Head office Husqvarna AB (publ) Mailing address Box 30224
SE-104 25 Stockholm Visiting address S:t Göransgatan 143 Telephone: +46 36 14 65 00 www.husqvarna.com Registered office Husqvarna AB (publ) Jönköping
Mailing address SE-561 82 Huskvarna Visiting address Drottninggatan 2
Telephone: +46 36 14 65 00 Telefax: +46 36 14 68 10
Global leader in outdoor power products
A NN UA L R EP O R T 20 0 6
HU S Q V ARNA AN NU AL RE PORT 2 0 06
Husqvarna’s strong points 1 Report by the President 8
The market 10
Group operations 13
Financial information 15 Pro forma financial information 16 Report by the Board of Directors 24
Notes 39
Corporate Governance
Report 2006 72
Board of Directors 80
Group Management 82
Sustainable development 84 The Husqvarna share 87 Annual General Meeting 89
Listing in June
Husqvarna was listed on the Stockholm Stock Exchange on 13 June 2006.
The operation was previously part of the Electrolux Group, and was spun off following a decision by the Electrolux AGM in April 2006. Husqvarna thus became once again a listed company, after 30 years.
Higher income and continued high profitability
Despite lower demand for garden products, the Group’s operating income for 2006 rose to SEK 3,121m (2,927). Operating margin rose to 10.6% (10.2).
Complementary acquisitions
Agreements for acquisitions signed during the second half of the year included Gardena of Germany, with annual sales of approximately SEK 3,800m, and the outdoor products operation of Komatsu Zenoah of Japan, with annual sales of approximately SEK 1,200m. The acquisitions strengthen the Group’s strategic position and provide greater opportunities for growth.
History rich in tradition
Husqvarna has a long history that is rich in tradition. The first Husqvarna plant was established in 1689 as a weapons factory. In the course of the centuries, Husqvarna has produced a large range of different products, including sewing machines, bicycles, motorcycles and kitchen equipment.
When Electrolux acquired Husqvarna in 1978 the outdoor product range comprised mainly chainsaws. In the 1980s operations expanded strongly through acquisitions. In subsequent years, consistent organic growth gradually gave Husqvarna leading positions in the global market.
Husqvarna in 2006 Contents
Reports in 2007
• Consolidated results 2006 February 23
• Annual Report Early April
• Interim report January–March
and Annual General Meeting April 19
• Interim report April–June July 24
• Interim report
July–September October 19
Financial information from Husqvarna is
available at www.husqvarna.com/ir
The above reports are also available on
request by telephone +46 8 738 63 29 or
by email at ir@husqvarna.se
Head office Husqvarna AB (publ) Mailing address Box 30224
SE-104 25 Stockholm Visiting address S:t Göransgatan 143 Telephone: +46 36 14 65 00 www.husqvarna.com Registered office Husqvarna AB (publ) Jönköping
Mailing address SE-561 82 Huskvarna Visiting address Drottninggatan 2
Telephone: +46 36 14 65 00 Telefax: +46 36 14 68 10
Global leader in outdoor power products
A NN UA L R EP O R T 20 0 6
HU S Q V ARNA AN NU AL RE PORT 2 0 06
Husqvarna’s strong points 1 Report by the President 8
The market 10
Group operations 13
Financial information 15 Pro forma financial information 16 Report by the Board of Directors 24
Notes 39
Corporate Governance
Report 2006 72
Board of Directors 80
Group Management 82
Sustainable development 84 The Husqvarna share 87 Annual General Meeting 89
Listing in June
Husqvarna was listed on the Stockholm Stock Exchange on 13 June 2006.
The operation was previously part of the Electrolux Group, and was spun off following a decision by the Electrolux AGM in April 2006. Husqvarna thus became once again a listed company, after 30 years.
Higher income and continued high profitability
Despite lower demand for garden products, the Group’s operating income for 2006 rose to SEK 3,121m (2,927). Operating margin rose to 10.6% (10.2).
Complementary acquisitions
Agreements for acquisitions signed during the second half of the year included Gardena of Germany, with annual sales of approximately SEK 3,800m, and the outdoor products operation of Komatsu Zenoah of Japan, with annual sales of approximately SEK 1,200m. The acquisitions strengthen the Group’s strategic position and provide greater opportunities for growth.
History rich in tradition
Husqvarna has a long history that is rich in tradition. The first Husqvarna plant was established in 1689 as a weapons factory. In the course of the centuries, Husqvarna has produced a large range of different products, including sewing machines, bicycles, motorcycles and kitchen equipment.
When Electrolux acquired Husqvarna in 1978 the outdoor product range comprised mainly chainsaws. In the 1980s operations expanded strongly through acquisitions. In subsequent years, consistent organic growth gradually gave Husqvarna leading positions in the global market.
Husqvarna in 2006 Contents
Reports in 2007
• Consolidated results 2006 February 23
• Annual Report Early April
• Interim report January–March
and Annual General Meeting April 19
• Interim report April–June July 24
• Interim report
July–September October 19
Financial information from Husqvarna is
available at www.husqvarna.com/ir
The above reports are also available on
request by telephone +46 8 738 63 29 or
by email at ir@husqvarna.se
1
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6
Global market leader
Husqvarna is the world’s largest producer of lawn mowers and chainsaws as well as portable petrol-powered garden equipment such as trimmers and leaf blowers. The Group is also a global leader in garden tractors.
In addition, Husqvarna is the world leader in cutting
equipment and diamond tools for the construction and stone industries.
The above product categories account for more than 90%
of Group sales.
Product category Position on world market
Chainsaws No. 1
Portable petrol-powered equipment
such as trimmers and blowers No. 1
Lawn mowers No. 1
Garden tractors No. 1–2
Cutting equipment and diamond tools for
the construction and stone industries No. 1
The Group has a total share of approximately 40% of the global market for professional chainsaws.
M A R K E T P O S I T I O N
2
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6Jonsered
Jonsered is a leading brand for high-performance forestry and gar- den products, and complements Husqvarna in specific markets.
Flymo
Flymo is the market leader in inno- vative electric garden equipment for consumer markets in the UK and Scandinavia.
