SKF Half-year report 2005
SKF reports an increase in sales of 11.4% for the second quarter 2005, measured in local currencies and compared to last year. Profit before taxes increased by 26%. The operating margin was 10,9% for the second quarter.
· The SKF Group reports a profit before taxes for the second quarter 2005 of MSEK 1319 (1049). The profit for the first half of 2005 was MSEK 2443 (1864).
· Net profit for the second quarter amounted to MSEK 905 (733). Net profit for the first half-year was MSEK 1684 (1402).
· Earnings per share for the second quarter were SEK 1.95 (1.49), and for the first half-year, SEK 3.60 (2.80).
· Net sales for the second quarter amounted to MSEK 12 739 (11417), and for the first half-year to MSEK 24610 (22106).
The operating profit for the second quarter 2005 was MSEK 1383 (1159). The operating profit for the first half-year was MSEK 2571 (2062). The profit for the second quarter was affected by one-time items; a charge of MSEK 190 for the closure of two factories in the USA, a gain of MSEK 50 related to the disposal of the shares in the previous subsidiary FlexLink and a gain of MSEK 50 related to the Ovako transaction. The operating margin for the second quarter amounted to 10.9% (10.2), and for the first half-year to 10.4% (9.3).
The increase of 11.6% in net sales for the quarter, in SEK, was attributable to:
volume 7.6%, structure 0.2%, price/mix 3.6% and currency effect 0.2%.
For the first half-year, the increase of 11.3%, in SEK, was attributable to:
volume 8.0%, structure 1.2%, price/mix 3.6% and currency effect -1.5%.
Sales development
Sales for the SKF Group in the second quarter, calculated in local currencies and compared to the same quarter last year, were higher in Europe, significantly higher in North America, Latin America and Asia.
The manufacturing level for the second quarter 2005 was unchanged compared to the first quarter, but higher than for the second quarter last year.
Outlook for the third quarter 2005
The market demand for SKF’s products and services in the third quarter, compared to the previous quarter, is expected to remain on a high level in Europe, to be slightly higher in North America, higher in Latin America and significantly higher in Asia. However, the third quarter is seasonally lower than the second quarter.
The manufacturing level will be unchanged during the third quarter, compared to the second quarter, while lower in absolute terms due to normal seasonality.
Raw materials
The prices of raw materials in the second quarter were significantly higher than in the second quarter last year. Actions to offset the high raw material prices are ongoing and SKF expects to be able to offset these for the full year.
Financial
The Group’s financial net for the first half-year 2005 was MSEK -128 (-198).
Additions to property, plant and equipment for the first half-year totalled MSEK 670 (601). At the end of June 2005, the Group’s inventories were 20.6% (21.0) of annual sales. The return on capital employed for the 12-month period ended June 30 was 21.6% (14.5). Return on equity was 19.0% (14.5). On June 30, SKF’s equity/assets ratio was 41.8% (47.0). The gearing was 36.0% (27.7). Both ratios were affected by the redemption programme. The registered number of employees at the end of June was 37610 (38574).
Cash flow, after investments before financing, for the second quarter was MSEK 262 (559), and for the first half-year MSEK 406 (1094). Cash flow, after investments before financing and also before the acquisition of Jaeger Industrial Ltd. and the purchase of minority shareholding in previously acquired companies, was in the second quarter MSEK 718.
Exchange rates for the second quarter 2005, including the effects of translation and transaction flows, had a negative effect on SKF’s operating profit amounting to approximately MSEK 75, compared to the second quarter 2004. The total negative effect on the first half-year result amounted to MSEK 200 (220). Based on current assumptions and exchange rates, no significant effect is expected for the third quarter and a slightly positive effect is expected for the fourth quarter.
Major events during the quarter
· AB SKF, Rautaruukki Corporation and Wärtsilä Corporation completed the merger of their long steel businesses to form a new, jointly-controlled company. The new company is named Oy Ovako Ab and started operating on May 10th.
· The 2005 Annual General Meeting's resolution on a share split 5:1 with the mandatory redemption of one share was implemented during the quarter. SKF's shareholders received thereby SEK 2.8 bn. Together with the dividend paid during the quarter, the total distribution to shareholders was thus SEK 4.2 bn.
