Annual Report 2008
including Sustainability Report
Aktiebolaget SKF • SE-415 50 Göteborg, Sweden • Telephone +46 31 337 10 00 • www.skf.com
SKF Annua l R epor t 2008 • incl uding Sus tainabil ity R epor t
Content
• 1 Vision, mission, drivers and values
• 1 Key data
• 2 This is SKF
• 4 President’s letter
• 6 Administration report
• 8 Shares and shareholders
• 11 Report on the business 2008
• 16 Financial objectives and dividend policy
• 18 Financial risks
• 18 Sensitivity analysis
• 19 AB SKF’s Board’s proposal for principles of remuneration for Group Management 2009
• 21 Administration report for the Parent Company, AB SKF
• 21 Sustainability
• 23 SKF – the knowledge engineering company
• 28 SKF’s markets
• 30 Corporate Governance Report
• 38 Financial statements
• 99 Awards
• 100 The SKF divisions
• 114 Sustainability Report
• 138 Management
• 140 Definitions
• 140 SKF’s platforms
• 142 Glossary
• 144 Seven-year review of the SKF Group
• 145 Three-year review of the SKF divisions and seven-year review of per-share data
• 146 General information
The following topics related to the SKF Annual Report 2008 including Sustainability Report are to be found at www.skf.com, choose Investors and Reports.
• Articles of Association
• SKF Code of Conduct
• SKF Environmental, Health and Safety Policy
• Environmental performance data
• Zero Accidents – award winners
• Production sites
• Compliance table to GRI G3 Guidelines (GRI Index Table)
• AA1000 AS (2003)
• Carbon dioxide emissions, data
® SKF, SKF RELIABILITY SYSTEMS, @PTITUDE, MICROLOG, MULTILOG, SCOTSEAL and SPEEDI-SLEEVE are registered trademarks of the SKF Group.
TM
SKF Explorer and BeyondZero are trademarks of the SKF Group.
PreSet ® is a registered trademark of Consolidated Metco Inc .
© SKF Group 2009 • Production: AB SKF and Admarco. • Photo: SKF Group, Anna Hult and Paul Thompson.
Paper: Arctic Silk +, FSC-certified • Printing: Falk Graphic Media, FSC-certified The photo cover including the text “Our care for the future is firmly rooted”, is part of the global corporate campaign 2009.
SKF employees in the annual report: This page, Jennie Larsson, page 1 Ibbe Usi and Malin Jönsson,
page 3 Kelly Hoang and Peter Kostofski and page 130 Anna Ek.
1
Number of shares 31 December 2008: 455,351,068 whereof A shares: 47,746,034, B shares: 407,605,034.
1)
Dividend according to the Board’s proposed distribution of surplus.
2008 2007
Net sales, SEKm 63,361 58,559
Operating profit, SEKm 7,710 7,539
Profit before taxes, SEKm 6,868 7,138
Basic earnings per share, SEK 10.14 10.09
Diluted earnings per share, SEK 10.13 10.07
Dividend per share, SEK 3.50
15.00
Cash flow after operating investments before financial items, SEKm 65 2,126
Return on capital employed, % 24.2 25.4
Equity/assets ratio, % 36.6 39.6
Additions to tangible assets, SEKm 2,531 1,907
Registered number of employees, 31 December 44,799 42,888
Key data Vision
To equip the world with SKF knowledge
Mission
To strengthen SKF’s global leadership and sustain profitable growth by being the preferred company:
• for our customers, distributors and suppliers
• for our employees
• for our shareholders
Drivers
• Profitability
• Quality
• Innovation
• Speed
• Sustainability
Values
• Empowerment
• High ethics
• Openness
• Teamwork
Vision, mission, drivers and values
2
This is SKF
SKF Group is the leading global supplier of products, solutions and services within rolling bearings, seals, mechatronics, services and lubrication systems. Services include technical support, maintenance services, condition monitoring and training.
Research and development
Technical development, quality and marketing have been in focus at SKF since the very start. The Group’s efforts in research and develop- ment have resulted in numerous innovations, forming bases for new standards, products and solutions in the bearing world. In 2008, the number of first filings of patent applications was 179.
The SKF Group
SKF was founded in 1907, and grew at a rapid rate to become a global company. As early as 1920, the company was well established in Europe, America, Australia, Asia and Africa. Today, SKF is represented in more than 130 countries. The company has more than 100 manu- facturing sites and also sales companies supported by about 15,000 distributor locations. SKF also has a widely used e-business market- place and an efficient global distribution system.
Certification
The Group has global IS0 14001 environmental certification and global health and safety management standard OHSAS 18001 certification.
Its operations are also certified in accordance with either ISO 9001 or applicable customer segment standards, e.g. ISO/TS 16949 (Auto- motive), AS9100 Aviation or IRIS (Railway).
Five technology platforms
SKF groups its technologies in five platforms: Bearings and units, Seals, Mechatronics, Services, and Lubrication Systems. By utilizing capabilities of all or some of the platforms, SKF develops tailor-made offers for each customer segment, helping customers improve per- formance, reduce energy use and lower total costs, while bringing increased added value and higher price quality to SKF.
This is SKF
The power of knowledge engineering
3 Financial targets
SKF’s long-term financial targets were announced in January 2007.
These are to have an operating margin level of 12%, an annual sales growth in local currencies of 6-8% and a return on capital employed of 24%.
Results in 2008 were well in line with these targets. Towards the end of the year, the market demand weakened considerably. In the fourth quarter the automotive business continued to deteriorate and a neg- ative trend was seen also for several industrial segments. SKF initiated actions to adapt the capacity and cost base globally to address this.
Three divisions, 40 segments
SKF does business mainly through three divisions: Industrial Division and Service Division, servicing industrial original equipment manufacturers (OEMs) and aftermarket customers respectively, and Automotive Division, servicing automotive OEMs and aftermarket customers. SKF operates in around 40 customer segments, whereof examples include automotive, wind energy, railway, machine tool, medical, food & beverage and paper industries.
SKF Care
SKF defines sustainability as SKF Care, comprising Business Care, Environmental Care, Employee Care and Community Care. Within each of these four cornerstones, key focus areas and targets are defined to drive continuous performance improvement.