Poulan
Poulan is a leading brand for chain- saws and garden equipment for the consumer market in North America.
Diamant Boart
Diamant Boart is the world lead- ing brand in diamond tools for the stone industry. Its newly developed wire for cutting granite enables higher cutting speed and greater productivity.
The new garden tractors offer an improved driver environment as well as new features for greater comfort and enjoyment.
B R A N D S
3
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6
A strong brand
B R A N D S
Husqvarna has been a strong global brand for many years, primarily for chainsaws and other portable high-performance products for professional users. It stands for technological leadership and high quality. Husqvarna products are sold in the high-price segments.
The brand’s position has been built over the years through consistent investments in product development, marketing and service.
In recent years, the range of products sold under the Husqvarna brand has been successfully expanded to include high-performance equipment for consumers. Over the past five years, these products have shown an average annual growth rate of approximately 20%. They are sold mainly through servicing dealers.
In 2006 Husqvarna was launched as the global brand for all products for the construction industry.
The Group continues to invest in making the brand even stronger in order to create favorable conditions for continued profitable growth.
Complementary brands
In specific markets the Husqvarna brand is complemented by Jonsered, which has a similar
position. The Group has a number of other well-known brands, such as Flymo, which is known for
innovative electric garden equipment for domestic consumers and is the market leader in the UK
and Scandinavia. Poulan and Weed Eater are well-known consumer brands in the US. Diamant
Boart is the world leader in diamond tools for the stone industry.
4
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6High technological competence
Husqvarna’s competence in areas such as engine technology and development of engines for portable petrol-powered products has been decisive for achieving the Group’s leading position in the global market.
The Group is also a leader in developing products that meet increasingly strict cri- teria for reduced emissions. Husqvarna’s patents and expertise in this and other areas represent a considerable competitive advantage.
Efficient product development
The share of new products in the product range has increased substantially in recent years. Large sales volumes and more efficient development have enabled this without increasing the cost of product development relative to sales.
The Group continues to invest in strengthening and broadening the product range, with a special focus on increasing sales under the Husqvarna brand.
T E C H N O LO G I C A L CO M PE T EN C E
Automower
The Automower is the world’s first automatic lawn mower, and cuts grass entirely on its own. It is quiet, efficient and generates no emis- sions. The most advanced model can mow an area of up to 3,000 m2.
5
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6
Innovative chainsaw technology The new Husqvarna chainsaws fea- turing the patented X-TORQ engine combine high power with low weight, and enable reductions of up to 20% in fuel consumption and up to 60% in exhaust-gas emissions.
New riders
In addition to ergonomic design and the benefits of front-mounted cutting decks, the new Husqvarna riders are fitted with a unique, inno- vative rear-wheel steering. This pro- vides superior maneuverability, and at full steering lock, the uncut circle is only about 20 cm in diameter.
Better ergonomy, new design The new garden tractors feature
improved ergonomy as well as a new design. Cutting height can be adjusted with an easily accessible lever, and the cutting deck is spring- mounted for easier adjustment.
These tractors offer advanced engines and versatile cutting tech- nology. A broad range of accesso- ries enables year-round use of these tractors.
New power cutters
The latest generation of Husqvarna power cutters is based on the patented Dual-Charge technol- ogy, which cuts emissions by 70%
and reduces fuel consumption.
These units also feature improved ergonomy and considerably lower vibrations in the handles.
The Automower is self-charging.
When battery power drops to a pre- defined level, the mower automati- cally returns to the docking station.
T E C H N O LO G I C A L
CO M PE T EN C E
6
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6Global sales strength
Husqvarna has a strong global distribution network. More than 20,000 servicing dealers world-wide sell Group products under the Husqvarna and Jonsered brands. Sales and support to these dealers are handled by the Group’s own global sales organization, which has been developed over many years and is a substantial asset.
Continuous reinforcement and expansion of the distribution network also helps to create favorable conditions for profitable growth.
G LO B A L D I S T R I B U T I O N
Husqvarna products are sold in more than 100 countries.
Approximately 90% of sales are through the Group’s own sales companies.
More than 20,000 servicing dealers world-wide sell the Group’s products under the Husqvarna and Jonsered brands.
Since the 1980s, Husqvarna’s US
subsidiary has been the main supplier
to Sears, the world’s largest retailer of
outdoor products. The Group also sells
consumer products in the US through
Lowe’s, Wal-Mart and Home Depot.
7
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6
Strong positions with leading retailers
Husqvarna has also established strong positions with leading retailers in both Europe and the US for mass- market consumer products. Investments in product renewals together with greater efficiency in the supply chain have enabled the Group to steadily strengthen these positions.
Since the 1980s, Husqvarna has been the main supplier to Sears, the American retail chain, which is the world’s largest retailer of outdoor products, under the Craftsman brand.
G LO B A L D I S T R I B U T I O N
In the European market for consumer products, the Group has strong positions with leading retailers such as B&Q,
Bauhaus and K-Rauta.
Cutting machines and diamond tools
for the construction industry are sold
mainly through rental companies and
specialized dealers, with whom the
Group has strong positions.
8
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6The year was naturally marked by the spin-off and Husqvarna’s debut as a listed company. On the whole, we handled this process very well, without losing our business focus. Operations devel- oped largely according to plan with the exception of demand for garden products in the US, which was weaker than we expected.
Nevertheless, we were able to increase our market shares and the sales shortfall in Consumer Products, which referred to the fourth quarter and to a delayed inventory build-up by retailers, was rather small for the year as a whole.
The structure of our operations for these products involves relatively low fixed costs, so that the negative effect of a down- turn in sales on operating margin is limited. Improvements in product mix and cost-efficiency enabled us despite everything to increase operating margin for garden products in the US.
We also achieved good performance for chainsaws, an impor- tant product category, for which very strong sales growth in Rus- sia more than offset lower sales in the markets where storms had positive effects in 2005. The strength of the Professional Prod- ucts business area as a whole was confirmed, as sales showed good growth and operating margin remained high.
The Group’s operating income was in line with our financial goals.
