economic cycle. The structure of the industry is changing gradually. The recession took its toll on most bearings companies, and some were forced to give up completely or partly. Even during periods of economic prosperity, our Japanese competitors fight an uphill battle with high costs and an expensive currency. SKF s geographic spread provides benefits today. Demand for rolling bearings increased rapidly during 1994 and SKF sales finished the year at a high level. We expect, therefore, that volumes in 1995 will be between 6 and 12 percent higher than last year. Price trends are also expected to be better than in

6 Board of Directors Report The 1994 fiscal year was a good year for the SKF Group. The favorable effects of the restructuring and cost-reduction programs implemented during recent years became increasingly apparent. The rate of production at the Group s plants was raised substantially in order to satisfy the increasing demand. At year-end 1994, production had risen by approximately 30 percent, compared with the lowest level, which was noted during the third quarter of This was achieved with virtually an unchanged number of employees. The Group s efforts to reduce costs continued throughout the year, in the form of various programs. During the year, the Group strengthened its position as a leading supplier of bearings, particularly in Europe, but also in the Far East. In Europe, where the first signs of improved demand for rolling bearings became noticeable during the second half of 1993, the favorable trend continued and was strengthened during However, the rate of increase varied according to customer segment. The European automotive industry noted the strongest and most rapid recovery. Favorable growth in Europe All of the European countries that are of importance to SKF experienced GNP growth compared with The rates of increase varied from between nearly three percent in Germany and close to four percent in the U.K. Industrial output also increased in most European countries, by slightly more than five percent in the U.K. and nearly five percent in Italy. In Germany, the largest European market, industrial output rose by approximately three percent. The upswing in Germany, and in the other countries, was driven by the export industry. SKF s position as the leading supplier to the European automotive industry was strengthened during the year. SKF accounts for an ever-increasing share of the bearing content in most of the cars produced in Europe and is more than twice as large as its closest competitor. SKF also benefited from the sharp growth in the truck segment, since it is a major supplier of taper roller bearings to this segment. 6 U.S. continued to grow In the U.S., all major industrial segments continued to grow during the fiscal year. This was the fourth consecutive year of growth in the U.S. economy. GNP growth was four percent, while industrial output rose by slightly more than five percent compared with Growth in the customer segments of greatest significance to SKF namely automotive companies, paper machines, steel, electric motors and the after-market exceeded the general growth rate in the U.S. In Mexico, the closure of the plant in Celaya and the concentration of production to the Puebla plant yielded significant savings and a lower level of production costs. Three local sales offices were closed and the work-force was reduced. As a result of these measures, the Mexican company was able to offset the weaker demand and depressed price situation. The devaluation of the Mexican peso had an adverse financial effect on SKF s Mexican company. Uncertainty regarding the country s economic situation was exacerbated. Sales in Canada, the third country in the North American Free Trade Association (NAFTA) area, were very favorable in As a result of the upswing in volume, which mainly derived from the automotive industry and the after-market, SKF reported its best sales in Canada since the beginning of the 1980s. In Latin America, the positive sales trend continued in the largest markets, Brazil and Argentina, driven in both cases by growth in the automotive industry. Increased efforts in the Far East In the fast-growing Far Eastern market, demand for the Group s products continued to be very favorable. SKF s various companies reported sales increases ranging from 15 to 57 percent, thereby further enhancing the Group s position in this important part of the world. During the autumn of 1994, SKF and Shanghai Bearing Corporation signed a joint venture agreement. As a result, SKF entered a new era of operations in China. From having operated solely as a supplier of bearings to the country, via exports, the foundation was thereby laid for the local production of bearings in this rapidly expanding market. The new company, SKF Automotive Bearings Co. Ltd., in which SKF holds a 60-percent interest, will manufacture bearings for China s expanding car industry. During the first stage, an assembly plant is being established. This will involve the import of components from SKF s European plants and their subsequent assembly in the new plant. Following this, the intention is to gradually increase the domestic content of products as the market grows, assuming it develops as expected. Discussions regarding two other joint ventures in China are in progress. One of these relates to a plant for the manufacture of bearings for the railway industry. China has the world s largest production of train engines and passenger and freight wagons. The other involves negotiations regarding the possibility of SKF forming a joint venture for the production of seals. In the latter case, CR, the Group s seals company, is the driving force representing SKF. SKF expands in Korea Korea is the world s fastest-growing automotive market. SKF has sold bearings for some time to Hyundai, KIA and Daewoo, the three largest vehicle producers in Korea. A substantial part of these sales has been effected via Hanwha Machinery Co. Ltd. (HWMC), a leading local manufacturer of rolling bearings. During 1994, SKF further advanced its positions through a license agreement with HWMC, whereby HWMC is entitled to manufacture SKF s Hub Unit I for the Korean market. SKF accounts for approximately half of the Korean market for Hub Units. As a result of this license agreement, SKF will further strengthen its market share. SKF has captured its share of the Korean market in the face of intense competition, mainly from Japanese manufacturers. Favorable results In the mid-1980s, SKF established its strategy for the Asia Pacific region. The objective was to enhance the Group s direct presence by increasing the number of wholly owned sales companies. This was designed to bring SKF closer to its end customers and gain greater insight into their needs. At the same time, it increased the potential for offering technical and other services.