BeyondZero
BeyondZero is a commitment, launched in 2005, stating that SKF is to realize business objectives in such a way that negative environmental impact is minimized, while positive impact is enhanced. BeyondZero goes beyond traditional practice of reducing negative impact by striving for an overall positive environmental impact. A number of products and solutions have been launched as a result of SKF’s work according to the BeyondZero concept.
CO 2
Carbon dioxide (CO
2) is by far the most significant greenhouse gas gener- ated as a result of SKF’s operations. Therefore, the Group has set a target to reduce CO
2emissions by a minimum of 5% annually, irrespective of production volume. In 2008, the reduction was 9.1%.
0 5 10 15 20 25 30
08 07 06 05 04
19.0 21.8 24.7 25.4 24.2
%
Return on capital employed
0 5 10 15
08 07 06 05 04
9.9 10.8 12.6 12.9 12.2
%
10.4* 11.3*
Operating margin Growth development/
local currency
0 5 10 15
08 07 06 05 04
11.8 7.3* 7.5* 13.2 7.1
* Excluding income from the previously jointly controlled company Oy Ovako Ab
* Excluding effect from sale of Oy Ovako Ab. 2005: 10.4% 2006: 10.1%
Aquisitions/Divestments Organic growth
% Y-o-Y
This is SKF
The power of knowledge engineering
4
President’s letter
2008 was a year which experienced dramatic changes in global demand. The year started with the world economy growing very strongly and ended with the economy in a deep downturn. As we leave 2008, we see a synchronized and deep global slowdown affecting nearly all industries and all regions of the world.
Overall, 2008 was another very good year for the SKF Group. Earn- ings per share were good and increased slightly to SEK 10.14 and the operating profit increased to SEK 7,710 million giving an operating margin of 12.2%. Our sales in SEK grew ahead of the market and were up 8.2% at SEK 63,361 million. We have a strong balance sheet even after a high investment programme, a number of acquisitions and the return of some SEK 4.6 billion to our shareholders.
In order to keep a strong balance sheet to be able to manage the uncertain business and financial environment we are facing in 2009, and to enable the Group to take the opportunities to
invest in its business, the Board has decided to recommend to the Annual General Meeting 2009 a dividend of SEK 3.50 per share. The Board will also ask the meeting to renew the mandate to repurchase SKF shares to have the possibility to positively manage the Group’s capital structure.
The SKF Group has the long-term financial targets to deliver an oper- ating margin level of 12%, to grow annual sales between 6-8% in local currencies and to have a return on capital employed of 24%. The Group’s strategy is to become the knowledge engineering company. This is based on dedicated customer focus, our platform/segment approach, Six Sigma, delivering a strong and sustained financial performance and by having sustainability as a guiding light.
In 2008 we performed in line with our financial targets and made further steps towards delivering on our vision.
The operating margin of 12.2% is a result of a very strong price/mix in our business during the year and good productivity in our operations.
This was achieved despite significantly higher costs of raw material, components and energy, a negative currency development over the year and the need to significantly reduce the speed in our production towards the end of the year. The SKF Group’s strategy to increase its share of business from the industrial markets, as well as to develop and deliver more value in our products and services, are key factors in the very strong price/mix achieved in 2008.
While sales grew by 8.2% in SEK or 7.1% in local currencies, the volume growth was nearly flat over the year and in fact was down by 13.0% in the fourth quarter. This reflected the weakening global demand situation and although certain segments such as railway, aerospace and energy continued to grow, the significantly lower demand at the end of 2008 and continuing at the start of 2009, meant that we took major additional steps to adjust our manufacturing to this level.
SKF has been actively working to address its cost base and balance sheet for a number of years, to meet periods of lower demand through divesting non-core assets and reducing working capital. At the same time the expansion of our sales regionally and to the industrial markets, combined with the platform approach to widen the scope of our business into other technology areas, means that we are well placed to be less affected by any downturn in global demand.
However, the extent of the decline in demand we saw at the end of 2008 has necessitated additional steps to adjust our manufacturing and cost structure. In the fourth quarter we announced activities to reduce our manufacturing in a number of countries which will regret- tably mean that some 2,500 temporary and full-time employees will leave the SKF Group, while some 2,400 were in short time working by the start of 2009. Further steps may be necessary in 2009 depending on how the demand situation develops.
We have continued throughout the year, and will continue in 2009, to invest in a number of areas to strengthen our ability to support our customers both in developing their business and in expanding geographically.
We have increased spending in R&D, which was up to 1.9% of sales in 2008 from 1.5% 2007, and have launched a number of new products, primarily focused on energy efficiency and on customer-specific solutions. You can read more about these later in the annual report.
We also increased our organic investments and opened two new factories during the year. One factory is in China for the automotive industry and the other is our venture with GE in the USA, which will manufacture aircraft engine bearings for GE. In addition we announced significant expansion in our large-size bearing manufac- turing in Sweden, Germany and China. Our new factory in Ahmedabad, India, which will manufacture large size bearings, was constructed during the year and will start production in the first half of 2009.
These investments are focused on the faster growing segments of our business and regions.
Over the last few years we have been continuously strengthening our platforms through acquisitions to add new competences, technologies and geographical reach. In 2008 we acquired four companies. These were the metallic rod business of QPM in USA; GLO s.r.I, which is a European manufacturer of constant velocity joints and drive shafts for the vehicle service market; Cirval S.A. which is a lubrication systems company in Argentina; and the Peer Bearing Company in the USA.
President’s letter
I strongly believe that our work in both reducing our negative impact on the environment and helping our customers reduce theirs is a key advantage for SKF and we will continue to drive these activities forward in 2009.
“
”
5 The major acquisition was the Peer Bearing Company, which has
manufacturing facilities in China and Thailand and sales primarily in the USA. Peer will operate independently under its own brand and complement SKF’s existing offer to the market.
We have continued our commitment to move SKF towards becoming a Six Sigma company. This is progressing very well and we now have 410 black belts and our annualized savings in 2008 were up over 50%
on the previous year at SEK 462 million. Senior management in the Group and Divisions has now completed or are now undergoing green belt training. Six Sigma is also a key differentiator in doing business with a number of our customers.
During the year we increased our focus and activities in the field of sustainability or SKF Care as we call it. This is defined in the four dimensions of Business Care, Environmental Care, Employee Care and Community Care. SKF Care is a guiding light for us at the SKF Group and even in this tougher business climate we see an increased interest from our customers in our new products and services which can help them reduce energy consumption and CO
2emissions.