Five acquisitions since June 2006
Together with the new Board of Directors, we have reviewed and developed the Group’s strategic plans. In this context I would like to confirm our previously announced goal of increasing annual
sales by 5% organically over a business cycle, at the same time growing through acquisitions. We have achieved this over the past ten years and we expect to continue doing so in the years to come. This is a great challenge that requires increasing our market shares as well as a broadening our product range.
Our success to date has been based on continuous investment
Strong position and good growth opportunities
Long-term financial goals Strategies
Net sales
• Annual organic growth of approximately 5%
over the course of a business cycle.
• Additional growth through complementary acquisitions.
Profitability
• Operating margin of more than 10% over the course of a business cycle.
Capital structure
• Capital structure should meet criteria for long- term credit rating corresponding to at least BBB. This currently is considered to require that seasonally adjusted net debt in relation to operating income (EBITDA) should not exceed a multiple of 2.5 in the long term.
Dividend
• In the long term the dividend should correspond to 25–50% of income for the period.
R E P O R T BY T H E P R E S I D E N T
Sales and EBIT margin*
SEKm %
N Sales N EBIT margin Average annual growth 1996–2006
Sales: 6.4% (4.2% excluding acquisitions) Operating income: 9.1%
* According to Electrolux segment reporting for 1996-2004, i.e. common Group costs related to the present Husqvarna Group are not included.
30
20
10
0
96 97 98 99 00 01 02 03 04 05 06
15
10
5
0
Organic growth
• Invest in product development.
• Expand distribution network.
• Fully utilize Husqvarna brand’s potential.
Maintain high operating margin
• Focus on products in high-price seg- ments, particularly under the Husqvarna brand.
• Greater cost-efficiency, e.g. through relocation of some production and increased purchasing from low-cost countries.
Complementary acquisitions
• Rapid and successful integration in
Group operations.
9
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6
in product development, a strong global sales organization, and good customer relations. Our strengths in these areas will endure, and will generate continued good organic growth.
Another goal is for our operating margin to exceed 10%. The extent to which we exceed it will depend on several factors, including which operations we acquire and which parts of our operations grow fastest.
One result of our work on Group strategies is that we are aim- ing to increase the rate of acquisitions, and we are very pleased that since June we have been able to implement or reach agree- ments for five acquisitions, of varying size.
All of them offer a good potential in terms of cost synergies, and for most of them we also expect substantial synergies in the form of higher sales. For example, an increase in sales can be generated by selling the products of an acquired operation through Husqvarna’s global sales organization and/or under the Husqvarna brand.
The Gardena acquisition includes a strong sales organization, a strong brand and strong customer relations, which will provide greater sales opportunities for the Group’s other garden prod- ucts. Gardena is the European leader in irrigation products, a new area for Husqvarna where we see good opportunities for growth.
Husqvarna has considerable experience and skill in terms of efficient integration of acquisitions, and we definitely expect to be able to realize the potential benefits.
Outlook for 2007
We feel well-prepared for 2007, with a number of new products and an increased share of the large retailers’ product offerings for the garden season.
Naturally, we do not forecast the extent of demand with refer- ence to weather conditions, but we are planning for unchanged demand on the global level, with some decline in the US. We consider this to be reasonable in light of the fact that demand in the US has fallen considerably over the past two years, weath-
er conditions in 2006 were somewhat worse than normal, and approximately 75% of sales represent replacement buying.
In addition to our work on integrating acquired operations, we will give high priority to cutting costs in production and purchas- ing. We will also continue to accelerate building the Husqvarna brand on the basis of product development, service and market communications.
To sum it up, I see promising opportunities for a continued good performance by the Group in 2007.
Bengt Andersson President and CEO
Acquired operation Product area Annual sales
Dixon Industries, USA
Zero-turn mowers, mainly for professional users
SEK 400m
Jikai, China Diamond tools SEK 160m
Klippo, Sweden* Professional lawn mowers SEK 140m Komatsu Zenoah’s
outdoor products, Japan*
Professional forestry and garden equipment
SEK 1,200m
Gardena, Germany*
Garden equipment for consumer market
SEK 3,800m
* Not included in the accounts for 2006. For more information on acquisitions, see page 30.
R E P O R T BY T H E P R E S I D E N T
10
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6The market
The total global market for Husqvarna’s consumer and professional products is estimated at approximately SEK 150 billion. North America accounts for about 60% of this market, Europe for over 30%, and other coun- tries for less than 10%.
Demand is driven by general business conditions, activity in the forest and construction industries, and trends in private con- sumption of capital goods for households.
Dependence on weather, seasonal variations
It is estimated that annual demand for Husqvarna’s products increases by 2–3% in volume in the course of a business cycle.
However, substantial variations can occur year-on-year and between markets as a result of weather conditions, principally in terms of garden equipment. These are favored by an early spring and a long growing season, while demand for chainsaws is favored by storms and fallen trees.
Garden equipment in particular shows considerable seasonal variations, as most sales refer to the first half of the year. In contrast, demand for forestry products is greatest during the second half.
Distribution channels
Consumer products for the mass market are sold mainly through large retailers. The US market for consumer products is highly consolidated, and the four largest chains – Sears, Lowe’s, Wal- Mart and Home Depot – account for approximately 70% of the market. The European market is more fragmented, but includes a number of large chains such as B&Q, Carrefour, Bauhaus and K-Rauta.
Professional products for forestry and garden care are sold either through servicing dealers or directly to end-users. Dia- mond tools and equipment for the construction industry are sold mainly to rental companies and specialized dealers, but also directly to large contractors. Diamond tools for the stone industry are sold almost exclusively directly to companies that quarry and/or process stone.
T H E M A R K E T
Garden products show considerable seasonal variations, with the greater part of sales in the first half of the year. Demand depends on such factors as weather and the length of the growing season.
Demand for cutting equipment and diamond tools is driven e.g. by infrastruc- ture projects and industrial construction.
11
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6
Market trends
Demand for consumer garden equipment is being stimulated by a growing interest in garden care.
The trend for forestry in the Western world has for many years showed increasing use of forestry machines instead of manual felling, which led to a considerable decline in the market for chainsaws until the early 1990s. This market has subsequently shown growth on the basis of increasing demand from new mar-
kets in Russia, Turkey and Latin America. In addition, consumer demand for high-performance professional chainsaws has been increasing steadily.