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8 Board of Directors Report To gain access to the customers in the region who use rolling bearings as components in their products (OEM customers), manufacturing operations were started up in Malaysia in SKF now delivers bearings from the Malaysian plant to Japanese OEM customers, who were previously supplied exclusively by Japanese manufacturers. SKF will continue to consolidate its position in this expansive region. The Asia Pacific share of SKF s sales of bearings has doubled to approximately 12 percent during the past five years. In Japan, where SKF has a market share of less than one percent, sales efforts are being focused on a number of important customers, with the aim of strengthening SKF s foothold in the market. Continued restructuring efforts During the recession, SKF formulated guidelines to offset cyclical effects, which included a number of measures: Reduce inventories Adapt the work-force to the lower level of production Reduce fixed costs Streamline the product range Focus operations on the core business of rolling bearings and seals. The Group s objective was to lower the break-even point and thereby improve its earnings capacity. As a result, SKF would be able to quickly earn money again, as soon as business conditions turned around, and would also be able to face new recessions without incurring any losses. The fact that business conditions have now improved does not mean that the Group s efforts to reduce fixed costs have abated. SKF is to implement further structural changes, with the aim of continuing to strengthen its competitiveness. The closure of the plant in Madrid, announced in December 1993, was implemented during the autumn of The final bearings were manufactured at the end of October. The plant was sold to a German company, which also employed a large proportion of the existing work-force. The closure was implemented through close cooperation between the company s management, trade unions and local authorities. During the autumn of 1994, SKF announced that the operations at the 8 Group s plant in Argentina and the two bearing production plants in Brazil were to be integrated. As a result, ball bearings will be manufactured at the plant in Buenos Aires, while production of taper roller bearings and Hub Units will be undertaken at the plant in Cajamar, outside São Paulo. Both of the remaining plants will have a smaller product range, but larger manufacturing volumes, which will strengthen their competitiveness. First objective attained One important feature of SKF s efforts to reduce fixed costs and release capital is to reduce the Group s inventories. For several years, the Group s goal was to reduce inventories to a level corresponding to 30 percent of annual sales. During the first quarter of 1994, inventories were reduced to a level under 30 percent. A new objective of 25 percent was then set. At year-end 1994 the level was 25.9 percent. The relocation of local European stores to the new central warehouse for the European market in Tongeren, Belgium, proceeded as planned. The inventories previously stocked by SKF s sales companies in the Netherlands, Belgium, Switzerland, Denmark, Norway, Finland and Greece have been transferred, and the customers in these countries are now served from Tongeren. France and Italy are next in line. The entire project is expected to be completed by the end of 1996, by which time 20 local European warehouses will have been discontinued. The cost of the project is estimated to amount to approximately SEK 200 m. The new warehouse is estimated to generate annual savings of approximately SEK 250 m. European operations strengthened The 1990 acquisition of CR Chicago Rawhide strengthened SKF s position in the American market for oil seals. In Europe, SKF already owned RFT S.p.A., the leading manufacturer of bearing and shock absorber seals. Accordingly, SKF s position in the European seals market was previously limited to this range. In order to strengthen positions in Europe, SKF acquired the German company, Goetze Elastomere GmbH, during the autumn of Goetze is a state-of-the-art manufacturer that specializes in various types of valve seals and seals for