ASSA ABLOY
Annual Report 2003

Plain-text annual report

Annual Report 2003 i e c n e n e v n o c d n a y t e a s , y t i r u c e S f 2003 in brief In March 2003 Bo Dankis became the new President and CEO (cid:2) The Executive Team has been reduced from 17 people to seven (cid:2) The ASSA ABLOY Group has been organized into four major divisions: EMEA, Americas, Asia Pacific and Global Technologies (cid:2) A two-year action program ‘Leverage and Growth’ has been launched to leverage the Group’s strength and build a foundation for long-term growth. Restructuring costs related to the action program amount to SEK 1,320 M Sales amounted to SEK 24,080 M (25,397) and were affected by negative exchange-rate effects of SEK 2,660 M Income before tax but excluding restructuring costs amounted to SEK 1,903 M (2,015) (cid:2) Earnings per share excluding restructuring costs amounted to SEK 3.31 (3.53) (cid:2) Operating cash flow amounted to SEK 3,265 M (3,525) Contents Financials in brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 CEO’s statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Vision and business concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Cash flow analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Leverage and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Changes in shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Description of the market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Financial risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ASSA ABLOY products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Proposed disposition of earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Division EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Audit report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Division Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Comments on ‘Five years in summary’ . . . . . . . . . . . . . . . . . . . . 70 Division Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Five years in summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Division Global Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Quarterly information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Report of the Board of Directors for 2003 . . . . . . . . . . . . . . . . . . 40 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 The ASSA ABLOY share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Sales and earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Information for shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Income statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Results by division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Executive Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 (cid:2) (cid:2) (cid:2) ASSA ABLOY in brief The ASSA ABLOY Group is the world's leading manufac- turer and supplier of locking solutions, dedicated to satis- fying end-user needs for security, safety and convenience. With more than 100 companies operating in 40 countries, and a world market share of over 10 percent, ASSA ABLOY is the strongest global player in the industry. The Group operates in all major regions – both mature and developing markets – and enjoys market-leading positions in large parts of Europe and North America and in Australia. In the fast growing area of electromechanical locking solutions, ASSA ABLOY holds leading positions in Identification, Door Automatics and Hotel Security, for example. Since its formation in 1994, the Group has developed from a regional company with 4,700 employees to a global Group of companies with 29,000 employees in 2003 and sales of SEK 24 billion. As the world’s leading lock Group, ASSA ABLOY offers a product diversity, service offering and technological advantages that no other company can match. SALES share of Group total, % EBITA share of Group total, % SALES share of Group total, % EBITA share of Group total, % Americas EMEA 35 40 41 38 ASSA ABLOY’s division Americas consists of the companies on the North, Central and South American markets. The division is the Group’s second- largest, accounting for 35 percent of total sales. It operates 24 production units and 12 sales companies and has 10,100 employees. The main markets are the USA, Canada and Mexico. Some of the region’s leading Group companies are Sargent, Corbin Russwin and Curries. ASSA ABLOY’s division EMEA embraces all Group companies in Europe, the Middle East and Africa. The division is the largest in the Group, accounting for 41 percent of sales. EMEA has 35 production units, 30 sales companies and 12,500 employees. The main markets are France, Germany and the UK. The leading companies within the division are Assa, Abloy, Vachette and IKON. SALES share of Group total, % EBITA share of Group total, % 17 15 Global Technologies ASSA ABLOY’s division Global Technologies is the Group’s worldwide organization dedicated to high-technology prod- ucts and services that transcend national frontiers. Global Technologies accounts for 17 percent of sales and has 2,600 employees. The division comprises three sectors: – Identification Technology Group (ITG), consisting of highly recognized brands within the electronic access control industry, such as HID and Indala – Door Automatics, consisting of Besam, the world-leading supplier of automatic door solutions – ASSA ABLOY Hospitality, which includes two leading-brand companies serving the hotel and cruise ship sector: VingCard and Elsafe GROUP SALES AND EBITA SEK M 28,000 SEK M 4,000 21,000 14,000 7,000 0 3,000 2,000 1,000 0 95 96 97 98 99 00 01 02 03 Sales, SEK M EBITA, SEK M SALES share of Group total, % EBITA share of Group total, % 7 7 Asia Pacific ASSA ABLOY’s division Asia Pacific brings together the Group’s established compa- nies in Australia and New Zealand with manufacturing units in China and a chain of sales companies in South East Asia. Asia Pacific accounts for 7 percent of total sales and has 4 production units, 5 sales companies and some 3,500 employees. Among the largest companies in the region are Guli in China, Lockwood in Australia and Interlock in New Zealand. Financials in brief Sales, SEK M of which: Organic growth Acquired growth Foreign exchange differences, SEK M Operating income before goodwill amortization (EBITA), SEK M Operating margin before goodwill amortization (EBITA), % Income before tax, SEK M of which, foreign exchange differences, SEK M Operating cash flow, SEK M Return on capital employed, % Return on capital employed before goodwill, % Data per share (SEK/share) Earnings after tax and full conversion (EPS) Earnings after tax and full conversion excluding goodwill Cash earnings per share after tax and full conversion (CEPS) Shareholders’ equity per share after full conversion Dividend 2003 24,080 –2,660 3,3521 13.91 1,9031 –186 3,265 9.61 34.41 2003 3.311 5.891 8.611 31.231 1.252 2002 25,397 3,595 14.2 2,015 3,525 9.9 33.3 2002 3.53 6.13 9.08 35.85 1.25 Change, % –5 0 +5 –10 –7 –6 –9 –7 –6 –4 –5 –13 Number of shares after full conversion (1,000s) 370,935 370,935 1 Excluding non-recurring items 2 Proposed dividend CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED 3 INCOME BEFORE TAX / OPERATING CASH FLOW 3 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 SEK M % 95 96 97 98 99 00 01 02 03 Capital employed, SEK M Return on capital employed, % Return on capital employed before goodwill, % 35 30 25 20 15 10 5 0 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 3 Data for 2001 and 2003 excludes non-recurring items SEK M 95 96 97 98 99 00 01 02 03 Income before tax, SEK M Operating cash flow, SEK M 1 7 6 5 4 3 2 1 0 EARNINGS PER SHARE 3 SEK 95 96 97 98 99 00 01 02 03 Earnings per share, SEK Earnings per share excluding goodwill, SEK CEO’s statement Creating growth via leverage and innovation On the whole, 2003 has been another good year for ASSA ABLOY, although a challenging one at a time when we are entering