During the year we launched a number of new products and services in this area and also increased our work on reducing the greenhouse gas emissions at our factories. In 2008 the CO
2emissions from our factories were reduced by more than 9% while production increased.
Our focus has now extended to working on how we transport our goods, our business travel and by requiring our suppliers to actively work on reducing their energy use and CO
2emissions. You can read a lot more about this in the Sustainability section of this report.
I strongly believe that our work in both reducing our negative impact on the environment and helping our customers reduce theirs is a key advantage for SKF and we will continue to drive these activities forward in 2009.
2008 was the second year in which we ran our global employee survey called “Working climate analysis”. We saw an increase in the participation rate from our employees and although the overall score was the same as last year we are seeing signs of improvement. This is not a short-term activity for us at SKF and we will see improvements coming as we act on its results at each of our operations worldwide. This survey is a tool to help each employee throughout the world to improve their working environment. A key factor for SKF to be successful short- and long- term is to be able to attract, retain and develop the right employees and we will continue to work on this in the coming years building on the strong foundations we have. I am particularly pleased and proud that SKF received the “Best employer of the year” award in Sweden, as well as “Best employer of the year” award in Dalian, China. Both these awards were received in 2008. This is a sign that we are on the right way.
In summary, 2008 was a very challenging year with the changing business environment. However, SKF delivered another very strong
year in line with our financial targets and took important steps to strengthen the Group for the future with organic investments,
acquisitions and increased R&D spending. We also took the necessary steps to adapt our manufacturing and cost struc-
ture to the new business situation. 2009 promises to be a more challenging year, but we will continue to work both short-
term on managing the Group and long-term in putting the foundation in place for a long-term sustainable financial
performance.
I would like to take this opportunity to sincerely thank SKF’s employees throughout the world for an excellent
job in 2008. Their outstanding commitment and support enabled us to take a further step towards becoming the
knowledge engineering company.
Göteborg, 29 January 2009
Tom Johnstone President and CEO
President’s letter
Administration Report
Content
8 Shares and shareholders 11 Report on the business 2008
16 Financial objectives and dividend policy 18 Financial risks
18 Sensitivity analysis
19 AB SKF’s Board’s proposal for principles of remuneration for Group Management 2009
21 Administration Report for the Parent Company, AB SKF 21 Sustainability
23 SKF – the knowledge engineering company
28 SKF’s markets
8
Shares and shareholders
The SKF share as of 31 December 2008
SKF’s A and B shares have been quoted on the NASDAQ OMX Stockholm since 1914. The total number of shares traded in 2008 was 1,564,934,260. SKF’s ADRs are traded on the OTC market.
A shares, unrestricted 47,746,034
B shares, unrestricted 407,605,034
Total 455,351,068
An A share gives the entitlement to one vote and a B share to one-tenth of a vote. It was decided at AB SKF’s Annual General Meeting on 18 April 2002 to insert a clause in the Articles of Association which would allow owners of A shares to convert these to B shares. Of the total of 178,190,713 A shares converted to B shares up to December 2008, 1,250,000 were converted in 2008.
Changes in share capital 1982–2008 Amount paid
SEKm Share capital
SEKm Number of
shares in millions Quoted value per share, SEK
1982 Bonus issue 1:4 – 1,350 27.0 50.00
1989 Split 4:1 – 1,350 108.0 12.50
1990 Conversion of debentures 62 1,412 113.0 12.50
1997 Conversion of bonds 11 1,423 113.8 12.50
2005 Split 5:1 and redemption – 1,138 455.3 2.50
2007 Split 2:1 and redemption – 1,138 455.3 2.50
2008 Split 2:1 and redemption – 1,138 455.3 2.50
Basic earnings per share, SEK
Shareholders’ equity per share, SEK
Cash flow after operating investments, before financial items per share, SEK Share savings fund for employees
SKF Allemansfond, a national security savings fund for SKF employees in Sweden was started in 1984. On 31 December 2008, the SKF Allemansfond had 791 members. 38% of the fund was invested in SKF shares. Assets amounted to SEK 55.6 million.
Distribution of shareholding
Shareholding shareholders Number of % Number
of shares %
1 – 1,000 51,343 78.9 18,209,798 4.0
1,001 – 10,000 12,189 18.7 34,505,974 7.6
10,001 – 100,000 1,207 1.8 34,206,770 7.5
100,001 – 379 0.6 368,428,526 80.9
65,118 100.0 455,351,068 100.0
Source: Euroclear Sweden AB (Securities Register Centre) as of 31 December 2008.
Administration Report • Shares and shareholders Basic earnings Shareholders’ equity
per share, SEK Cash flow after operating investmensts, before financial items per share, SEK
0 2 4 6 8 10
08 07 06
28x25
Stapelbredd 60x80
9.48 10.09 10.14
0 9 18 27 36 45
08 07
06 0
1 2 3 4 5
08 07 06
42 39 43 4.74 4.67 0.14
9 The ten largest shareholders A shares B shares Number of shares Number of votes In percent of
voting rights In percent of share capital
Foundation Asset Management 22,500,000 32,553,511 54,803,511 25,755,351 28.82 12.04
Skandia 3,771,794 1,745,836 5,517,630 3,946,377 4.46 1.21
Alecta 2,192,404 17,427,200 19,619,604 3,935,124 4.45 4.31
Swedbank Robur Funds 2,633,641 12,036,257 14,669,898 3,837,266 4.34 3.22
AFA Sickness Insurance 1,384,900 14,416,406 15,801,306 2,826,540 3.19 3.47
Gamla Livförsäkringsbolaget 2,138,700 134,100 2,272,800 2,152,110 2.43 0.50
SEB Investment Management 635,180 7,477,956 8,113,136 1,382,975 1.56 1.78
AMF Pension 0 12,000,000 12,000,000 1,200,000 1.36 2.64
FPG Försäkringsbolaget
Pensionsgaranti, ömsesidigt 923,080 448,300 1,371,380 967,910 1.09 0.30
The Knowledge Foundation 925,000 0 925,000 925,000 1.05 0.20
Total 36,854,699 98,239,566 135,094,265 46,928,653 52.75 29.67
Source: Euroclear Sweden AB’s public share register as of 31 December 2008.