gas struts. The acquisition of Goetze broadens SKF s product range, improves its geographic presence and adds a new technology for seal production. Restructuring of Textile Machinery Components Sales by Textile Machinery Components declined during 1994, as a result of weaker market demand. To adapt operations to demand, production cutbacks continued during the year, at the same time as a comprehensive restructuring project was initiated. Within the framework of this project, portions of the manufacturing operations at the plant in Cannstatt, Germany, are being transferred to the sister plant in Singapore, where production lines are in the process of being expanded. At the end of 1993, SKF Textilmaschinen-Komponenten GmbH and Shanghai Erfangji Co., China s largest manufacturer and exporter of spinning machines, formed a joint venture company for the manufacturing of spindles for spinning machines. Preparations for the transfer of the operations at the Swiss company, SMM Spindel AG, to the Chinese company proceeded during 1994 and production under the management of the new company is expected to start at the beginning of The Swiss manufacturing operations are being discontinued. Gebr. Loepfe AG, based in Switzerland, a former Textile Machinery Components unit that manufactures electro-optical monitoring systems for textile machines, was sold during The Channel concept, which has been successfully introduced within SKF s bearing operations, is now being gradually introduced within the production of textile machinery components. The measures being implemented as part of the restructuring project are strengthening SKF s position as one of the world s leading suppliers of textile machinery components.

9 Board of Directors Report net sales sales by application field 1994 sales by geographical area 1994 SEK m Vehicle replacement 8% Endusers 6% Industrial distributors 25% Cars 16% Europe excl. Sweden 50% Electrical industry 5% Aerospace 2% General machinery 19% Trucks 9% Railways 2% Heavy industry 8% Sweden 5% Rest of the world 19% North America 26% income/loss inventories in percent of sales profitability SEK m Operating income/loss Income/loss after financial income and expense % 40 % 20 Return on capital employed Return on total assets Return on shareholders equity Key ratios for 1992 exclude CTT Tools Definitions see note 1 earnings and dividends per share capital expenditures number of employees registered SEK 15 Earnings Dividends SEK m Definition see note 1 9

10 Board of Directors Report Ovako Steel continues to improve The increase in worldwide sales of bearings resulted in greater demand for Ovako Steel s bearing steel. As a result of better utilization of Ovako Steel s resources, at the same time as restructuring measures continued within the Steel Division, Ovako Steel was able to report a profit. Well-needed price adjustments resulting from the improved demand contributed to the improvement. At present, the plant in Hofors, Sweden, has a concession from the environmental authorities to produce tons of steel per year. Ovako Steel has applied for an increase to tons. Ovako Steel s strategic focus on rolling bearing steel was strengthened during the year. The standardization of the company s product range continued, while the connection between Ovako Steel s and the bearing plants production channels was further strengthened. Group result The Group s income after financial income and expense amounted to SEK m in 1994, compared with SEK 515 m in Group sales totaled SEK m during the year, compared with SEK m in Other operating income amounted to SEK 151 m (427). According to a recommendation by the Swedish Financial Accounting Standards Council only quite unique events could motivate accounting of extraordinary items. A reclassification has therefore been made in the 1992 and 1993 income statements. During the year, payments of SEK 612 m were made from the provision for restructuring costs to cover the Group s ongoing rationalization program. An amount of approximately SEK 400 m remains to be utilized in ongoing projects. The Group s operating income, after depreciation of SEK m (1 456), amounted to SEK m (251). Net financial items amounted to SEK 304 m ( 766). Of