a new phase in our business development. Consider that in less than a decade we have built a unique Group of compa- nies in our industry. More than one hundred organizations have been acquired. Our next objec- tive is to make the most of our position by exploiting leverage and growth opportunities. Despite the headwind in the market – which has faced us from the end of 2002 through most of 2003 – we managed to end the year with stable sales volumes and slightly improved margins for comparable units and exchange rates, excluding restructuring costs. Our cash flow was again very strong, especially considering that it is harder to reduce inventory in a contracting business climate. We have a large installed base of locks and cylinders, which gives us stability through repeat business. The few operations that are underperforming are well identified and we are taking appropriate actions. Several companies did very well and found new and innovative ways to satisfy our customers. And in between these two extremes there were many companies that managed to keep volumes, margins and market shares at high levels. New focus and structure The change of CEO does not mean a change of strategy nor a deviation from our financial and operational targets. It just starts a new chapter of the same book. However, our new stage of development, which focuses on the second and third phases of the ASSA ABLOY Group development strategy, has motivated a changed manage- ment structure. The previous large management team was efficient in the acquisition phase, but is less appropriate for building a strong foundation for sustainable growth. Eleven regions have therefore been condensed into four divisions, each led by an Executive Vice President. The new structure implies clear responsibilities and dedicated resources. Two-year action program Our three-step Group development strategy is well estab- lished and has been widely communicated. Although it pro- vides a useful crystallization of our plans, the separate steps are too sequential. That is why we have translated the strat- egy into a two-year action program that we call ‘Leverage and Growth’. The aim is to create a firm foundation for sustainable and profitable growth through a better utiliza- tion of our Group strengths. ASSA ABLOY delivers good margins. Nevertheless, we are taking strong measures to further improve our perform- ance and competitiveness. Because we see continuing strong potential. To allow rapid progress, restructuring costs of SEK 1.3 billion were incurred in the 2003 accounts. During 2004 our low-performing units will be turned around, divested or closed down. Throughout the organization we will work on adjustments of capacity and exploiting cost synergies. The main thrust will be in the EMEA region (Europe, Middle East and Africa). We expect the two-year action program to pay for itself in less than three years. Untapped potential for leverage The ‘Leverage’ part of the action program comprises three main themes. The first is to utilize our resources more effi- ciently. All units, with very few exceptions, are doing better – some, much better – than they did before joining ASSA ABLOY. Now we are raising our ambitions and turning our attention to how these units can operate even better together. 2 Secondly, we want to improve even further the well functioning Group Supply Management programs. Our companies are locally strong with many local suppliers. By working together more effectively we will be able to make substantial cost savings in purchases of materials, services and goods. By reducing variations between compo- nents we can steadily improve the economics of joint com- ponent manufacturing. Our third aim is to exploit our considerable untapped potential in the area of productivity improvement. We have too many units that manufacture the same or similar products. Going forward we will both streamline and specialize our production. Actions for growth It is the ‘Growth’ part of the action program that will pro- vide the greatest test of our ability to change ourselves. Most of our companies sell their products through distribu- tors. This can result in a lack of information feedback about customers’ preferences. Through increased focus on the customer, we plan to build up our bank of knowledge and thereby become better at developing our products and services to meet the customer’s needs. And through more effective collaboration with our distributors we will be able to strengthen customer benefit even further. Today we have more than 90 brands. To achieve better market coverage and deeper penetration we plan to make some necessary changes in our brand portfolio. Some brands will be turned into driver brands or full-concept brands, others will become brands for specific product lines, while some brands will disappear. Profitable growth is our highest long-term priority. Our main financial objective – a return on capital employed (ROCE) of 20 percent in 2008 – calls for good growth. But we also need to create growth for the dynamics of our Group, for creation of job opportunities and careers, for motivation and employee involvement, and for our own pride. We are the world’s largest lock Group and the only truly global player in our industry. We will draw benefit from our size to become true leaders in both innovation and cost- efficiency. We need to inform the market better and develop better products faster in order to benefit from the ever-increasing global trend towards higher security. We are fortunate to be in an industry where demand is increasing and where our products can make a real difference for people at home, at the office or traveling. We anticipate no substantial improvements in demand in any of our major markets during 2004. Through our own efforts in leverage, and through innovative new con- cepts, we will return to growth before the end of 2005. In everything we do we will have two things in mind – lever- age and growth. Stockholm, February 2004 Bo Dankis President and CEO 3 Hospitals Like many public institutions, hospitals hold a large quantity of confidential information, and also have many visitors. Authorized staff must be granted physical entry and access to information at the same time as the information is kept protected from unauthorized viewing. An electromechanical masterkey system allows central key control (regulating which keys can give access through which doors at different times of day), and can also block lost keys. An access control system with smart cards and doors that open and close automatically makes movement easier for staff and visitors at buildings ranging from large teaching hospitals to health centers and doctors’ surgeries. 4 i e c n e n e v n o c d n a y t e a s , y t i r u c e S f 5 Vision and business concept Security, safety, convenience and design The ASSA ABLOY Group was formed in 1994 when Secu- ritas and Wärtsilä merged their lock businesses. Since then, the Group has grown through a combination of acquisi- tions and organic growth to become the world’s largest lock Group. ASSA ABLOY currently has operations in more than 40 countries. Vision ASSA ABLOY is the world’s leading manufacturer and sup- plier of locking and security solutions. The Group strives to transform and develop the industry by continually increas- ing end-user satisfaction in the areas of safety, security, con- venience and design. ASSA ABLOY aims to introduce new solutions and concepts that are adapted to local needs and that will work effectively with the security investments that customers have already made. Its leading position enables the Group to leverage tech- nology investments and market development in the inter- ests of end-customers and distributors all over the world. The local business operations are enhanced by the strength and resources of the ASSA ABLOY Group. ASSA ABLOY is being developed with long-term sus- tainability in