Foundation Asset Management Sweden AB (FAM) is the only shareholder with a shareholding representing at least 10% of the voting rights in SKF.
As of 31 December 2008, about 36% of the share capital was owned by foreign investors, about 55% by Swedish companies, institutions and mutual funds and about 9% by private Swedish investors. Most of the shares owned by foreign investors are registered through trustees, so that the actual shareholders are not officially registered.
Per-share data (Definitions, see page 140)
Swedish kronor/share unless otherwise stated 2009 2008 2007 2006 2005 2004 2003 2002
Earnings/loss per share 10.14 10.09 9.48 7.73 6.42 4.48 5.42
Dividend per A and B share 3.50
15.00 4.50 4.00 3.00 2.50 2.00
Total dividends, SEKm 1,594
12,277 2,049 1,821 1,366 1,138 911 683
Redemption, SEKm 2,277 4,554 2,846
Purchase price of B shares at year-end
on the NASDAQ OMX Stockholm
277.25 104.79 113.22 99.8 60.83 57.13 46.45
Shareholders’ equity per share 43 39 42 39 37 34 36
Yield in per cent (B)
24.5
14.8 4.0 4.0 4.9 4.4 4.3
Yield in per cent (B), including share
redemption
29.5 12.8 46.0
P/E ratio, B
27.6 10.4 11.9 12.9 9.5 12.8 8.6
Cash flow after investments,
before financing per share 0.14 4.67 4.74 5.25 -2.05 5.43 5.81
2002 is reported according to Swedish GAAP.
1
According to the Board’s proposal for the year 2008.
2The years 2002 to 2007 have been recalculated to reflect the effects of the split and redemption in 2008.
2008 2007 2006
Sweden
Europe excl. Sweden
USA
Rest of the world Sweden
Europe excl. Sweden
USA
Rest of the world
Sweden
Europe excl. Sweden
USA
Rest of the world
Geographic ownership
Source: SIS Ownership Data Corp.
Administration Report • Shares and shareholders
10
Additional information
There are no regulations under Swedish law or under the Articles of Association limiting the transferability of SKF shares. Furthermore, to the best of SKF’s knowledge, there exist no agreements between shareholders limiting the right to transfer SKF shares (e.g. by pre- emption or first refusal clauses). No limitations exist limiting the number of votes which each shareholder may cast at a shareholders’
meeting.
There are no existing agreements between SKF and any director or employee, which allow them to receive compensation in case of resig- nation, dismissal without cause, or termination of employment as a consequence of a public takeover bid on AB SKF’s shares.
AB SKF Stock Fund in the USA
SKF USA Inc. is offering a majority of its employees a possibility to defer pre-tax earnings into a Defined Contribution Pension Plan. The employees can direct their contributions and the matching contribu- tions by the company to different mutual funds, including an AB SKF Stock Fund. The contribution to the AB SKF Stock Fund is limited to a maximum of 20% of the total contributions, and assets can not be trans- ferred into the fund. The employees have no direct voting rights based on the shares held in the fund. The fund held 829,406 AB SKF B shares at the end of 2008.
ABG Sundal Collier Erik Ejerhed Banc of America Securities-Merrill Lynch Ben Maslen
CA Cheuvreux Patrik Sjöblom Carnegie Investment Bank AB
Oscar Stjerngren Credit Suisse Andre Kukhnin
Danske Markets Equities Carl Holmquist Deutsche Bank Johan Wettergren Erik Penser Bankaktiebolag Joakim Höglund Evli Bank Magnus Axén Exane BNP Paribas Arnaud Brossard
Execution Limited Nick Paton
Handelsbanken Capital Markets
Peder Frölén HQ Bank Andreas Koski HSBC Colin Gibson JP Morgan Nico Dil
Morgan Stanley Guillermo Peigneux Nordea
Ann-Sofie Nordh Johan Trocmé RBS
Klas Bergelind Redburn Partners James Moore SEB Enskilda Anders Eriksson
Societe Generale Roddy Bridge Standard and Poor’s Equity Research Heenal Patel Swedbank Markets Mats Liss UBS Fredric Stahl
Öhman Fondkommission Anders Roslund Analysts who follow SKF
160 140 120 100
80
60
40
2004 2005 2006 2007 2008 © NASDAQ OMX
200,000 150,000 100,000 50,000 B share A share OMX Stockholm_PI (normalized after B share) Number of A shares traded, thousands
Number of B shares traded, thousands SEK
Price trend of SKF’s shares
Administration Report • Shares and shareholders
Price trend of SKF’s shares
11
Report on the business 2008
SKF’s net sales increased by 8.2% in 2008, from SEK 58,559 million to SEK 63,361 million. This rise was attributable to volume 0.1%, price/
mix 5.6%, structure 1.4% and currency effects 1.1%.
Operating profit was SEK 7,710 million (7,539), profit before taxes SEK 6,868 million (7,138) and earnings per share SEK 10.14 (10.09).
Exchange rates, including effects of translation and transaction flows, had a negative effect on SKF’s operating profit of around SEK 140 million.
Net financial items were SEK –842 million (–401), excluding revalu
ation of share swaps SEK –822 million –405). Interestbearing loans were amortized by SEK 468 million and totalled SEK 13,447 million at yearend. Pension provisions amounted to SEK 5,539 million (4,840).
The cash flow after operating investments but before financial items was SEK 65 million (2,126) and included acquisitions of SEK 1,284 million (1,209). Return on capital employed for the 12month period ending 31 December was 24.2% (25.4).
Capital expenditure on property, plant and equipment amounted to SEK 2,531 million (1,907). Depreciation was SEK 1,607 million (1,518). Increased capital expenditure reflects the upgrading of oper
ations as well as addition of new capacity, mainly in Asia, to support strong regional growth. SEK 122 million (166) was spent on internal and external environmental improvements.
Research and development expenditure was SEK 1,175 million (900), corresponding to 1.9% (1.5) of annual sales, excluding develop
ment of IT solutions. The number of first filings of patent applications was 179 (186).
Overall a record year for sales
2008 had a very positive start with record demand, but later in the year the demand picture changed. In late September, a rapid decline was apparent in the automotive business, spreading to several industrial segments in late November. Demand growth remained, however, in the aerospace, railway, energy, mining and marine segments, although at a lower pace than previously. The speed and depth, as well as the global spread, of the fall in demand in late 2008 was unprecedented.