the Group s income after financial income and expense, which amounted to SEK m ( 515), rolling bearings and seals operations accounted for SEK m ( 167) and special steels for SEK 188 m ( 351). Earnings per share amounted to SEK 11.05, compared with SEK 4.35 in The return on capital 10 employed was 14.7 percent (4.2) and on shareholders equity 13.3 percent ( 5.6). Group solvency was 30.8 percent (26.7) at year-end. Strong cash flow Calculated in fixed exchange rates, the SKF Group s operations generated a positive cash flow of close to SEK m in As a result, the Group was able to further reduce its net indebtedness. Among other measures, approximately one-tenth of SKF s convertible bond loan in ECU was repurchased. The Group s total loans amounted to SEK m (9 272) at year-end. At the same time, the Group had financial assets of SEK m (4 034), of which current financial assets amounted to SEK m (2 692). SKF s policy is that Group operations be funded through long-term financing, and that in addition to normal liquidity the company shall have a payment capacity in the form of longterm credit commitments amounting to at least USD 250 m. During 1994, the renegotiation of a number of loans and credit facilities was initiated, with the objectives of extending the lifetime of the loan portfolio, extending credit commitments so that they will be valid into the 21st century, reducing the cost of financing, and to phase out so-called material adverse change clauses. SKF s policy is that both borrowing and financial assets be based on floating interest rates. Currency trends The Group s products are manufactured and sold in many countries throughout the world, which provides the basis for a favorable spread of risks. However, the overall assessment is that the Group has more production than sales in Europe. Exports from Europe to America and Asia correspond to approximately 20 percent of SKF s production in Europe. In America and Asia the degree of self-sufficiency amounts to approximately 80 and 40 percent, respectively. The objective is to reach a balance within the various currency zones. During the past years, SKF has derived certain benefits from currency trends. Firstly, because earnings have improved in countries with weakened currencies and which are net exporters, such as Sweden and Italy, and secondly because most of SKF s competitors have a larger portion of their manufacturing operations in countries whose currencies have appreciated. The Group s currency exposure is centralized via the internal bank, SKF Treasury Centre AB, which manages flows in some 20 currencies. In terms of size, the major currency inflows are in USD, DEM and GBP, which are exchanged into SEK, ITL and FRF. This means that an appreciation in the export currencies, USD, DEM and GBP, has a beneficial effect on SKF, while the opposite applies if the SEK, ITL and FRF appreciate. With the exception of the sharp weakening in the SEK and ITL exchange rates during recent years, currency fluctuations do not normally have a major impact on SKF. SKF s policy is to hedge currency flows for an average of approximately three to six months. This is considered to be the time normally required to adjust to new conditions. Increased investment activity Capital expenditures in property, plant and equipment during 1994 totaled SEK m (933) and related to the ongoing rationalization and modernization of the Group s plants. The current intention is that this process be conducted at a faster pace than previously. The aim is to reduce fixed costs, increase flexibility and improve the trend of productivity with the help of technological upgrades and a further concentration of resources. This means that the Group expects its rate of investment to increase during the years ahead to between five and eight percent of annual sales. Research and development costs during the year totaled SEK 542 m (552), representing nearly two percent of sales during the year. Number of employees The number of Group employees registered rose by 338 during the year and amounted to (41 394) at the end of The average number of employees was (39 439), of whom (5 975) were located in Sweden, see note 28 average number of employees, wages and salaries.