Particularly in the US, companies, municipalities and consum- ers are increasingly contracting out garden care to companies that specialize in this type of service. These contractors thus comprise a growing customer category for professional garden equipment.
Demand for garden products in the consumer market is beeing positively affected by increasing interest in garden care.
Particularly in the US, contractors that specialize in garden care have become a growing customer category.
In recent years demand for professional chainsaws has shown good growth in countries such as Russia and Turkey.
T H E M A R K E T
12
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6Environmental requirements
Stricter criteria for reducing emissions from petrol-powered garden equipment and chainsaws were introduced in the US in 1997 and 2002. The latest criteria are being phased in until 2010.
Similar criteria will be phased in in Europe in 2007–2012. Such criteria are also expected to be introduced in other countries, including Japan.
In 2005 the EU established producer responsibility for han- dling and recycling waste from electric and electronic products, and also prohibited the use of hazardous substances in such products.
For information on the Group’s environmental activities, see page 84.
Prices
Consumer products are subject to continuous downward pres- sure on prices, which means that prices are falling by 1–2% annu- ally. Husqvarna responds through continuous product develop- ment and improvement of cost-efficiency. Prices for professional products are largely unchanged year-on-year.
Competitors
Husqvarna’s major competitors are shown in the table below.
The largest of them, such as Stihl of Germany and the US compa- nies MTD and John Deere, compete with Husqvarna in several product areas. However, most competitors specialize in either wheeled or portable products, and in some cases only in electric products.
Major competitors
Company Country Major markets
Garden equipment
Forestry
Cutting equipment
& diamond tools Consumer Professional
GGP Italy Europe X
Hilti Liechtenstein Europe, US, Asia X
Jenn Feng Taiwan Asia, Europe X
John Deer US US, Europe X X
MTD US US X X
Saint Gobain France Europe, US X
Stihl Germany US, Europe X X X X
Toro US US X X
TTI China US X
Tyrolit Austria Europe, US, Asia X
Wheelabrator France Europe, Asia X
T H E M A R K E T
In order to optimize product performance and reduce environmental impact, Husqvarna has developed a range of two-stroke oils, and also supplies a veg- etable-based chain oil and environmental petrol.
The new professional blower from Husqvarna features a noise level of 64 dB, which is the low- est on the market and is below the criteria of the American National Standards Institute (ANSI).
13
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6
Consumer Products
Consumer Products are divided into two geographical areas, i.e. North America and Rest of the world. The American opera- tion accounts for approximately two-thirds of total sales in this business area.
Seasonal patterns
Operations in Consumer Products are subject to substantial seasonal variations, and the greater part of sales are during the first half of the year. Factors affecting demand include weather conditions and the length of the growing season.
The sales season for garden equipment is essentially over at the end of the third quarter. Inventory build-ups for the coming season begin in the fourth quarter, and the season peaks in the second quarter.
Key indicators
SEKm, unless otherwise stated 2006 2005
Net sales 18,335 18,360
Share of Group sales, % 62.4 63.8
Operating income 1,415 1,332
Operating margin , % 7.7 7.3
Net assets 6,034 5,719
Capital expenditure 524 859
Average number of employees 5,751 6,054
Product range
• Petrol-powered wheeled products such as lawn mowers, garden tractors and snow throwers.
• Petrol-powered portable products such as chainsaws and trim- mers.
• Electric products such as lawn mowers, the automatic lawn- mower Automower, hedge trimmers and leaf blowers.
Garden equipment is exposed to severe competition and price pressure. High cost-efficiency in operations is a prerequisite for profitability. Other vital factors include strong brands cre- ated by successful product development, high quality, and sus- tained marketing, which normally generate higher profit margins.
Husqvarna, Jonsered and Flymo are such brands.
Market position
• World’s largest producer of lawn mowers and portable petrol- powered garden equipment such as trimmers and leaf blowers.
• One of the world’s largest producers of garden tractors.
The Group’s share of the global market is estimated at 20–40%
for the major product categories.
Brands Major plants
Major competitors
North America Husqvarna Poulan Weed Eater
US John Deere
MTD Stihl Toro Rest of the world Husqvarna
Jonsered Flymo Partner McCulloch
Sweden UK
Bosch GGP Stihl
Group operations
Operations in Husqvarna comprise two business areas – Consumer Products and Professional Products.
O PE R AT I O N S
Consumer products include both portable and wheeled products, such as chainsaws, trimmers, hedge cutters, lawn mowers and garden tractors.
14
H U S Q VA R N A A N N U A L R E P O R T 2 0 0 6Professional Products
The Professional Products business area comprises three areas, i.e. Forestry, Commercial Lawn and garden, and Construction.
Seasonal patterns
The three areas show different seasonal patterns. Most sales of equipment for commercial lawn and garden care are during the first half of the year, while chainsaws are sold mainly during the second half. Sales of cutting equipment and diamond tools for the construction industry are spread more evenly over the year.
Key indicators
SEKm, unless otherwise stated 2006 2005
Net sales 11,067 10,408
Share of Group sales, % 37.5 36.2
Operating income 1,875 1,739
Operating margin , % 16.9 16.7
Net assets 4,714 4,626
Capital expenditure 366 400
Average number of employees 5,661 5,627
Product range
• High-performance chainsaws, clearing saws and accessories such as chains, blades, protective clothing and tools.
• Riders and walk-behind lawn mowers, zero-turn mowers, specialty turf-care equipments, trimmers, hedge trimmers, leaf blowers etc.
• Floor saws, tile and masonry saws, wall and wire saws, drill motors and stands, power cutters and diamond tools, and dia- mond tools for the stone industry.
Market position
• Husqvarna and Jonsered are two of the three leading brands for professional chainsaws in the global market, with a combined market share of approximately 40%.
• The Group is also the world leader in diamond tools and cutting equipment for the construction and stone industries.