Sales for the full year, calculated in local currencies, excluding structural effects and compared to last year, were higher for the Group. Looking at regions, sales were slightly higher in Europe and North America. In Asia and Latin America, sales were significantly higher than last year. Sales for Industrial Division and the Service Division were significantly higher while the Automotive Division was lower.
Important factors influencing financial results
The results developed very positively in 2008, despite higher raw material costs and negative currency effects, due to a very strong price/mix, good productivity and cost control. The SKF strategy to deliver more value to its customers, as well as an improving mix in the business towards more sales to the industrial markets, were important factors in the price/mix development.
The previously announced and implemented restructuring pro
grammes had a positive effect on results. In the fourth quarter SKF announced cost cutting and capacity reduction measures which reduced the operating profit by SEK 340 million.
Raw material supply
Steel and steelbased components are the main raw materials in SKF’s manufacturing. Efforts continue to optimize the number of global suppliers providing regional production and deliveries, to increase flexibility and reduce the need for longdistance transpor tation. SKF is working closely with its suppliers to secure the right capacity, right quality and lowest total cost.
Focus on energy efficiency
SKF launched the next two types of the SKF E2 energyefficient bearings in 2008, namely spherical roller bearings and cylindrical roller bearings, joining the deep groove ball bearings and tapered roller bearings, already launched in 2007. SKF’s focus on energy
efficient products and solutions across all technologies and divisions will gain further momentum in 2009.
The new SKF E2 bearings use at least 30% less energy compared to standard SKF bearings. In many cases, they run cooler at equivalent loads and speeds, reducing lubricant use and potentially extending equipment life. With all their special features, this new performance class of bearings is designed to improve machine efficiency.
Administration Report • Report on the business 2008
12
SKF’s divisions
SKF’s does business mainly through three divisions, each focusing on specific customer groups worldwide. The divisions are interdependent in that they constitute a market within the SKF Group with products, services and knowhow on offer to each other to enable any of the divisions to serve its final customers.
The Industrial Division serves industrial Original Equipment Manu
facturer (OEM) customers with product development and production of a wide range of bearings – such as spherical and cylindrical roller bearings, angular contact ball bearings, medium deep groove ball bearings and high precision bearings – lubrication systems, linear motion products, bywire systems and couplings. The SKF industrial market is divided into around 30 customer segments.
Highlights in 2008:
Opening a machine tool competence centre in Stuttgart, Germany.
•
Launching new conditionbased maintenance solutions for the
•
railway industry, to achieve lower product life costs by improving performance and safety.
Launching the first series of a new generation of superprecision
•
bearings with superior performance, in particular for demanding machine tool applications.
New business:
Bearings and seals for the leading Chinese wind turbine company
•
Goldwind Technologies Co. Ltd. for their largest 1.5 MW turbines.
Traction motor bearing units for Skoda Electrics a.s. new Prague
•
15T low floor tramway.
Axleboxes and tapered roller bearing units to Siemens Transport
•
ation Systems for their new longdistance Railjet trains to the Austrian Federal Railways, ÖBB.
A multiplatform cabin support solution, as well as a sensor with
•
optimized slewing bearings, plus a seal and lubrication system for John Deere Forestry.
Contracts to supply the rudder pedal assembly and the throttle
•
control quadrant for the latest executive jets, Legacy 450 and Legacy 500, with Embraer, one of the world’s largest aircraft manufacturers based in Brazil.
The Service Division serves the global industrial aftermarket, mainly via a network of around 7,000 distributors, providing products and knowledgebased services to increase customers’ plant asset effi
ciency. Solutions include consulting, mechanical services, predictive and preventive maintenance, condition monitoring, decisionsupport systems and performancebased contracts. The division is also responsible for all SKF’s sales in certain smaller markets.
SKF Logistics Services supplies logistics services to the SKF Group and external customers.
Highlights in 2008:
Launching the latest energyefficient SKF E2 bearings through SKF
•
authorized distributors.
Launching the Distributor Value Program to support SKF author
•
ized distributors in documenting expected savings achieved by utilizing various SKF products and services.
Increasing the number of products in the SKF portfolio.
•
Launching several new SKF reliability products providing advanced
•
product and service solutions designed to optimize plant machinery performance.
New business:
A fiveyear contract with British Petroleum to provide proactive
•
reliability maintenance services for all their upstream oil and gas assets in the UK continental shelf.
A contract with the Indian Tata Power Generation Company for
•
increasing the reliability of its critical assets.
A contract with Store Norske Spitsbergen Kulkompaniet. SKF cond
•
ition monitoring systems were installed to enable the mine to regu
larly check the operating conditions of bearings on their conveyors.
The Automotive Division serves manufacturers of cars, light trucks, heavy trucks, buses, twowheelers and the vehicle service market.
In addition it also serves the market for household appliances, power tools and electric motors. The division develops and manufactures bearings, seals and related products and service solutions. Products include wheel hub bearing units, tapered roller bearings, small deep groove ball bearings, seals, specialist automotive products and complete repair kits for the vehicle service market, including a range of drive shafts and constant velocity joints.
North America 17
12 9
Latin America
5 6 4
Western Europe 51 51
64
5 8 4
3 1 0
19 22 19 Net sales
Average number of employees Property, plant and equipment
Eastern Europe Middle East and Africa Asia / Pacific Geographic distributions of net sales, average number of
employees and property, plant and equipment (per cent)
Administration Report • Report on the business 2008
13 Highlights in 2008:
Launching new energyefficient solutions for car driveline portfolios.
•
Launch in the USA of the SKF hub knuckle module, a lightweight
•
corner solution of fitting bearings and hubs into aluminum knuckles.
Opening a new factory in Shanghai, China.
•
New technology centres in China and expanded in India.
•
Acquisition of GLO s.r.I, in order to strenghen the position in the
•
after market segment.
New business:
A major contract with Fiat Brazil for the supply of wheelbearing
•
units for their 326 and 327 platforms.
An order for bearings for the Tesla Roadster allelectric sports car.
•
A new contract with the world’s largest trailer axle manufacturer,
•
Guangdong Fuwa Engineering Manufacturing Co. Ltd., China to supply the sealing part for truck axles.