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12 Proposed distribution of surplus Retained earnings Kr Reported income for the year Kr Total surplus Kr The Board of Directors and Managing Director recommend: that a dividend of 4.25 Swedish kronor per share be paid to the shareholders Kr that the balance be carried forward Kr Kr The results of operations and the financial position of the Parent Company and the Group 1994 are given in the income statements and in the balance sheets together with related notes. Göteborg, February 23, 1995 Anders Scharp Mauritz Sahlin Per-Olof Eriksson Sune Carlsson Anders Sjöberg Melker Schörling Göran Johansson Gösta Bystedt Giovanni Mario Rossignolo Claes Dahlbäck Stig Blomberg Auditor s report 12 We have examined the annual report, the consolidated financial statements, the accounting records and the administration of the Board of Directors and the Managing Director for the year Our examination was made in accordance with generally accepted auditing standards. Parent Company The annual report has been prepared in accordance with the Swedish Companies Act. We recommend, that the general meeting of the shareholders resolve to adopt the income statement and the balance sheet, that the surplus is distributed in accordance with the proposal in the Board of Directors Report, and that the Board of Directors and the Managing Director are discharged from liability for their administration of the company for the year Group The consolidated financial statements have been prepared in accordance with the Swedish Companies Act. We recommend, that the general meeting of the shareholders resolve to adopt the consolidated income statements and the consolidated balance sheets. Göteborg, March 3, 1995 Arthur Andersen AB Mats Fredricson Authorized Public Accountant

13 Consolidated income statements Millions of Swedish kronor Net sales Other operating income note Cost of goods sold note Selling, administrative and technical expenses note Depreciation note Operating income/loss Financial income and expense net note Income/loss after financial income and expense Taxes note Income/loss after taxes Extraordinary expense note 7 52 Minority interest 28 7 Net income/loss

14 Consolidated balance sheets Millions of Swedish kronor ASSETS Current assets Current financial assets note Trade accounts receivable note Inventories note Short-term tax assets note Other current assets note Capital assets Long-term financial assets note Investments note 13, Property, plant and equipment note Long-term tax assets note Other capital assets note Total assets LIABILITIES AND SHAREHOLDERS EQUITY Short-term liabilities Short-term loans note Trade accounts payable note Short-term tax liabilities note Other short-term liabilities note Long-term liabilities Long-term loans note Pensions and other postretirement benefits note Long-term tax liabilities note Other long-term liabilities note Convertible bonds note Minority interest Shareholders equity note 24 Restricted equity Share capital Restricted reserves Unrestricted equity Unrestricted reserves Net income/loss Total liabilities and shareholders equity Assets pledged note Contingent liabilities note

15 Consolidated statements of cash flow Millions of Swedish kronor Operating income/loss Depreciation and goodwill amortization Extraordinary expenses 52 Changes in working capital: Inventories Trade accounts receivable Trade accounts payable Other current assets and liabilities net Cash flow from operations Additions to property, plant and equipment Additions to property, plant and equipment through acquisition of companies 7 Sales of property, plant and equipment Sale of net operating assets in CTT Tools Cash flow after investments Financial income and expense net Cash dividends, AB SKF shareholders 480 Taxes Change in loans Change in other long-term assets and liabilities net Change in accounting principles (FAS 106 and 109) 160 Translation adjustments Change in current financial assets

16 Notes to the consolidated financial statements Amounts in millions of Swedish kronor unless otherwise stated. note 1 accounting principles General The consolidated financial statements include the Parent Company AB SKF and all companies in which AB SKF, directly or indirectly, owns shares representing more than 50 percent of the voting rights. AB SKF and its subsidiaries are referred to as the SKF Group or the Group. Investments in companies, representing 20 to 50 percent of the voting rights, and where the SKF Group has a significant influence, are referred to as Associated Companies. All companies within the Group apply the accounting rules as stated in the SKF Accounting and Financial Reporting Manuals. These rules are primarily based on generally accepted accounting principles in Sweden (Swedish GAAP). In general, the rules applied by the SKF Group are also in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Significant differences between Swedish GAAP and U.S. GAAP are described in note 29. Consolidation subsidiaries The consolidated financial statements are prepared using the purchase method. The consolidated shareholders equity includes the Parent Company s equity and that part of the equity in subsidiaries which has arisen after the acquisition. The difference between the cost of acquiring the shares in a subsidiary and the shareholders equity of that subsidiary at the time of acquisition, adjusted for revaluations of assets and liabilities, is accounted for: as goodwill in the consolidated balance sheets, if the cost of acquiring the subsidiary is higher than the shareholders equity, or as a decrease in the value of acquired capital assets, if the cost of acquiring the subsidiary is lower than the shareholders equity. Intercompany