mind. The external environment, ethical values and employee relations are important elements. Business concept ASSA ABLOY leads a process of consolidation and the development of the lock industry. The Group’s united strength will increase customer benefit by delivering secure, safe, convenient and well designed security solutions. Targets The primary target of the ASSA ABLOY Group: Return on capital employed should exceed 20 percent. During the acquisition phase of the Group’s strategy sub- stantial amounts of goodwill have been added, which have diluted the return on capital employed. The target, which has remained unchanged since the Group was formed in 1994, will be reached in 2008 through the following sub- targets: FINANCIAL TARGETS – A 5-YEAR PERSPECTIVE 20% Return on capital employed ORGANIC GROWTH: • About 5% per annum over a business cycle MARGIN IMPROVEMENT: 2–3% • Stand-alone improvements • Leverage Group synergies CAPITAL RATIONALIZATION: • Inventory reductions • Maintained capital expenditure level ACCUMULATED GOODWILL AMORTIZATION: • SEK 5 billion 6 Leverage and Growth In the fall of 2003 ASSA ABLOY launched a two-year action program concentrating on the Group’s Leverage and Growth. The program focuses on simultaneously progress- ing phases 2 and 3 of the strategy by taking advantage of the Group’s united strength and capturing growth opportu- nities within the industry. The two-year program will cost SEK 1.3 billion to carry out and is expected to pay for itself within three years. Organization ASSA ABLOY reorganized its businesses during 2003 with the aim of increasing flexibility and putting itself in a posi- tion to exploit market opportunities more quickly. This was a natural move at a time when focus had shifted from the acquisition phase of the overall strategy to leveraging syn- ergies and increasing customer benefit. The new organization consists of four divisions: • Americas • EMEA (Europe, Middle East and Africa) • Asia Pacific • Global Technologies (door automatics, identification, and solutions for the international hospitality industry) To support these divisions a central organization for mar- ket and business development has been established. To reflect the reorganization, the Executive Team was reduced from 17 to 7 people in the interests of greater decision-making efficiency. Each division is headed by an Executive Vice President with a clear mandate, wide- ranging authority and his own resources. The Executive Team meets monthly. Experience and best practice are shared between companies, and benchmarking is employed at many levels. Every month the most important key ratios are collected, sorted from best to worst and sent back to all units. This transparency has been a highly effective tool to encourage a dynamic improvement process amongst all units. Subtargets: • Sales should grow organically at about 5 percent a year over a business cycle. • The EBITA margin should be improved by 2–3 percent- age points. This should be achieved mainly by utilizing synergies within the Group. • The long-term positive trend in ASSA ABLOY’s operat- ing cash flow should be maintained. • Capital employed should be maintained at the present absolute level, in spite of growth, in a five-year perspective. Measures should include improvement of production flows, which will reduce capital tied up in inventory. Capital expenditure should be maintained at today’s level, which is below current depreciation. • Amortization of goodwill totaled over the next five-year period should amount to SEK 5 billion. Strategy For several years now, ASSA ABLOY has followed a strat- egy model based on three phases of development: 1. Build a worldwide presence and successively add new areas of expertise 2. Leverage synergies and develop the strength of the Group 3. Accelerate organic growth by increasing focus on creat- ing value for customers STRATEGY CUSTOMER VALUE • Upgrading of security • Complete offering • Partner concepts E U L A V LEVERAGE GROUP SYNERGIES • Corporate identity • World-leading technology • Joint R&D, platforms, components E G A R E V E L GLOBAL PLATFORM • Geographic/areas of expertise • Installed base generating recurring revenue • Operational excellence E C N E S E R P 7 Leverage and Growth Developing strengths and sustainable growth In November 2003 the Group launched a two-year action program to leverage Group strength and build a foundation for sustainable growth. Leverage Use resources more efficiently The aim of this program is to exploit ASSA ABLOY’s com- bined resources more efficiently, so that the performance of the whole Group exceeds the sum of what each company can achieve on its own. By means of benchmarking, the individual companies will benefit from one another’s devel- opments and improve their own working methods. Twelve companies are identified as low performers. In 2003 they had aggregate sales of SEK 1.5 billion and a combined operating margin close to zero. Profitability among these companies must be significantly improved – if not, they will be divested or closed down before the end of 2004. ACTION PROGRAM 2004–2005 G R O W T H L E V E R A G E GROWTH • Innovation and new concepts • Channel management • Brand-building LEVERAGE • Use resources more efficiently • Smarter ways of working • Increase productivity Smarter ways of working Purchasing activities within the Group will be further co- ordinated. The number of suppliers is very large – there are currently nearly 5,000 suppliers in Europe alone. It should be possible to reduce them by 30 percent as a first step. This will allow the remaining suppliers to sell larger volumes and develop closer relationships. As an example, six facto- ries in France used to have 57 packaging suppliers. Today, there are eight suppliers and the prices are 20 percent lower. Successful product concepts and sales activities in differ- ent markets will be shared within the Group. Today, there are major differences in demand between Americas and Europe. By adapting to local preferences and paying atten- tion to cross-selling activities the Group will aim to maxi- mize the potential value of its markets. Increase productivity The Group currently has about 75 production units as a result of the acquisitions made since 1994. Production will be increasingly specialized and some production will be transferred to low-cost countries. A proportion of compo- nent manufacture will also be put out to subcontractors. However, the priority is to increase productivity, not to reduce staff numbers. Growth Innovation and new concepts The lock industry is characterized by long product life and a relatively low level of innovation. At present locks are changed on average every twenty years, and many still offer relatively low security. In recent years the demand for secu- rity and safety has increased and ASSA ABLOY will capi- talize on this trend by focusing on the end-users of locks and security solutions. The market wants solutions that are ever more integrated, secure and convenient. Combinations of locks, alarms, lighting, access control, technical monitor- ing and building evacuation are becoming more important. 