Manufacturing
Actions were taken in the third and fourth quarters of 2008 to adapt production levels to the fall in demand that began in the third quarter, initially in the automotive segment. Around 2,500 SKF employees, of which 1,300 were temporary, will have to leave mainly in the Automo
tive Division. The main countries affected are were the USA, France, Italy, Ukraine, Brazil and Argentina.
Overtime was significantly reduced, flexibility arrangements, includ
ing timebanks, were used, and shorttime working was introduced for around 2,400 employees at several factories, primarily in Europe.
In the fourth quarter, SKF announced restructuring and impair
ment charges of SEK 470 million, of which SEK 340 million in 2008 and SEK 130 million in 2009. Around SEK 75 million refers to write
downs and impairments. These actions will result in annual savings of around SEK 250 million when fully implemented in early 2010. The restructuring announced at the end of 2007 affecting primarily the automotive factories in Glasgow, Kentucky, USA and Fontenay, France are still being implemented and will be finalized during 2009.
SKF continues to invest in rapidly expanding markets and segments and opened two new factories in 2008: one with GE Aviation in the USA, for manufacturing aircraft engine bearings, and one wholly
owned automotive components facility, SKF Automotive Technologies
Co. Ltd., in Shanghai. The latter is part of SKF’s strategy to further strengthen its presence in China and to support the growing auto
motive industry there and in the Asia region.
In addition, SKF decided on further major investments in all of the company’s largesize bearing factories to support the strong growth of these products, especially in the wind energy segment. A decision was taken to double the manufacturing capacity for large and medium size bearings in China, to support the continuous business growth there and in other parts of Asia, especially in the renewable energy, metalworking, mining, construction and industrial transmission indus
tries. The investment will be around SEK 500 million. A 25,000 sq.m.
facility, expected to be in operation in 2009, will be built adjacent to the current factory and the headcount will increase from the current 240 to about 600.
SKF will open a new factory in Ahmedebad, India in 2009, for manufacturing large size bearings. The investment will be around SEK 450 million and will, when fully utilized, employ about 300 people. SKF is also to build a new factory in Haridwar, Uttarakhand, for manufacturing ball bearings mainly for the Indian twowheeler industry. The investment will be around SEK 250 million.
In September 2008, SKF started construction of the new railway factory in Tver, Russia, which is expected to be in operation in the first half of 2010. The factory will supply tapered bearing units to the rapidly expanding Russian railway industry. The investment will be around SEK 235 million and the headcount around 150.
SKF also decided to invest SEK 400 million in extending the capa
city of its facilities in Göteborg, Sweden, supplying products to the mining, energy, pulp and paper industries, among others. Production volume has grown considerably over the past few years as a result of strong sales development. The new production line for large size bearings will mainly supply products to the European market and is expected to start production in 2010. This investment is in addition to the SEK 600 million announced in February 2007.
SKF Six Sigma
The Six Sigma work at SKF has deployed several techniques for con
tinuous improvement, alongside valuable defect elimination methods.
Design for Six Sigma is applied to the product development processes to ensure premium product quality and “Lean” methods are applied in
Industrial distribution 23%
Vehicle service market 9%
Special industrial equipment 6%
Heavy industry 8%
General industry 14%
Aerospace 5%
Railway 3%
Cars and light trucks 13%
Off-highway 4%
Trucks 5%
Two-wheelers and Electrical 3%
Energy 6%
Net sales by customer segment
Administration Report • Report on the business 2008
14
During their first year at SKF in Sweden new employees with university degrees take part in a programme called Intro.nu.
It consists of both lectures by a number of senior managers on their business activities as well as training in product knowl
edge, presentation techniques, business and health.
The Intro.nu programme is followed by the Grow programme which focuses on personal development and lasts for three years. The Grow programme gives the participants the chance to get to know themselves and shape their careers within SKF according to their interests and strengths.
Interview with an SKF employee Name: Annika Ölme
Position: Business Unit Manager, Engineering Consultancy Services (ECS)
Education: MSc in Electrical Engineering and Master of Business Administration Joined SKF: 2002
What is your working role and tasks?
My main job is to set targets and run ECS together with the management team. Much of our work deals with how we interact with the rest of SKF in the best way. ECS provides consultancy services to SKF’s customers in modelling, simulation and other calculations, to support their product development and verification and help with problem solving. One can say that we literally “equip the world with SKF knowledge”. We work closely with SKF’s sales teams, research units and customer service departments.
What do you feel are the advantages working for SKF?
Because SKF offers a stimulating job, good colleagues and a positive, familiar company culture. In addition, it gives me the opportun
ities I want to develop my career. This is my third position at the company since I started
in 2002.
SKF – Best Employer in Sweden 2008
SKF received the award for best employer in Sweden 2008, from Universum Communications. SKF also received in 2008 an award as best employer in Dalian, China by Dalian Personnel Bureau, Dalian Labor and Social Security Bureau.
What is important for you to enjoy work?
It is important for me that there are opportun
ities to develop and change the direction of my career at a company. That’s the case with SKF. There is an extensive commitment to help all employees develop in their work. SKF is a truly international workplace as well. No matter where you work, there are colleagues from around the world, which is very stimu
lating.
In your view, what makes SKF Sweden’s best employer?
Many things. SKF’s company culture is char
acterized by openness and a spirit of commu
nity. One can phone anybody and discuss anything. Everybody helps and supports each other. One important factor is the top management’s modern leadership approach, by always being available and prioritizing key issues, such as sustainability. SKF is a com
pany that sets targets and achieves them.
wastereducing projects and nonmanufacturing processes. In 2008, the Six Sigma scheme at SKF was renamed “SKF Six Sigma” to empha
size the customization of methods and tools to SKF’s specific needs.
By end 2008, SKF had 410 Black Belts and 1,950 Green Belts. In total, 1,128 projects were completed in 2008, with SEK 462 million in confirmed annualized savings. To fully leverage the potential of SKF Six Sigma and strengthen Six Sigmarelated leadership, the Group Management and Division Management have all started a practical Six Sigma training scheme and will be certified as Green Belts in 2009.
Six Sigma, see also glossary page 143.
Employees
Talent Management is the process by which SKF develops, and visual
izes career opportunities, for people within the SKF Group. For the
individual, the objective is to give people the opportunity to develop to
their full potential as far as they choose to within SKF. For the company,
the objective is to develop people with the necessary competences
needed for the future success of SKF. The ultimate objective in SKF is
to have the right people, at the right place at the right time equipped
with the right competence, knowledge and motivation, positioning
SKF as the Knowledge Engineering Company as well as the preferred
employer.