· The acquisition of Jaeger Industrial Ltd., a leading manufacturer of electromechanical actuators, electronic control units and complete actuation systems, was finalized. It is headquartered in Taipei, Taiwan and has manufacturing facilities in Taiwan and in China. The purchase price including acquisition related costs was MSEK 409, slightly above annual sales. The reporting of Jaeger Industrial Ltd. will start in the third quarter.
· SKF decided to close its bearing plant in Aiken, South Carolina, and its seals plant in Springfield, South Dakota, in the USA. The production will be moved mainly to Mexico.
· SKF issued a 350 million euro dual-tranche bond.
Divisions
Comments on net sales per geographical region are based on local currencies and compared to the corresponding period for 2004. The operating margin has been calculated on sales including intra-Group sales.
Industrial Division
The operating profit for the second quarter 2005 amounted to MSEK 504 (435), resulting in an operating margin of 10.2% (10.4) on sales incl. intra-Group sales. The operating profit for the first half-year amounted to MSEK 952 (816), resulting in an operating margin of 10.1% (10.1).
Net sales for the second quarter amounted to MSEK 3327 (2705), an increase of 23.0%. Net sales for the first half-year amounted to MSEK 6381 (5255), an increase of 21.4%. Sales incl. intra-Group sales for the second quarter were MSEK 4960 (4176), and for the first half-year were MSEK 9456 (8115). The figures includes Willy Vogel AG.
Sales for the second quarter were higher in Europe, North America and Asia. Sales within the segments wind energy, industrial transmission and metals industry showed good growth due to focused efforts to offer higher value added solutions to the customers.
With the acquisition of Jaeger Industrial Ltd. during the quarter, SKF is now one of the largest manufacturers of electric actuators and actuation systems in the world. Actuation systems are used within a wide range of products and applications. Primary areas of operation are in medical technology, health care and factory automation.
SKF was awarded a contract from Alstom, comprising 2 000 axleboxes equipped with tapered roller bearing units and 500 slewing bearings equipped with lubrication systems. This equipment is intended for the new Alstom METROPOLIS metro vehicles for Barcelona, Spain.
Service Division
The operating profit for the second quarter 2005 amounted to MSEK 511 (427), resulting in an operating margin of 11.6% (11.0). The operating profit for the first half-year amounted to MSEK 907 (763), resulting in an operating margin of 11.1% (10.3).
Net sales for the second quarter amounted to MSEK 4021 (3511), an increase of 14.5%. Net sales for the first half-year amounted to MSEK 7439 (6711), an increase of 10.8%. Sales incl. intra-Group sales for the second quarter were MSEK 4423 (3876), and for the first half-year, MSEK 8189 (7418).
Sales in Europe were unchanged but were higher in North America and significantly higher in both Asia and Latin America.
During the quarter, SKF signed a five year Integrated Maintenance Solutions (IMS) contract with Coca Cola for their Jundiai, Brazil plant. It is Coca Cola's second largest bottling plant in the world producing 1.1 billion litres per year. The performance-based contract covers bearings, condition monitoring, maintenance products, training, predictive maintenance, lubrication services and reliability and application engineering.
The number of SKF Certified Maintenance Partners continued to grow as SKF expands its plant predictive maintenance services in the data collection area.
During the quarter, SKF Spindle Service inaugurated a new service centre located in SKFs factory in Nilai, Malaysia. The new centre will offer professional reconditioning services to the Malaysian and surrounding markets. In total, SKF now has spindle service operations in 13 places around the world.
Automotive Division
The operating profit for the second quarter was MSEK 30 (209), resulting in an operating margin of 0.7% (5.1). The operating profit for the first half-year amounted to MSEK 184 (374), resulting in an operating margin of 2.1% (4.7). The one-time restructuring charge of MSEK 190 had an impact on the result for the second quarter.
The operating profit for the second quarter, excluding the restructuring charge, was MSEK 220 (209), corresponding to an operating margin of 4.8% (5.1) and for the first half-year MSEK 374 (374), corresponding to an operating margin of 4.3% (4.7).
Net sales for the second quarter amounted to MSEK 4047 (3710), an increase of 9.1%. Net sales for the first half-year amounted to MSEK 7678 (7196), an increase of 6.7%. Sales incl. intra-Group sales for the second quarter were MSEK 4568 (4117), and for the first half-year MSEK 8630 (8006).
In the second quarter, sales to the car and light truck industry in Europe were significantly higher but significantly lower in North America. Sales to the heavy truck industry in Europe and North America were significantly higher. Sales to the vehicle service market were significantly higher in all regions.