8 In the spirit of our brand idea ‘Unlock Your Life’, ASSA ABLOY intends increasingly to offer more complete solu- tions designed specifically for different customer segments. A large proportion of product development has been driven by technology and to a lesser extent by customers’ unique requirements. ASSA ABLOY will increasingly base its locks and security solutions on common technical plat- forms with the aim of leveraging the Group’s strengths and shortening lead times from innovation to market launch. Channel management Collaboration with distributors and installers will increase in order to enhance knowledge of the end-users’ require- ments and to secure the aftermarket of the more than one billion ASSA ABLOY locks installed throughout the world. The distribution channels will be developed on a partner- ship basis, with increased support in the form of systems, sales promotion measures and training. The Group will cooperate with the distribution network to speed up its turnover of goods and to reduce its tied-up capital. Existing products and services will also be com- bined in new ways to better reflect end-users’ needs. TRUE LEADERSHIP L E A D E R S H I P THE MARKET GROWS – customer satisfaction ATTRACTIVE TO DISTRIBUTORS – partnerships EDUCATE THE MARKET T R U E IDENTIFY TRUE CUSTOMER NEEDS – invest in R&D Brand building The Group will increase investment in a number of selected brands. ASSA ABLOY currently has 90 brands, which include some world-leading names. Some of these will be reinforced, others retained for specific product areas and others discontinued. Today ASSA ABLOY sells its products principally to other companies. Since the consumer market is judged to have great potential for high rates of growth, ASSA ABLOY intends to strengthen some brands that are aimed directly at consumers, or where demand for a product can be increased by a stronger brand. The main barriers to rapid development of the consumer market are tradition, and lack of knowledge among the individual consumers about what makes a good or bad lock. It is therefore vital to educate and actively develop the market in order to increase demand. One response to this need is the Armadillo sales concept launched towards the end of 2003, which consists of specially designed shops directed at the individual consumer. On 27 November 2003 ASSA ABLOY opened the world’s first Armadillo Home Security concept store in Melbourne, Australia. The store will bring the latest available residential security technology to Australian consumers. 9 Evacuation of buildings The challenge in public places is to meet the demands for high security and for safety. Many doors that are normally kept locked for security reasons must be easy to open in an emergency so that people can escape quickly. Electrically controlled panic exit devices overcome the problems since they can be set in different operating modes for different times of day. 10 i e c n e n e v n o c d n a y t e a s , y t i r u c e S f 11 Market A growing world lock market The global lock market is fragmented, and in the industrial- ized part of the world many companies are still family- owned. These typically have leading positions in their own home markets and strong, well-established relationships with their local distribution networks. In less-developed countries, established lock standards and strong brands are less common. The needs of different market segments also vary greatly. Airports have different needs from private houses; shopping malls from schools; factories from hospitals and hotels. The size of the global market There is no established method to estimate the size of the global lock market accurately. Few countries produce well- defined statistics for the industry, and the information that exists also varies in what product areas are included. ASSA ABLOY’s estimates are based on the Group’s own product range. Door automatics are therefore included as well as doors for the professional end-user market in the USA. ASSA ABLOY believes that a fair estimate of the size of the world lock market is around EUR 25 billion. Year-on-year growth The major players Viewed over a business cycle, the world lock market is growing year-on-year. The reasons for this steady expan- sion are greater prosperity in the developing world and a sense of increased vulnerability everywhere. The focus on security has intensified and people realize that they must take responsibility for their own security. It has become easier to discuss security, and many companies have moved it up the agenda. Locks form one important component in this growing concern with security. Major imbalances There remain major imbalances between different markets. Americans spend more than twice as much per head on panic exit devices for evacuating buildings as Europeans do. Conversely, northern Europeans spend more than three times as much as Americans on high-security locks for the residential market. Door automatics are also several times more widely used in Europe than the USA. If it is assumed that security and evacuation solutions could be equal in size in Europe and America, a rough estimate indicates that it should be possible to double the total market. ASSA ABLOY’s view is that there is no long-term reason for these differences to continue. Rather, there is a challenging opportunity for ASSA ABLOY to equalize these imbalances by informing and developing the market. 12 With annual sales of SEK 24 billion, about 10–12 percent of the world market, ASSA ABLOY is the market leader. The second-largest company is Ingersoll Rand, followed by other leading players such as Kaba, Black & Decker, Stanley Works and Dorma. Other companies have grown too, some internationally through export sales or by estab- lishing operations away from their domestic markets. TOTAL SALES BY REGION, SEK M Western Europe, 10,581 North America, 9,377 South Pacific, 1,148 South and Central America, 1,054 Eastern Europe, 663 Asia, 602 Middle East and Africa, 562 Other, 93 Americas EMEA North America The USA’s war against terrorism and rising levels of crime in society have intensified security concerns and the devel- opment of new security Standards in America. This is par- ticularly evident in government bodies such as the Depart- ment of Defense and in schools, and it drives forward the development of higher security. ASSA ABLOY’s most important segment in the USA is the institutional market such as schools and hospitals. Interest in high-security locks, smart cards and biometry has increased significantly. Product development for the non-residential market is car- ried out in close collaboration with insurance companies, police and fire services, customer organizations and other important influencers. The residential market in the USA has a lower standard of locks than in Europe. Instead, alarms play a major role in home security. However, better locks are a preventive measure while alarms only react when harm has already occurred. The residential market therefore holds great potential, and the ASSA ABLOY company Emtek, which sells to speciality hardware dealers in the USA, has grown rapidly in recent years by focusing on design and security. South America Major parts of South America have a fragmented market and have not yet developed security Standards. The markets have a great need for security solutions and represent a growth market for the future. Western Europe EU standardization now governs many European countries, which has provided a driver for higher sales. It has raised previously low national requirements and thereby also raised the quality of security products. A survey carried out by ASSA ABLOY shows that west- ern European households believe that there are too few types of electromechanical and electronic locks for their homes, especially when compared with locks for hotels and modern cars. The survey also shows that over half of all households would have chosen an electronic door-lock if they had known what alternatives existed. Eastern Europe Eastern Europe currently has a lower standard of locks than the rest of Europe. Foreign locks – e.g. Swedish or German – are considered better than local products. In Russia both the consumer market and commercial con- struction are booming. Africa With the exception of South Africa, most African countries have inadequate security Standards for both the residential and commercial markets. South Africa is currently the largest market in Africa and ASSA ABLOY is the market leader there. TOTAL SALES IN AMERICAS, SEK M TOTAL SALES IN EMEA, SEK M TOTAL SALES IN ASIA PACIFIC, SEK M USA, 8,686 Mexico, 731 Canada, 691 South America, 195 Central America (excl. Mexico), 128 Australia, 914 Asia excl. China, 358 China, 244 New Zealand, 234 Western Europe, excl. the Nordic countries, 7,783 The Nordic countries, 2,798 Eastern Europe, 663 Africa, 307 Middle East, 255 13 Electromechanical locks offer the customers a whole new level of security, convenience and flexibility. Nowhere is this trend more apparent than in airport and transportation security, where there are numerous opportunities to combine electromechanical blocking mechanisms with electronic identification. Asia Pacific Asia In Asia, China is the fastest-growing market, with a mass flow of population from rural areas to the cities. The mar- ket is still undeveloped and has an excess of low-quality products. ASSA ABLOY has established itself in China with its own factories, and now faces a major challenge in educating and developing the distribution chain to accept products of higher quality. Australia and New Zealand In the South Pacific area, both Australia and New Zealand have been spared the recession that has affected much of the rest of the world. Construction activities – new build and renovation – have continued to grow at an overall rate of 6–7 percent a year. Forecasts are that the construction market will maintain its growth, or even increase it in some segments, over the coming years. Global Technologies Advanced technologies grow In recent years sales of advanced security products have risen strongly. This applies particularly to electronic lock cylinders, where ASSA ABLOY more than doubled its sales in 2003. One clear trend – led largely by hospitals and com- mercial companies – is towards a rapidly increasing elec- tronic content in security solutions. There is a strong demand for opening and closing doors automatically while retaining or increasing the level of security. This is a complex market segment which demands high functionality in security solutions. Advanced technical solutions such as identification technology for access control are expanding in other areas also. Ordinary contact-based cards of the type used in cash machines and in stores are not considered sufficiently reliable and convenient to be read many times a day in access control systems. Contactless cards based on radio- frequency identification technology are therefore now widely used. These can be further developed into smart cards which can carry far greater volumes of data and can receive, store and transmit information. Such cards offer promising potential for the future based on utilizing the same card for different applications. The new iCLASS card from the ASSA ABLOY company HID, which provides a higher level of security technology, is one product that has attracted great interest. 14 ASSA ABLOY products New products unlock the way to organic growth A continuous flow of innovative new products is the single most important source of organic growth. Planned and focused product development is critical to success. ASSA ABLOY’s level of innovation is reflected in the many patents that its companies obtain. Although mechanical lock technology still accounts for the largest number of patents, the fastest-growing area is that of electromechani- cal and electronic products for locking, identification and passage control. Mechanical locks Mechanical locks and accessories and mechanical mas- terkey systems continue to form the core of the ASSA ABLOY product range, accounting for over half of the Group’s sales worldwide. Mechanical locks provide the two primary functions of any security device: identification (the key) and a strong barrier (the lock). demand for modern high-security locks. In developed mar- kets there is a similar demand for the peace of mind that higher security can provide. Here the Group’s huge installed base of locks creates a solid foundation for sales by directing customers towards its familiar brands when they are seeking replacements and upgrades. Electromechanics Electromechanical technology can provide even greater secu- rity and is currently showing the strongest rate of growth. Electrical assistance makes locking and unlocking operations easier while adding to the impregnability of the locked door. Many ASSA ABLOY products now use motorized and sole- noid locks, electric strikes, and magnets for door locking. Electromechanical locks and components also form part of many integrated solutions for access control and safe emer- gency evacuation of buildings. The most notable trend is towards higher levels of secu- rity. In many developing markets, rising standards of living mean that more people experience a growing need for security. Where simple locks once sufficed, there is now a By exploiting developments in microprocessor and com- munications technology, electronics can add a further layer of security plus new monitoring and control options. There is a trend towards integrating all the systems involved in 15 managing a property, which is driving the development of more intelligent lock products. Identification In the field of identification, the main growth area is Radio Frequency Identification (RFID). The prime advantage of RFID is that it is a non-contact technology. Where even greater security is needed, ‘smart’ cards can store information about the authorized user on the card itself. The combination of RFID and biometric informa- tion such as fingerprints or iris scans has a very high level of security. Door Automatics Through Besam, ASSA ABLOY has acquired a world-lead- ing position in door automatics. The Group’s global cover- age gives it an unrivalled opportunity to integrate door automatics with locking and access control and thereby to meet customers’ demands for maximum convenience and simplicity allied to security and safety. Hotel locks In the hospitality industry ASSA ABLOY started a technical revolution when VingCard introduced its first card- operated lock in the late 1970s. The ability to give each new hotel guest a unique new key without changing the lock transformed the industry. Since then there has been ongoing development of electromechanical and then electronic solutions. Today, the key card is also used to open in-room safes, to give access to elevators and recre- ation areas, to control room temperature and as a charge card for use in neighboring stores and restaurants. Smart- card systems offer further options, including automatic recording of room visits by maintenance and cleaning staff. Security doors and fittings Throughout the world, door and window manufacturers are customers for the Group’s locks and fittings. But in sev- eral markets, notably the USA and France, ASSA ABLOY itself has become a major supplier of security doors. Another successful development in the USA is the design of up-market door fittings. 