15 GLO s.r.I is one of the companies SKF acquired in 2008. GLO is located in Poggio Rusco in Italy, and mainly manufactures constant velocity joints and drive shafts. SKF acquired GLO to widen the existing prod
uct range and strengthen its presence primarily in the European vehicle aftermarket. GLO is one of the leading manufacturers in the European automotive aftermarket and has a wide range of products for this sector.
The SKF Code of Conduct states, that all employees are to be treated equally, fairly and with respect regardless of race, gender, age, national origin, disability, caste, religion, sexual orientation, union membership or political affiliation. SKF also needs to ensure that all employees have equal access to development opportunities and to advancement within SKF. Tools to safeguard this are e.g.
internal job posting of vacancies, the performance and leadership reviews and the individual development plan.
All employees are entitled to feedback on their performance and to have a development plan. The performance and the leadership review are the Group tools that are used to give feedback and devise an individual development plan.
Details of salaries, wages and other remuneration are given in the Consolidated Financial Statement, Note 26.
Acquisitions
SKF made acquisitions in 2008 for SEK 1,284 million, net of cash, to strengthen the technology platforms and improve the product and solutions portfolio, improve the company’s presence in key segments and markets.
Bearings and units
QPM Aerospace’s metallic rod business
•
QPM produces metallic rods, used in aerospace applications such as mechanism actuation, airplane structures and equipment suspen
sions. The company has its manufacturing site in Monroe, close to Seattle, USA, and is a supplier to Boeing and also qualified for supplies to Airbus. QPM will be a platform for SKF’s growth in this segment in North America – the existing customer base is mainly European, with customers such as Airbus, Dassault and Eurocopter. SKF paid a total of SEK 43 million, net of cash, and took over 12 employees. QPM was included in the Group’s reporting for the second quarter.
PEER Bearing Company
•
PEER Bearing Company primarily serves certain segments on the North American market, not served by SKF. PEER’s sales in 2007 amounted to almost USD 100 million, with a headcount of about 1,400. The company is a whollyowned subsidiary of the SKF Group and operates independently on the market under the brand PEER.
The acquired manufacturing plants are located in China and Thailand. SKF paid a total of SEK 1,019 million, net of cash, and PEER was included in the Group’s reporting for the fourth quarter.
GLO s.r.I
•
GLO mainly manufactures constant velocity joints and drive shafts.
Sales were around EUR 17 million in 2007 and the headcount about 50. The acquisition broadens SKF’s existing product range and pre
sence, primarily in the vehicle aftermarket in Europe. The company is located in Poggio Rusco, in the Mantova region of northeast Italy.
SKF paid a total of SEK 102 million, net of cash and GLO was included in the Group’s reporting for the fourth quarter.
Full ownership of the operations in the previous jointly owned
•
company SKF Automotive Bearings Company Ltd. in Shanghai, China.
Lubrication systems Cirval S.A.
•
Cirval S.A. specializes in design, manufacturing and sales of central
ized lubrication systems, with annual sales of around USD 2.5 million and around 60 employees. The company has a strong position in engineering, product development and customized solutions, par
ticularly for the steel industry, with its headquarters and manufac
turing located at Rosario, Argentina.
The Cirval product range will further strengthen SKF’s market position in lubrication systems in Latin America. SKF paid SEK 26 million, net of cash, and the company was included in the Group’s reporting for the fourth quarter.
Divestments
SKF sold the operating assets of Roller Bearing Industries, INC, USA to Greenbrier Companies USA, a leading supplier of transportation equipment and services to the railway industry. Roller Bearing Industries was a part of Industrial Division.
Risks and uncertainties in the business
The company operates in many different industrial and automotive segments as well as in many geographical segments that have differ
ent economic cycles. A general economic downturn at a global level, or in one of the world’s leading economies, could reduce the demand for the Group’s products, solutions and services for a period of time.
In addition, terrorism and other hostilities, as well as disturbances in worldwide financial markets, could have a negative effect on the demand for the Group’s products and services. However, the Group’s wide geographical presence and its exposure to different customer segments would normally mean that the business climate is good in some of the regions or segments.
Administration Report • Report on the business 2008
16
Financial objectives and dividend policy
Financial targets
SKF’s longterm financial targets were announced in January 2007.
The targets are:
• an operating margin level of 12%
• annual sales growth in local currencies of 68%
• a return on capital employed of 24%
Strategy
SKF’s business strategy to achieve longterm profitable growth and attain financial targets includes:
• keeping a clear and dedicated customer focus
• developing new products, solutions and services with higher added value which enable customers to improve their efficiency and performance while lowering their total cost
• improving price quality by applying the SKF platform and segment approach to deliver value to customers
• strengthening the product portfolio through greater investment in R&D and through acquisitions
• focusing on rapidly expanding segments and regions
• reducing capital employed and fixed costs
• attracting, retaining and developing the right people.
0 5 10 15 20 25 30
08 07 06 05 04
19.0 21.8 24.7 25.4 24.2
%
Return on capital employed
0 5 10 15
08 07 06 05 04
9.9 10.8 12.6 12.9 12.2
%
10.4* 11.3*
Operating margin Growth development/
local currency
0 5 10 15
08 07 06 05 04
11.8 7.3* 7.5* 13.2 7.1
* Excluding income from the previously jointly controlled company Oy Ovako Ab
* Excluding effect from sale of Oy Ovako Ab 2005: 10.4% 2006: 10.1%
Aquisitions/Divestments Organic growth
% Y-o-Y
Administration Report • Financial objectives and dividend policy
17 Overall financial objective
SKF’s overall financial objective is to create value for its shareholders.
Over time, the return on the shareholders’ investment should exceed the riskfree interest rate by around five percentage points. This is the basis for SKF’s financial objectives and SKF’s financial performance management model.
Financial performance management model
SKF’s financial performance management model is a simplified, eco
nomic value added model, called Total Value Added (TVA), promoting increased operating profit, capital efficiency and profitable growth.