Brands Major plants
Major competitors
Forestry Husqvarna Jonsered
Sweden Stihl
Commercial Lawn and garden
Husqvarna Jonsered Bluebird Yazoo/Kees
Sweden US
John Deere Stihl Toro
Construction Husqvarna Diamant Boart
Sweden US China
Hilti
Saint Gobain Tyrolit
Wheelabrator O PE R AT I O N S
Professional products include high-performance chainsaws, clearing saws, lawn mowers, ZTH mowers, specialty turf-care equipment, and trimmers.
This business area also includes cutting equipment and diamond tools.
15
HUSQVARNA ANNUAL REPOR T 2006
Financial information
Operations in Husqvarna previously comprised the Outdoor Product segment within the Electrolux Group and were spun-off as an independent group following a decision by the Electrolux Annual General Meeting in April 2006.
The Husqvarna Group was established and capitalized as of 31 May 2006, and listed on the Stockholm Stock Exchange on 13 June 2006.
Husqvarna publishes pro forma financial information and com- bined financial statements.
Pro forma financial information
The pro forma financial information is prepared in order to describe the Group on a stand-alone basis, and is based on the assumption that the Group was established and capitalized as of 1 January 2005 for the pro forma income statement, and 31 December 2005 for the pro forma balance sheet.
The pro forma financial information on pages 16–22 has not been audited. However, the auditors have performed certain procedures on the pro forma financial information, which are reported on page 23.
Combined Financial Statements
Operations were transferred to Husqvarna AB at book values reported by Electrolux according to the predecessor basis. The combined financial statements represent the financial position, results of operations and cash flows of Husqvarna AB and its subsidiaries and other legal entities, which were included in the former Outdoor Product segment within Electrolux.
The report by the Board of Directors is based on the combined financial statements.
As the establishment of the Group was finalized by 31 May 2006, the income statement, balance sheet, equity statement and cash flow statement as of 1 June 2006 and onward represent the consolidated values for the Group.
For more information, see “Accounting and valuation prin- ciples” in Note 1 on page 40. The difference between the pro forma information and the combined financial statements are described in Note 29 on page 67.
FINANCIAL INFORMATION
16
HUSQVARNA ANNUAL REPOR T 2006Pro forma financial information
(unaudited)
• Net sales for 2006 rose by 2% to SEK 29,402m (28,768)
• Sales were negatively impacted by lower demand for garden products
• Operating income rose by 7% to SEK 3,121m (2,927), operating margin improved to 10.6% (10.2)
• Sales for Consumer Products were unchanged from 2005 despite lower demand, operating income and margin improved
• Sales for Professional Products increased, income and margin improved
• Income for the period rose to SEK 1,862m (1,641), corresponding to SEK 6.29 (5.54) per share
• The Board of Directors proposes a dividend payment of SEK 2.25 per share, and a bonus issue to increase the number of A-shares
PRO FORMA
Key data
Change in comparable
SEKm, unless otherwise stated 2006 Change, % currencies, %1) 2005
Net sales 29,402 2 2 28,768
Operating income 3,121 7 7 2,927
Operating margin, % 10.6 – – 10.2
Income after financial items 2,692 10 – 2,448
Margin, % 9.2 – – 8.5
Income for the period 1,862 13 – 1,641
Earnings per share, SEK
2)6.29 13 – 5.54
Return on capital employed 23.8 – – 24.1
Return on equity, % 32.5 – – 40.1
Net debt/equity ratio 0.68 – – 1.11
Capital expenditure 890 – – 1,259
Average number of employees 11,412 – – 11,681
1) Including both transaction and translation effects.
2) Before dilution. To enable comparison, figures for both 2006 and 2005 are based on the number of shares as of 31 December 2006, i.e. 296,259,153.
For definitions, see Note 30 on page 69.
17
HUSQVARNA ANNUAL REPOR T 2006
Net sales and income – pro forma
Net sales
Net sales in 2006 rose by 2% to SEK 29,402m as against SEK 28,768m in the previous year. After adjustment for exchange rate fluctuations, net sales also rose by 2%.
The low growth in sales as compared with the previous year is mainly explained by lower demand and a decline in sales of consumer garden products. Also, sales of chainsaws were par- ticularly strong in 2005 due to hurricanes in the US and effects of storms in Scandinavia.
In terms of business areas, net sales for Consumer Products were largely unchanged from the previous year and amounted to SEK 18,335m (18,360). Net sales for Professional Products rose by 6% SEK 11,067m (10,408).
Operating income
Operating income in 2006 rose by 7% to SEK 3,121m (2,927m) and operating margin improved to 10.6% (10.2). After adjustment for exchange rate fluctuations, operating income rose by 7%.
The improvement in operating income refers mainly to Profes- sional Products, where Forestry, as well as Commercial Lawn and garden and Construction, reported higher operating income.
Consumer Products also showed an improvement, mainly as a result of an improved mix in terms of both products and geo- graphical markets, and greater cost efficiency.
Operating income for Consumer Products improved by 6%
to SEK 1,415m (1,332), corresponding to a margin of 7.7% (7.3).
Operating income for Professional Products rose by 8% to SEK 1,875m (1,739), corresponding to a margin of 16.9% (16.7).
Effects of changes in exchange rates
Changes in exchange rates in comparison with the previous year, including both transaction and translation effects, had a total negative impact on operating income of approximately SEK -2m.
Transaction effects, net of hedging contracts, had a negative impact of approximately SEK -25m, and referred mainly to the strengthening of the Swedish krona against the euro. Translation of income statements in subsidiaries had a positive impact of approximately SEK 23m, and is mainly explained by the weaker Swedish krona against the US dollar in the first half of the year.
Net sales by business area
Change in comparable Change, currencies,
SEKm 2006 % %1) 2005
Consumer Products 18,335 0 -1 18,360
Professional Products 11,067 6 7 10,408
Total 29,402 2 2 28,768
1) Including both transaction and translation effects.
Operating income by business area
Change in comparable Change, currencies,
SEKm 2006 % %1) 2005
Consumer Products 1,415 6 2 1,332
Margin, % 7.7 – – 7.3
Professional Products 1,875 8 12 1,739
Margin, % 16.9 – – 16.7
Total business areas 3,290 7 7 3,071
Margin, % 11.2 – – 10.7
Group common
costs etc. -169 – – -144
Total 3,121 7 7 2,927
Margin, % 10.6 – – 10.2
1) Including both transaction and translation effects.