accounts, transactions and unrealized profits have been eliminated in the consolidated financial statements. Accounting for investments in Associated Companies Investments in Associated Companies are accounted for in accordance with the equity method. The value of the investments is equal to the Group s share of shareholders equity in these companies, determined in accordance with the accounting rules of the Group. The Group s share of these companies results is based on their income/loss after taxes. At present no such investments are accounted for. Translation of foreign financial statements The current rate method is used for translating the financial statements of the major part of the foreign subsidiaries into Swedish kronor. Under this method, all assets and liabilities are translated into Swedish kronor at year-end exchange rates, whereas income and expense items are translated at average exchange rates. The translation adjustments that arise are transferred directly to shareholders equity. For the translation of financial statements of subsidiaries operating in highly inflationary economies, the Group applies the monetary/non-monetary method (MNMmethod) according to the Statement of Financial Accounting Standards No. 52, Foreign Currency Translation (FAS 52). Monetary balance sheet items are translated at year-end exchange rates and non-monetary balance sheet items, as well as related income and expense items, are translated at rates in effect at the time of acquisition (historical rates). Other income and expense items are translated at average exchange rates. Translation differences that arise are included in the related lines in the income statement. Foreign currency transactions Receivables and payables denominated in foreign currencies are translated at year-end exchange rates. The resulting gains and losses are classified as either operational or financial items in the income statement. Forward exchange contracts Forward exchange contracts, which serve as hedges of the flow of goods and services between countries, have been treated such that trade accounts receivable and payable have been valued at the applicable forward rates. In those Exchange rates In translating the financial statements of foreign subsidiaries, operating in the countries shown below, the following exchange rates into SEK have been used: Average rate Year-end rate Belgium 100 BEF Canada 1 CAD France 1 FRF Germany 1 DEM India 100 INR Italy 100 ITL Japan 100 JPY The Netherlands 1 NLG Spain 100 ESB Switzerland 1 CHF United Kingdom 1 GBP USA 1 USD

17 cases where receivables and payables have not yet arisen, valuation of the forward exchange contracts has not been made. Currency gains and losses on forward exchange contracts and loans, serving as hedges of net investments in foreign subsidiaries, are excluded from the income statement. These gains and losses, less current and deferred income taxes, are transferred directly to shareholders equity, thereby offsetting gains and losses arising from the translation of the financial statements of the foreign subsidiaries. For these forward exchange contracts, the interest difference between currencies is evenly allocated over the life of the contract. Forward exchange contracts which are not considered hedges of firm commitments have been valued at market value. Gains and losses are included in financial income and expense. Debt and marketable equity securities The Group applies FAS 115 Accounting for Certain Investments in Debt and Equity Securities. There are no marketable equity securities held. Debt securities held for trading purposes are recorded at market value with changes in value recognized in the income statement. Inventories Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). Net realizable value is defined as the lower of current replacement cost or market value less selling cost. Cost includes material, labor and manufacturing overheads. Capital and intangible assets Depreciation is provided on a straight-line basis and is calculated based on the cost of the asset. In some countries, legal revaluations are made in addition to cost, and depreciation is then based on the revalued amounts. The rates of depreciation are based on the estimated economic lives of the assets, generally 33 years for buildings, years for machines and 4 5 years for tools, office equipment and vehicles. Goodwill is amortized over 10 years on a straight-line basis, except for goodwill related to significant strategic acquisitions, which is amortized over a maximum of 20 years. Amortization of goodwill is included in administrative expenses. Patents and similar rights are stated at cost and are amortized on a straight-line basis over their legal lives. Leases Leases which transfer virtually all benefits and risks incident to the ownership of the property to the Group (capital leases), are capitalized and accounted for as assets and incurrence of obligations. Rentals for other leases (operating leases) are charged against income over the lease term. Research and development Research and development expenditures are charged against income as incurred. Income taxes All companies within the SKF Group compute current income taxes in accordance with the tax rules and regulations of the countries where the income is taxable. As from 1993 deferred taxes are accounted for according to FAS 109 Accounting for Income Taxes. FAS 109 requires that deferred taxes be calculated on differences between the book and tax bases of assets and liabilities in accordance with the liability method which, among other things, means that changes in tax rates affect the year s results. Additionally, it allows the recognition of loss carryforwards if they, more likely than not, can be utilized. The