The TVA profit is the operating profit, less the pretax cost of capital in the country where business is conducted. The pretax cost of capital is based on a weighted cost of capital with a risk premium of 5% above the riskfree interest rate for the equity part and on actual borrowing cost. The TVA profit performance for the Group correlates well with the share price trend over a longer period of time. Variable salary schemes are primarily based on this model.
Financial position and dividend policy
The capital structure target is a gearing of around 50%, correspond
ing to an equity/assets ratio of around 35% or a net debt/equity of around 80%. This ensures the Group financial flexibility and ability to continue investing in its business, while maintaining a strong credit rating. On 31 December 2008, the gearing was 47.2% (40.1), the equity/assets ratio 36.6% (39.6) and the net debt/equity 76.5% (47.5).
Definitions of key figures can be found on page 140.
SKF’s dividend and distribution policy is based on the principle that the total dividend should be adapted to the trend for earnings and cash flow, while taking into account the Group’s development potential and financial position. The Board of Directors’ view is that the ordinary dividend should amount to around one half of SKF’s average net profit calculated over a business cycle.
If the financial position of the SKF Group exceeds the targets stated above, an additional distribution to the ordinary dividend could be made in the form of a higher dividend, a redemption scheme or a repurchase of the company’s own shares. On the other hand, in peri
ods of more uncertainty a lower dividend ratio could be appropriate.
Dividend
In order to keep a strong balance sheet to be able to manage the uncertain business environment in 2009, and to enable the Group to take the opportunities to invest in its business, the Board has decided to recommend to the Annual General Meeting a dividend of SEK 3.50 per share. This proposal is subject to a resolution by the Annual General Meeting in April 2009.
Repurchase of the company’s own shares
The Board proposes that the Annual General Meeting should resolve to authorize the Board, until the next Annual General Meeting, to decide upon the repurchase of the company’s own shares. The intention of this proposal is to be able to adapt the capital structure of the company to its capital needs in order thereby to contribute to increased shareholder value. According to the proposal, the author
ization will involve Class A shares as well as Class B shares. The maxi
mum number of shares to be repurchased will be such that the com
pany then holds a maximum of 5% of all shares issued by the company.
The shares may be repurchased by operations on the NASDAQ OMX Stockholm AB. The proposal is subject to a resolution by the Annual General Meeting in April 2009.
The Annual General Meeting in April 2008 resolved to authorize the Board, until the next Annual General Meeting, to decide on the repurchase of the company’s own shares. In 2008, no repurchases were made and the company owns no SKF shares.
Credit rating
The Group has an A minus (A) rating with stable outlook for long
term credit from Standard and Poor’s and an A3 rating with negative outlook from Moody’s Investors Service. SKF intends to keep a strong credit rating, which is reflected in its gearing target.
Financing
SKF’s policy is to have longterm financing of its operations. As of 31 December 2008, the average maturity of SKF’s loans was 4 years.
SKF has issued two separate notes on the European bond market, one amounting to EUR 250 million with a due date of 2010 and one amounting to EUR 500 million with a due date of 2013. Further, SKF has issued one note on the Swedish bond market amounting to SEK 1,500 million with a due date of 2011. According to the conditions of the notes, the notes’ interest rate may increase by 5% in case of a change of control of the company (meaning any party/concerted parties acquiring more than 50% of SKF’s share capital or SKF shares carrying more than 50% of the voting rights). Similar conditions apply to a loan SKF is having with the Nordic Investment Bank (NIB) amounting to EUR 100 million with a due date of 2016.
In addition, SKF has a term loan amounting to EUR 150 million with a due date of 2013.
Administration Report • Financial objectives and dividend policy
18
Financial risks
SKF’s operations are exposed to various types of financial risk. The Group’s financial policy defines the main risks as currency, interest rate, credit and liquidity risks and defines responsibility and authority to manage these. The policy states that the objective is to eliminate or minimize risk and to contribute to a better return through active risk management. The responsibility for risk management and treasury operations are largely centralized to SKF Treasury Centre, the Group’s internal bank.
Currency risk
SKF is subject to both transaction and translation exposure. The Group’s principal commercial flows of foreign currencies pertain to exports from Europe to North America and Asia as well as intra
European business. SKF hedges 75% of the estimated net USD expos
ure for three to twelve months. This hedging corresponds to around 50% of the total net transaction flows. At yearend, the lengths of the actual forward contracts conformed to the Group policy. Translation exposure on Group accounts is hedged to some extent by borrowing in foreign currencies
Interest rate risk
Liquidity and borrowing are managed at Group level. By matching the maturity dates of investments made by subsidiaries with the borrow
ings of other subsidiaries, the interest rate exposure of the Group can be reduced.
Credit risk
The Group policy states that only well established financial institutions are to be approved as counterparties. Exposure per counterpart is continuously monitored.
Liquidity risk
In addition to its own liquidity, AB SKF had committed credit facilities of EUR 500 million at year end. More details about risk management and hedging activities can be found in Consolidated financial state
ments, Note 29.
Sensitivity analysis
This analysis shows how changes of a number of factors will affect the Group’s profit before tax. Calculations are based on yearend figures as well as on the assumption that everything else is equal.
The annual cost for raw material and components is around
•
SEK 18,000 million, of which steel bars, tubes, components or oilbased products account for the majority. A change of 1%
in the cost of raw material and components reduces/
increases the profit before tax by SEK 176 million.
An increase of 1% to wages and salaries (including social
•
security charges) reduces the profit before tax by SEK 162 million.
An decrease/increase of 1% in interest rates has a positive/
•
negative effect on the profit before tax of around SEK 80 million,
based on the current position. The Group had a net short
term financial debt (shortterm financial assets less total loans) of SEK 10,219 million on 31 December 2008.
A weakening/strengthening by 10% of the SEK versus the USD
•
has a positive/negative net currency flow effect on the profit before tax of around SEK 400500 million, excluding effects from hedging transactions. In regards to commercial flows, the Group is primarily exposed to the USD and US dollar
related currencies.
A weakening/strengthening by 5% of the SEK versus all major
•
currencies has a positive/negative effect of the translation of profits in SEK of around SEK 350 million. Most of the profit is made outside Sweden, why the Group is exposed to transla
tional risks from all major currencies.
2-Spalt
-6,000 -4,500 -3,000 -1,500 0 1,500 3,000 4,500 SEK -5,880
Other 1,980 EUR -990
CAD 360
USD 4,530
1
Net currency flows 2008 (SEKm)
1