16 Industrial locks Industrial locks have also been influenced by developments in electronics. These locks are marketed to manufacturers of products such as vending machines, parking meters, payphones and lockers. They are integrated into the end- product and often combined into a coin lock. The latest electronic options assist with time control, tracking and in-company security functions by recording the visits of personnel servicing the machines. Global platforms A recent development in ASSA ABLOY’s product planning is international collaboration in designing new product platforms, which can then be adapted to local standards. A notable example is the CLIQ technology first launched in Scandinavia in 2001 and rolled out in other countries since. CLIQ is a cylinder-based masterkey system that combines mechanical and electronic security and is ideal for colleges, apartment blocks and industrial estates with a rapid turnover of keyholders because of the ease of canceling lost keys and issuing new keys. 17 Evolution is a modular lock case based on common components which can be set up to serve a number of dif- ferent local market requirements. SALES BY PRODUCT GROUP, % Mechanical locks, lock systems and accessories, 54% Electromechanical and electronic locks, 24% Security doors and fittings, 19% Industrial locks, 3% Sustainable development Environment, ethics and social responsibility It has always been important that ASSA ABLOY follows the cornerstones of vision, ethics, courage and realism that were adopted when the Group was formed in 1994. These cornerstones provide a natural platform for ASSA ABLOY’s activities in the areas of environmental issues, business ethics and social responsibility. Through common, committed actions, the Group’s market positions and brands will be strengthened. At the same time ASSA ABLOY will do everything possible to avoid environmental harm and possible claims for damages. ASSA ABLOY has identified and analyzed environmen- tal risks and opportunities in the Group’s whole value- chain. In contrast to many consumer goods, the greatest environmental impact in ASSA ABLOY’s case comes from production operations. A steering group led by the Group CEO has been set up, and during 2003 there was estab- lished a new organization, following the same general structure as the Group, to ensure compliance with the guidelines. OUR CORNERSTONES A S S A A B L O Y E T H I C S V I S I O N VISION • The true leading lock company • Leading in size and thought REALISM • Know your numbers • Seek the truth • Don´t be afraid of details • Profit drives growth ETHICS • Believe in the individual • Lead by example • Confidence in competence COURAGE • Lead change C O U R A G E R E A L I S M 18 The external environment has priority In its environmental work ASSA ABLOY focuses on its own production and its major suppliers. Today, products including chemicals are handled, energy is consumed and waste products are disposed of. All these operations should be carried out systematically and with great care for the environment, directed towards overall sustainability. Com- panies as widely spread as Guli in China, Phillips in Mexico and Vachette in France now hold ISO 14001 certification. One current example is that ASSA ABLOY is seeking opportunities to introduce a new method for electroplating components that offers reduced consumption of both plat- ing metals and water. Conserving energy and reducing water consumption are important, and moreover often yield a direct economic benefit. ASSA ABLOY is also seeking to recycle the production waste that arises in various manufacturing processes. And organic solvents are currently widely used for degreasing metals, but ASSA ABLOY has begun to replace them with water-based products. Again, chromium plating can use either hexavalent or trivalent chromium. The latter is less poisonous but gives a rather less fine finish which customers in some markets have previously been reluctant to accept. A project has been initiated to inform them about the environmental consider- ations, and in many places this has resulted in a greater use of the trivalent form. Environmental factors and social responsibility will play an increasingly important role when evaluating suppli- ers. A questionnaire for ASSA ABLOY’s suppliers has been prepared that covers both their environmental work and health and safety in the workplace. The purpose of these evaluations is to create a basis for discussions about improvements. The evaluations sometimes show that more detailed studies are required. The extraction of various materials, especially metals, that are used in ASSA ABLOY’s products has a significant impact on the external environment, and working condi- Many of the guidelines used in ongoing development are based on each country’s legal requirements and on rele- vant international Standards and guidelines including ISO 14001, the UN Global Compact, and the OECD Guidelines for multinational enterprises. ASSA ABLOY also works locally towards strong social involvement, with support for local projects. ASSA ABLOY’s Environmental Policy Global Environmental Policy At ASSA ABLOY we are committed to true leader- ship. Our Environmental Policy • We meet or exceed legal requirements • We continuously develop strategies to reduce consumption of resources, prevent pollution and improve the overall environmental impact caused by our operations and our products at every stage of the value-chain • We continuously seek ways to improve our work environment by reducing risks that can cause acci- dents or pollution • We require management personnel to be respon- sible for implementing and upholding this policy in their business units and groups through aware- ness, training, measurement and reporting • We encourage and foster openness and communi- cation of our policy to our stakeholders • We apply our policy in all business transactions and expect our employees, partners and suppliers to apply them as well • We will strive to implement certifiable environ- mental management systems at all local produc- tion units. Our environmental policy and procedures are based on each country’s legal requirements and on relevant international Standards and guidelines including ISO 14001, the UN Global Compact, and the OECD Guidelines for multinational enterprises. tions in these industries may be severe. Since the materials are often bought and sold via commodity exchanges, and since ASSA ABLOY is a relatively small purchaser, it is hard for the Group to discover which producer they are coming from and therefore hard to influence the conditions of pro- duction. ASSA ABLOY has grown rapidly, and there still remains much for the Group as a whole to do in order to meet its ambitious targets. Strict rules of business ethics ASSA ABLOY operates with high standards of business ethics. For example, the Group does not tolerate any anti- competitive activities, the giving or taking of bribes, nor any other form of inducement. The Group makes no party- political donations of any kind and can therefore derive no commercial advantage from such contributions. But ASSA ABLOY Group companies do belong to local business organizations and thereby indirectly support business poli- tics that favor free enterprise. A socially aware outlook ASSA ABLOY is setting up businesses in many parts of the world and strengthening its production resources in the third world and elsewhere. This produces many advantages for the countries concerned, but it is especially important that the Group acts responsibly in such countries. For instance, anyone employed by ASSA ABLOY or by any of the Group’s suppliers must have reached the minimum age required by local laws. ASSA ABLOY’s approach is that employees are free to organize themselves or have the option to join existing organizations. The Group will toler- ate no form of forced labor, and it naturally respects human rights throughout the world. Nor will ASSA ABLOY tolerate any form of discrimina- tion or harassment. Discrimination may arise on grounds of ethnic origin, sexual orientation, gender, religion, politi- cal opinion, nationality or upbringing. Equal opportunities and diversity are important for the future development of ASSA ABLOY. The Group also strives for safe and healthy workplaces. In addition, consumers’ demands for good, safe products and trustworthy product information must be met. 19 Identification When the amount of important information stored in an organization increases, the problem of controlling access to buildings and records increases in step with it. The use of an electronic access control system with con- tactless smart cards that can receive, store and transmit information can assure high security, functionality and flexibility all at once. Biometry can add a further level of security to a smart card by allowing the cardholder’s identity to be veri- fied from such features as fingerprints or the iris of the eye. 20 i i e e c c n n e e n n e e v v n n o o c c d d n n a a y y t t e e a a s s , , y y t t i i r r u u c c e e S S f f 21 Division