difference between the gross effect and the amounts expected to be utilized are provided for in a valuation allowance. The cumulative effect of this change per the beginning of 1993 was accounted for as extraordinary income in the income statement for As from the Annual Report 1994 this item has been reclassified. See below under the heading Change in accounting principles. Provisions have been made in the consolidated financial statements for estimated taxes on earnings of subsidiaries expected to be remitted in the following year, but not for tax liabilities which may arise on distribution of the remaining unrestricted earnings of foreign subsidiaries. Postretirement benefits FAS 106 Employers Accounting for Postretirement Benefits Other Than Pensions requires that the cost of health insurance and other similar benefits provided to employees after their retirement be expensed during an employee s active service life. Previously the cost of these benefits was expensed on a cash basis. The cumulative aftertax effect of this change in accounting principle was reflected as extraordinary expense in the income statement for As from the Annual Report 1994 this item has been reclassified. See below under the heading Change in accounting principles. Postemployment benefits FAS 112 Employers Accounting for Postemployment Benefits establishing standards for employers accounting for benefits provided to former employees before retirement has been implemented as of January 1, The Group currently has no such obligations. Change in accounting principles According to RR 4 Accounting for extraordinary income and expense and information for comparison of the Swedish Financial Accounting Standards Council only quite unique events could result in extraordinary items. The cumulative effect of applying FAS 109 and FAS 106 as above was accounted for as extraordinary items in In the 1994 Annual Report the shareholders equity at January 1, 1993, has been credited with 160 in adjusting prior years figures in accordance with RR 5 Change in accounting principles. In applying FAS 106 the shareholders equity was charged with 572 after considering tax of 364 and credited with 732 in application of FAS 109. In addition, a gain of 154 on the sale of Sandvik shares was included in extraordinary income in This has been reclassified to other 17

18 operating income. Other extraordinary items have been referred to operation except for write-off of operations in former Yugoslavia due to war. See note 6. Definitions of key figures The majority of the subsidiaries within the SKF Group report their results of operations and financial position ten times a year. The key figures presented in the Annual Report have been calculated using average values based on these interim reports. Therefore, the calculation of these key figures using the year-end values presented, may give slightly different results. 1. Portion of risk-bearing capital Shareholders equity plus minority interest and deferred taxes, as a percentage of total assets at year-end. 2. Solvency Shareholders equity plus minority interest, as a percentage of total assets at year-end. 3. Return on total assets Operating income/loss plus financial income, as a percentage of average total assets. 4. Return on capital employed Operating income/loss plus financial income, as a percentage of average total assets less the average of noninterest bearing liabilities. 5. Return on shareholders equity Income/loss after taxes, as a percentage of average shareholders equity. 6. Profit margin Operating income/loss plus financial income, as a percentage of net sales. 7. Turnover of total assets Net sales in relation to average total assets. 8. Earnings per share in Swedish kronor Income/loss after taxes and minority interest divided by average number of shares. 9. Yield Dividend as a percentage of share price at year-end. 10. P/E ratio Share price at year-end divided by earnings per share. 11. Average number of employees Total number of working hours of all employees, divided by the normal total working time during the year. note 2 research and development Research and development expenditures charged against income were 542 in 1994, 552 in 1993 and 473 in Additionally, the Group enters into research and development contracts to develop or produce prototypes of various products. Expenses under these contracts were 20, 27 and 20 in 1994, 1993 and 1992 respectively, and have been fully reimbursed. note 3 depreciation Land improvements Buildings Machinery and equipment Leases Leaseholds Revaluations Depreciation related to assets used in manufacturing amounted to in 1994, in 1993 and in The remainder relates to assets used in selling, administrative and technical areas. note 4 financial income and expense Dividend income Interest income Interest expense Financial exchange gains and losses The net interest cost component of the pension cost, included in the operating income/loss, amounted to 264 in 1994, 235 in 1993 and 311 in See also note 20 Pensions and other postretirement benefits. Financial exchange gains and losses include 23 in 1994, 116 in 1993 and approximately 160 in 1992 referable to the Parent Company s convertible ECU bonds. See note 23 Convertible bonds. note 5 taxes Taxes on the income/loss after financial income and expense Current taxes Deferred taxes Deferred taxes for 1994 include an income of 328 related to the net change in the valuation allowance. Of this change, 192 represents an adjustment of the beginning of the year balance of the part of the valuation allowance that still exists at year end. The adjustment was because of a change in circumstances that caused a change in judgement about the realizability of the related deferred tax asset in future years. 18