Financial net
Net financial items for the year amounted to SEK -429m (-479).
The financial net was negatively impacted by higher interest rates, which was more than compensated by reduced net bor- rowings.
Income after financial items
Income after financial items increased by 10% to SEK 2,692m (2,448), corresponding to a margin of 9.2% (8.5).
Taxes
Total taxes amounted to SEK -830m (-807), corresponding to 30.8% (33.0) of income after financial items.
Earnings per share
Income for the period rose by 13% to SEK 1,862m (1,641), cor- responding to SEK 6.29 (5.54) per share before dilution.
Seasonality in sales and income
Husqvarna´s sales and income are subject to marked seasonal variations, with significantly higher demand and sales during the first half of the year, with the second quarter normally the stron- gest. This refers particularly to Consumer Products but also for Commercial Lawn and garden within Professional Products.
In contrast, chainsaws are subject to stronger demand and show higher sales during the second half of the year. Equipment PRO FORMA
N Consumer Products N Professional Products
1) For 2004, according to Electrolux segment reporting.
041) 05 06
Net sales by business area
SEKm 17,579
9,623 10,408 11,067 18,360 18,335
N Consumer Products N Professional Products
1) For 2004, according to Electrolux segment reporting.
041) 05 06
Operating income by business area
SEKm
1,6071,521
1,739 1,875 1,332 1,415
18
HUSQVARNA ANNUAL REPOR T 2006for the construction industry normally shows a more even distri- bution throughout the year.
Sensitivity analysis
Husqvarna´s sales and earnings are impacted by numerous fac- tors. The presentation below shows the effects on operating income from changes in selected key factors. The estimated effects should be viewed as income effects that could occur with an isolated change in each variable.
• A change in total sales volume of 5 percentage points would impact operating income by approximately SEK 300m.
• A decline of 10 percentage points in the rate for SEK against USD would impact operating income negatively in the amount of approximately SEK 75m, i.e. SEK 165m in negative transac- tion effects and SEK 90m in positive translation effects.
• A decline of 10 percentage points in the rate for SEK against EUR would impact operating income positively in the amount of approximately SEK 270m, i.e. SEK 240m in transaction effects and SEK 30m in translation effects.
• An individual decline of 10 percentage points in the rate for SEK against all other currencies, including USD and EUR, would have a positive impact on operating income in the amount of approximately SEK 560m, i.e. SEK 385m in transaction effects and SEK 175m in translation effects.
• A change in the borrowing rate of 1 percentage point would impact net income by approximately SEK 55m.
Value created
Value created is a performance indicator for measuring and evaluating financial performance, and is the basis for variable remuneration to senior managers in the Group. The model links operating income and asset efficiency with the cost of capital employed in operations. Value created is measured by business area, sector, product line and regions.
Total value created in 2006 amounted to SEK 1,894m (1,815). The WACC rate for 2006 was computed at 10% (10). For information on value created as a basis for remunerations, see Notes 21 and 26.
Operating cash flow – pro forma
Operating cash flow for 2006 amounted to SEK 535m (949). The decline refers mainly to lower trade payables, while lower inven- tories had a positive impact. Trade payables were at an unusually high level in 2005 and were normalized during the year.
Operating cash flow shows a strong seasonal pattern. It is normally negative during the first quarter and part of the second quarter, as a result of the build up of inventories and trade receiv- ables ahead of the lawn and garden season.
Operating cash flow – pro forma
SEKm 2006 2005
Cash flow from operations, excluding
changes in operating assets and liabilities 2,626 2,468 Changes in operating assets and liabilities -1,194 -177
Cash flow from operations 1,432 2,291
Cash flow from investments -897 -1,342
Operating cash flow 535 949
Acquisitions of operations -558 –
Total cash flow from operations
and investments -23 949
Capital expenditure
Capital expenditure in 2006 amounted to SEK 890m (1,259), cor- responding to 3% (4) of net sales. The decline from the previous year is due to the fact that capital expenditure in 2005 was at a high level following the completion of a new platform for garden tractors within Consumer Products.
PRO FORMA
N2005 N2006
Q1 Q2 Q3 Q4
Net sales by quarter
SEKm
7,880
9,338 9,73010,133
6,158 5,3925,000
4,539
N2005 N2006
Q1 Q2 Q3 Q4
Operating income by quarter
SEKm
814 929
1,162 1,275
624 571 327 346
Net sales and expenses, by currency
Average Average Closing Closing
Share of net sales, % Share of expenses, % exchange rate 2006 exchange rate 2005 exchange rate 2006 exchange rate 2005
SEK 3 13 – – – –
USD 49 57 7.38 7.33 6.87 7.95
EUR 27 20 9.26 9.12 9.05 9.40
GBP 4 3 13.58 13.54 13.49 13.69
Other 17 7 – – – –
Total 100 100
19
HUSQVARNA ANNUAL REPOR T 2006
Financial Position – pro forma
Operating working capital
Operating working capital at year-end increased to SEK 6,062m (5,367).
Inventories amounted to SEK 5,165m (6,264), trade receiv- ables to SEK 3,106m (3,325) and trade payables to SEK 2,209m (4,222).
Total capital employed
Total capital employed at year-end increased to SEK 11,354m (11,121). The return on capital employed decreased to 23.8%
(24.1).
Equity
The Group’s equity as of 31 December 2006, excluding minority interest, amounted to SEK 6,252m (4.755), corresponding to SEK 21.10 (16.05) per share.
The net debt/equity ratio was 0.68 (1.11) and the equity/assets ratio rose to 38.3% (26.1).
Net borrowings
The Group´s net borrowings as of 31 December 2006 decreased to SEK 4,250m (5,262). Net borrowings were reduced by SEK 2,522m in the second half of the year.
Net borrowings
SEKm 2006 2005
Interest-bearing liabilities 5,090 6,366
Liquid funds 840 1,104
Net borrowings 4,250 5,262
Net debt/equity 0.68 1.11
Equity/assets ratio, % 38.3 26.1
Liquid funds
Liquid funds at year-end amounted to SEK 840m (1,104). See note 30 for definition.