EMEA Reorganization creates a platform to exploit economic recovery EMEA Hans Johansson “Selling locks is not enough in today’s highly competitive environment. As the leader in our industry we must identify the needs of different groups of customers and then align our product solutions to fit them.” ASSA ABLOY’s new EMEA division embraces the Group’s companies in Europe, the Middle East and Africa. The divi- sion is the largest in the Group, accounting for 41 percent of total sales. In the region the Group has 35 production units, 30 sales companies and 12,500 employees. The region has experienced flat sales growth in 2003 primarily due to the slow economic climate and dis- advantageous foreign exchange rates. Over a 12-month period the US dollar depreciated by 20 percent against the Euro. Later in the year the economic climate slowly improved. As signs of a slow economic recovery now begin to appear on the horizon, ASSA ABLOY is positioned to make the most of the opportunities it provides. As the world’s leading lock Group, ASSA ABLOY offers a broad product range, multiple service offerings and technological advances that no other company can match. The two largest European operations, Scandinavia and France, have managed to keep volumes and margins stable 22 under difficult market conditions. In the Netherlands, Lips, which sells lock products to both the com- mercial and residential markets, has developed positively. EMEA’s two main German companies, IKON and effeff, have also expe- rienced an upturn in sales after slow performance during the first half of the year. The UK companies are beginning to benefit from relocating some production to eastern Europe and China as well as from the launch of new products developed in collaboration with other Group companies. The Italian business has been underperforming and during the year there has been some reduction of exports and consolidation of production. A positive trend is seen in Spain, especially in the project spec- ification market. In eastern Europe a strong demand for ASSA ABLOY products is emerging as living standards rise and people feel a need for improved security. In Russia both the consumer market and commercial construction are booming. The Group’s presence is increasing, especially in retail sales and high-end hotel and identification products. A new office in Moscow was set up in April 2003 to coordinate operations and launch growth initiatives targeted at all sectors of the market. In May 2003 the EMEA region established an office in Dubai, with the objective of taking full advantage of the increased economic and construction activity in the dynamic Middle Eastern region. This will be achieved by developing business through sales and marketing activities, improvement of the distribution network and education. The office will also coordinate the Group’s many brands into complete packages for different market segments. Mul-T-Lock in Israel has a steady demand for its prod- ucts, particularly in the UK, Germany and the Americas. In South Africa, the volatile currency has had a negative impact on sales even though ASSA ABLOY South Africa The Yale brand is one of the oldest international brands in the world and one of the best-known names in the locking industry. Yale protects millions of homes and businesses worldwide. In EMEA alone, Yale-branded products with an estimated value of EUR 60 M were sold in 2003. maintained its leading position on the domestic market in 2003 and is now using that experience as a blueprint for operations elsewhere in Africa. New sales offices in East Africa, Nigeria and Angola have been added to the five existing offices in southern Africa. Current standing The main markets are France, Germany and the UK. During the year the strongest markets have been Finland, Germany, Benelux and parts of eastern Europe. The focus during 2003 has been to streamline the orga- nization’s efficiency with respect to manufacturing, market- ing, sales and distribution. The market was divided geo- graphically into 11 market divisions. Each division has identified existing and future business opportunities and assigned specific strategic objectives. ASSA ABLOY believes that much more than selling locks is needed to succeed effectively in today’s highly com- EMEA, Key figures Income statement Sales, external Sales, internal Sales Organic growth 2003 2002 SEK M SEK M 2003 2002 EUR M EUR M 9,858 10,168 1,081 1,112 318 364 35 40 10,176 10,532 1,116 1,152 –1% 1% –1% 1% Operating income before goodwill amortization (EBITA)1 Operating margin before goodwill amortization (EBITA)1 1,359 1,417 149 155 13.4% 13.4% 13.4% 13.4% Goodwill amortization –338 –343 Operating income (EBIT)1 1,021 1,074 –37 112 –38 117 Operating margin (EBIT)1 10.1% 10.1% 10.1% 10.1% Capital employed Capital employed – of which goodwill 8,519 10,064 4,728 5,056 939 521 1,099 552 Return on capital employed 1 10.6% 10.2% 10.6% 10.2% Return on capital employed before goodwill 1 29.0% 27.0% 29.0% 27.0% Cash flow Operating income before goodwill amortization (EBITA)1 Depreciation Net capital expenditure Change in working capital1 Cash flow1 1,359 1,417 505 –357 66 514 –437 247 1,573 1,741 149 55 –39 7 172 155 56 –48 27 190 Average number of employees 12,481 12,972 12,481 12,972 1 Excluding non-recurring items SALES / EBITA CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED EUR M 400 EUR M 300 200 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 Sales, EUR M EBITA, EUR M 60 45 30 15 0 1,400 1,200 1,000 800 600 400 200 0 35 30 25 20 15 10 5 0 70 60 50 40 30 20 10 0 EUR M % Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 Capital employed, EUR M Return on capital employed, % Return on capital employed before goodwill, % 23 EBITA / CASH FLOW EUR M Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 EBITA, EUR M Cash flow, EUR M Division EMEA petitive environment. As the leader in the industry ASSA ABLOY must identify the needs of many disparate groups of customers and then align its product solutions to fit them. The near future The economic outlook for the EMEA region is showing signs of a gradual improvement. There is unlikely to be any dramatic rise in sales or shifts in market share in the near future. However, the market continues to show rising demand for higher levels of security. In response to this demand, locking solutions are becoming increasingly sophisticated. The ongoing roll-out of ASSA ABLOY’s patented CLIQ lock technology is evi- dence for that. This new generation of smart, programm- able cylinders and battery-powered keys has been very well received in Scandinavia, Germany, France and Finland and will be available on most of EMEA’s markets in 2004. Electromechanical locks offer the customers a whole new level of security, convenience and flexibility. Nowhere is this trend more apparent than in airport and transporta- tion security, where there are numerous opportunities to combine electromechanical blocking mechanisms with elec- tronic identification. Similar considerations affect ASSA ABLOY’s largest single market sector, commercial construction. New con- struction has been limited in many parts of the region over the past few years but opportunities are reviving as industry restructures and downsizes to compete more effectively. The growing number of high-technology firms with valu- able intellectual property to protect demands highly secure and flexible electromechanical locking solutions. These solutions could also incorporate strict access control com- bined with safe, fast emergency exit. In the residential market widespread housing shortages in many countries have increased demands for new con- struction. As living standards rise, there will also be a grow- ing demand for affordable higher-security locking solutions to upgrade existing properties. Towards the end of the year EMEA started to imple- ment the Group’s two-year action program, ‘Leverage and Growth’. The main objective is to return to a level where ASSA ABLOY can create sustainable growth by using its resources more efficiently. This objective will be achieved by more cross-selling and improved channel management. ASSA ABLOY will also achieve savings through a combi- nation of production efficiency, personnel reductions, lower inventory and improved selling procedures. On the supply side EMEA is taking advantage of its strong market presence to streamline the number of suppliers and then to leverage the best prices possible. The division will also improve the profitability of any low-performing Group companies, or else close them down. EMEA – SALES BY PRODUCT GROUP Mechanical locks, lock systems and accessories, 71% Electromechanical and electronic locks, 13% Security doors and fittings, 10% Industrial locks, 6% Vachette’s innovative RADIAL locking system has a unique combination of a highly original key profile and several rows of multi-directional pins arranged radially across the lock cylinder. The mobile element that forms part of the key has enabled Vachette to patent the system, thereby making key-duplication outside its own factories illegal. 