In Europe SKF was awarded an order to supply the rear wheel bearings for the Smart W451, the successor of the current Smart fortwo vehicle. The bearing is a compact HBU3 enabling increased wheel stiffness and lower weight. Production will start in 2007.
During the quarter, SKF and Haldex announced a programme to jointly develop an advanced wheel end system for trucks, buses and trailers. The system will be based on dual disc brakes integrated with truck hub units including seals. The integration creates a much more compact and efficient product.
The restructuring charge refers to the closure of the bearing plant in Aiken and the seals plant in Springfield. These two factories manufacture products for the North American automotive industry and some 460 employees will be affected.The bearing production will be transferred to SKF's plant in Puebla, Mexico and the seals manufacturing to the plants in Elgin, Illinois, USA and Guadalajara, Mexico. The total restructuring cost for the programme is estimated to SEK 280 millions, of which SEK 190 million is taken in the second quarter 2005. The remaining MSEK 90 will occur gradually during the phasing out process, which is expected to take place over a 18-month period. In addition, there will be investments in the factories receiving production, amounting to some MSEK 40. The amount affecting cash flow of the total restructuring cost is approximately MSEK 100.
Electrical Division
The operating profit for the second quarter 2005 amounted to MSEK 122 (68), resulting in an operating margin of 6.4% (3.9). The operating profit for the first half-year amounted to MSEK 194 (123), resulting in an operating margin of 5.3% (3,6).
Net sales for the second quarter amounted to MSEK 540 (501), an increase of 7.8%. Net sales for the first half-year amounted to MSEK 1079 (992), an increase of 8.8%. Sales incl. intra-Group sales for the second quarter were MSEK 1902 (1744), and for the first half-year, MSEK 3681 (3412).
Sales in the second quarter in Europe were significantly lower. Sales in Asia were significantly higher.
SKF received during the quarter an order from Bajaj Auto India for its newly launched faremeter for three-wheelers, incorporating bearing, seals and mechatronics. This will be used in taxis in India.
Aero and Steel Division
The operating profit for the second quarter amounted to MSEK 190 (38), resulting in an operating margin of 14.5% (2.3). This includes MSEK 133 from the steel business of which MSEK 50 is related to the gain of the Ovako transaction.
The operating profit for the first half-year amounted to MSEK 335 (67), resulting in a operating margin of 10.4% (2.0)
Including net sales for Ovako Steel for one month in the second quarter, net sales were MSEK 783 (975). Net sales for the first half-year were MSEK 1996 (1926). Sales incl. intra-Group sales for the second quarter amounted to MSEK 1307 (1667), and for the first half-year, MSEK 3213 (3315).
Net sales, excluding Ovako Steel, for the second quarter were MSEK 566 (452), an increase of 25.2% and for the first half-year MSEK 1 071 (912), an increase of 17.4%. Sales incl. intra-Group sales for the second quarter, excluding Ovako Steel, were MSEK 964 (755). Sales incl. intra-Group sales for the first half-year were MSEK 1791 (1513).
Aerospace
Sales to the global aerospace industry were significantly higher in both Europe and North America.
Parent company
Profit before taxes for the first half of 2005 amounted to MSEK 1488 (439).
The Company had no net sales. Investments amounted to MSEK 0 (0). As of June 30,
short-term financial assets amounted to MSEK 9 (3). As of January 1, they amounted to
MSEK 2. As of June 30, the average number of employees was 149 (134).
Previous outlook statement
First-quarter report 2005:
The market demand for SKF’s products and services in the second quarter is expected to remain on a high level in Europe and North America and to continue to be significantly higher in Asia and Latin America.
The manufacturing level will be maintained to ensure a good service level.
Presentation from SKF
A presentation will be published on SKF’s website at the following address:
investors.skf.com (choose Presentations).
Cautionary statement
This report contains forward-looking statements that are based on the current expectations of the management of SKF.
Although management believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Accordingly, results could differ materially from those implied in the forward-looking statements as a result of, among other factors, changes in economic, market and competitive conditions, changes in the regulatory environment and other government actions, fluctuations in exchange rates and other factors mentioned in SKF’s latest 20-F report on file with the SEC (United States Securities and Exchange Commission) under "Forward-Looking Statements" and "Risk Factors".