The unused portion of the Group´s committed revolving credit facility of SEK 8,000m was SEK 6,350m.
Performance by business area
Consumer Products
• Lower demand for garden products, particularly in the US
• Sales in the US declined, but operating income improved due to a better mix in garden products and greater cost-efficiency
• Sales in Europe showed good growth, operating income and margin improved
Consumer Products
Change in
comparable
Change, currencies,
SEKm 2006 % %1) 2005
Net sales 18,335 0 -1 18,360
Operating income 1,415 6 2 1,332
2)Operating margin, % 7.7 – – 7.3
1) Including both transaction and translation effects.
2) Operating income in 2005 includes a provision of SEK 40m for closure of a plant in Italy.
Industry shipments of garden products in the US in 2006 are estimated to have declined by 6–8% from the previous year. Sales for the Group’s North American operation, which accounts for about two thirds of this business area, were somewhat lower than in 2005. Sales showed good growth in the first half of the year, but declined significantly in particularly the third quarter, follow- ing substantial inventory reductions by retailers in comparison with the previous year. Overall, the Group is estimated to have increased its market shares somewhat for garden products in the US. Operating income for the North American operation increased slightly for the full year. Operating margin improved, mainly as a result of a more favorable product mix within garden products and greater cost-efficiency. Operating income was adversely affected by costs for a recall of garden tractors. In 2005, both sales and income were positively impacted by strong demand for chainsaws following hurricanes in the US.
Demand in Europe was negatively impacted by unfavorable weather during the garden season, particularly in the UK. Sales for the Group’s European operation showed good growth, how- ever, mainly referring to chainsaws and other handheld prod- ucts in particularly Russia and Eastern Europe as well as garden products in Scandinavia. Sales of Husqvarna branded products showed a continued positive trend. Operating income and mar- gin improved, on the basis of a more favorable product mix, posi- tive effects from previous restructuring and favorable impact of exchange rates on products imported from the US operation.
Overall, sales for the Consumer Products business area were largely unchanged from the previous year. Operating income and margin improved.
PRO FORMA
20
HUSQVARNA ANNUAL REPOR T 2006Professional Products
• Demand largely unchanged from the previous year
• Continued strong performance for chainsaws
• Improved operating income for both Commercial Lawn and garden and Construction
Professional Products
Change in
comparable
Change, currencies,
SEKm 2006 % %1) 2005
Net sales 11,067 6 7 10,408
Operating income 1,875 8 12 1,739
2)Operating margin, % 16.9 – – 16.7
1) Including both transaction and translation effects.
2) Operating income in 2005 includes a provision of SEK 46m for closure of a plant in France within Construction.
Demand for professional chainsaws is estimated to have increased slightly from the previous year. Group sales were somewhat higher overall, as lower sales in the US and Scandinavia were compensated by higher volumes in other markets such as Cen- tral Europe, Russia and Latin America. Operating income rose slightly, despite a less favorable mix and negative impact from changes in exchange rates. In 2005, both sales and income were positively impacted by hurricanes in the US and effects of previ- ous storms in Scandinavia.
Sales for Commercial Lawn and garden rose substantially from the previous year. The increase is traceable mainly to a strong trend in sales for the Group’s riders in Europe and the acquisition of Dixon Industries in the US, which was consolidated as of August 2006. Operating income improved from the previous year.
Demand for diamond tools and cutting equipment for the con- struction industry is estimated to have been largely unchanged in the US, and shown some growth in Europe. Group sales increased slightly from the previous year. Operating income and margin improved significantly, mainly as a result of lower restructuring costs than in 2005. Operating income was adversely affected by costs for the consolidation of brands and change to Husqvarna as the global brand for all products sold to the construction industry.
Total sales for the Professional Products business area rose from the previous year. Operating income and margin improved, despite a negative impact of changes in exchange rates.
Consolidated income statement
Pro forma, unaudited
SEKm 2006 2005
Net sales 29,402 28,768
Cost of goods sold -21,477 -21,109
Gross operating income 7,925 7,659
Selling expense -3,727 -3,695
Administrative expense -1,086 -1,037
Other operating income/expenses 9 0
Operating income* 3,121 2,927
Financial items, net -429 -479
Income after financial items 2,692 2,448
Taxes -830 -807
Income for the period 1,862 1,641
Income for the period attributable to:
Equityholders of the Parent company 1,862 1,641 Minority interests in income for the period 0 0
1,862 1,641
Earnings per share
Before dilution, SEK 6.29 5.54
After dilution, SEK 6.29 5.54
Average number of shares, million 296.3 296.3
* Group common costs for the full year 2005 were initially estimated at SEK -200m.
In order to enable year-on-year comparison, these costs pro forma have been assumed to equal the outcome for 2006, excluding an insurance provision of SEK 25m relating to the Group´s captive insurance companies.
PRO FORMA
21
HUSQVARNA ANNUAL REPOR T 2006
Consolidated balance sheet
Pro forma
31 Dec 31 Dec
SEKm 20061) 20052)
Assets
Non-current assets
Property, plant and equipment 3,575 3,846
Goodwill 1,780 1,728
Other intangible assets 511 454
Investments in associates 6 9
Deferred tax assets 628 756
Financial assets 246 166
Total non-current assets 6,746 6,959
Current assets
Inventories 5,165 6,264
Trade receivables 3,106 3,325
Derivatives 142 104
Tax receivables 112 32
Other current assets 386 564
Short-term investments 0 271
Cash and cash equivalents 698 729
Total current assets 9,609 11,289
Total assets 16,355 18,248
Equity and liabilities Equity attributable to equity
holders of the Parent company 6,252 4,755
Minority interests 12 –
Total equity 6,264 4,755
Non-current liabilities
Long-term borrowings 4,683 6,220
Deferred tax liabilities 567 504
Provisions for pensions and other
post-employment benefits 363 373
Other provisions 477 468
Total non-current liabilities 6,090 7,565
Current liabilities
Trade payables 2,209 4,222
Tax liabilities 233 103
Other liabilities 1,096 1,329
Short-term borrowings 303 0
Derivatives 104 146
Other provisions 56 128
Total current liabilities 4,001 5,928 Total equity and liabilities 16,355 18,248
1) Actual and audited.
2) Unaudited.
Consolidated cash flow statement
Pro forma, unaudited
SEKm 2006 2005
Operations
Income after financial items 2,692 2,448
Depreciation and amortization 836 827
Change in accrued and prepaid interest 1 0
Taxes paid -903 -807
Cash flow from operations, excluding
changes in operating assets and liabilities 2,626 2,468
Changes in operating assets and liabilities
Change in inventories 716 -19
Change in trade receivables 2 -132
Change in other current assets 141 15
Change in trade payables -1,787 324
Change in operating liabilities and provisions -266 -365 Cash flow from operating
assets and liabilities -1,194 -177
Cash flow from operations 1,432 2,291
Investments
Acquisitions of operations -558 –
Capital expenditure in property,
plant and equipment -735 -1,111
Capitalization of product
development and software -155 -148
Other -7 -83
Cash flow from investments -1,455 -1,342
Total cash flow from operations
and investments -23 949
Financing
Change in short-term investments 233 –
Change in interest-bearing liabilities -224 -949
Cash flow from financing 9 -949
Total cash flow -14 0
Cash and cash equivalents
at beginning of year 729 729
Exchange-rate differences -17 0
Cash and cash equivalents at year-end 698 729
PRO FORMA
22
HUSQVARNA ANNUAL REPOR T 2006Net sales and income by quarter
Pro forma, unaudited
SEKm Q1 Q2 Q3 Q4 Full year
Net sales 2006 9,338 10,133 5,392 4,539 29,402
2005 7,880 9,730 6,158 5,000 28,768
Operating income 2006 929 1,275 571 346 3,121
Margin, % 9.9 12.6 10.6 7.6 10.6
2005 814 1,162 624 327 2,927
Margin, % 10.3 11.9 10.1 6.5 10.2
Income after financial items 2006 792 1,154 467 279 2,692
Margin, % 8.5 11.4 8.7 6.1 9.2
2005 676 1,020 516 236 2,448
Margin, % 8.6 10.5 8.4 4.7 8.5
Income for the period 2006 546 797 322 197 1,862
2005 453 683 346 159 1,641
Earnings per share, SEK 2006 1.84 2.69 1.09 0.66 6.29
2005 1.53 2.31 1.17 0.54 5.54
Net sales by business area per quarter
Consumer Products 2006 6,540 6,993 2,774 2,028 18,335
2005 5,417 6,841 3,583 2,519 18,360
Professional Products 2006 2,798 3,140 2,618 2,511 11,067
2005 2,463 2,889 2,575 2,481 10,408
Total 2006 9,338 10,133 5,392 4,539 29,402
2005 7,880 9,730 6,158 5,000 28,768
Operating income by business area per quarter
Consumer Products 2006 503 734 164 14 1,415
Margin, % 7.7 10.5 5.9 0.7 7.7
2005 421 687 190 34 1,332
Margin, % 7.8 10.0 5.3 1.3 7.3
Professional Products 2006 455 576 447 397 1,875
Margin, % 16.3 18.3 17.1 15.8 16.9
2005 422 510 474 333 1,739
Margin, % 17.1 17.7 18.4 13.4 16.7
Group common costs etc.* 2006 -29 -35 -40 -65 -169
2005 -29 -35 -40 -40 -144
Total 2006 929 1,275 571 346 3,121
Margin, % 9.9 12.6 10.6 7.6 10.6
2005 814 1,162 624 327 2,927
Margin, % 10.3 11.9 10.1 6.5 10.2
* In order to enable year-on-year comparison, Group common costs for 2005 have been adjusted to equal actual costs for the first, second, third and fourth quarters of 2006 excluding an insurance provision of approximately SEK 25m taken in the fourth quarter of 2006.
PRO FORMA
23
HUSQVARNA ANNUAL REPOR T 2006
Auditor’s Report on
Pro Forma Financial Information
To the shareholders in Husqvarna AB (publ) Corporate Identity Number 556000-5331
We have examined the pro forma financial information set out on pages 16–22 in the printed version of Husqvarna AB’s annual report for 2006.
The pro forma financial information has been prepared for illustrative purposes only to provide information about how the income statements and balance sheets for the Husqvarna Group would have been presented for the financial years 2005 and 2006, if the formation of the Husqvarna Group had taken place as per 1 January 2005.
The Board of Directors’ and the Managing Director’s responsibility
It is the Board of Directors’ and Managing Director’s responsibil- ity to prepare the pro forma financial information.
The auditor’s responsibility
Our responsibility is to provide an opinion based on our audit.
We provide no other opinion on the pro forma financial informa- tion or any of its constituent elements. We accept no responsibil- ity for any financial information used in the compilation of the pro forma financial information beyond that owed to those to whom any reports on that financial information were addressed by us at the date(s) of issue.
Work performed
We performed our work in accordance with generally accepted auditing standards in Sweden. Our work, which did not include an independent examination of the underlying financial informa- tion, consisted primarily of comparing the unadjusted financial information with source documentation, assessing the evidence supporting the pro forma adjustments and discussing the pro forma financial information with the management of the company.
Our work did not include an independent examination of any of the underlying financial information.
We planned and performed our work so as to obtain the infor- mation and explanations we considered necessary in order to obtain reasonable assurance that the pro forma financial informa- tion has been compiled on the basis stated on pages 67–69.
As the pro forma financial information addresses a hypotheti- cal situation and, therefore, does not represent the company’s actual financial results or position, we can express no opinion as to whether the actual results and position reported would have corresponded to those shown in the pro forma financial informa- tion. The differences may prove to be material.
Opinion
In our opinion, the pro forma financial information has been prop- erly compiled on the basis stated on pages 67–69 and in accor- dance with the accounting principles applied by the company.
Stockholm 28 February 2007
PricewaterhouseCoopers AB
Anders Lundin Christine Rankin Johansson
Authorized Public Accountant Authorized Public Accountant Auditor in Charge