24 Division EMEA KEY PRIORITIES Near future • Increase productivity through reduction in personnel and consolidation of production • Reduce the number of suppliers • Turn-around low performers Long term • Common product platforms, e.g. Evolution lock case • Increase penetration of electromechanical products • Provide complete offerings on all markets The longer term Looking forward, EMEA will be developing new multiple platforms from which to launch product lines and design concepts tailored to appeal to specific regional differences. No two regions have exactly the same product preferences. It is ASSA ABLOY’s mission to identify the differences and ensure that the Group has products and designs in every market that enjoy popular acceptance. EMEA will continue to sell to effectively the same cus- tomer base, but with a product portfolio constantly adapt- ing to its needs. Growth will come increasingly from more advanced, high-security locking solutions designed for the commercial, institutional and industrial sectors, including transportation and communications. Electromechanical and electronic technologies will become even more impor- tant. More energy will be devoted to educating the market about their advantages and providing support to distribu- tors, specifiers, architects and builders. Other significant product areas will include panic exit devices; mechanical masterkey systems for controlling access to offices and institutions; and designer door hardware such as handles, lock cases and hinges. Geographically, the Middle East and parts of eastern Europe including Russia have the potential to offer particu- larly good growth opportunities over the next few years. Eastern Europe has the potential to offer particularly good growth opportunities over the next few years. 25 Division Americas Americas holds its position in a challenging climate AMERICAS Thanasis Molokotos “We have well thought out strategies. It is the localization and adaptation of those strategies that allow us to be flexible to market demands. This is our culture of continuous improvement at work. It makes us better partners to our customers and distribution channels.” ASSA ABLOY’s Americas division comprises all markets in North, Central and South America. The Americas division is the ASSA ABLOY Group’s second-largest, accounting for 35 percent of total sales. The division operates 24 produc- tion units and 12 sales companies and has 10,100 employ- ees. The division has been affected by the weak economic climate in 2003. There has been a persistent softness in the division’s most important market segment – new construc- tion in the continental United States. Despite this, the divi- sion as a whole has succeeded in generating strong cash flow and maintaining cost control while retaining its culture of continuous improvement in all aspects of its businesses. The region is still coming to terms with the new economic realities two years after 9/11. Thanks to ASSA 26 ABLOY’s global resources, product diversity and operational excel- lence, the Americas division has managed well during the reces- sion. It has been more important than ever to utilize the division’s synergies to the fullest with respect to the coordination of capital expenditure, cost control, improved manufacturing efficiency, distribution and sales. Some 90 percent of sales in the Americas division come from the non-residential sector, more specifically commercial and institutional construction. In the USA new commercial construction – office buildings and industrial premises – has been hit hardest by the down- turn of the past two years, but institutional new-construc- tion showed slight recovery in the second half of 2003. The Door Group has been impacted the hardest, although sales volume began to recover late in the year. The Architectural Hardware Group has remained relatively constant. Assisted by continuing efforts to educate the market on the benefits of key control and higher-security locking solu- tions, most of the region’s companies have shown sales growth in electromechanical and high-security products. The Residential Group has shown strong growth coupled with increased profitability. Emtek continues its success in marketing its premium residential products. New products and technical innovation remain impor- tant drivers of growth. Emtek has had success with new products launched this year. Additionally, strategic partner- ships have enabled the Group to develop innovative life- safety solutions for the marketplace. One such innovation is SARGuide by Sargent. SARGuide integrates electrolumi- nescent technology into an exit device to illuminate the touchpad with the word EXIT. This highly visible exit indi- cator informs people of the exit location in the event of a fire or power failure. Other ASSA ABLOY companies too are now developing proprietary life-safety products incor- porating this technology. In 2003 Medeco launched the most powerful patented key system in its history, Medeco3. Medeco3 includes 13 billion potential combinations and three separate means of locking while retaining full dimensional compatibility with all North American lockset types. A strong market has been the basis for ASSA ABLOY’s continued growth in Canada. Success in gaining market share has also come through greater coordination and cooperation among the main units and joint efforts in the high-security sector for new construction. The Mexican economic market has been rather unsteady, with the mid-term election creating uncertainty. Some new market initiatives are expected to come to fruition during the coming year. ASSA ABLOY has been successful in developing official Security Standards for a number of its products. Outsourcing of some US product lines to some of the Mexican companies is now complete. Additional opportunities for competitive sourcing are also being sought. Americas, Key figures Income statement Sales, external Sales, internal Sales Organic growth 2003 2002 SEK M SEK M 2003 2002 USD M USD M 8,625 10,545 1,069 1,086 32 88 4 9 8,657 10,633 1,073 1,095 –2% 2% –2% 2% Operating income before goodwill amortization (EBITA)1 Operating margin before goodwill amortization (EBITA)1 1,428 1,728 176 178 16.5% 16.3% 16.5% 16.3% Goodwill amortization –331 –375 Operating income (EBIT)1 1,097 1,353 –41 135 –39 139 Operating margin (EBIT)1 12.6% 12.8% 12.6% 12.8% Capital employed Capital employed – of which goodwill 7,528 5,010 9,711 5,930 1,046 1,109 696 677 Return on capital employed 1 12.4% 12.2% 12.4% 12.2% Return on capital employed before goodwill 1 43.8% 39.2% 43.8% 39.2% Cash flow Operating income before goodwill amortization (EBITA)1 Depreciation Net capital expenditure Change in working capital1 1,428 1,728 250 –212 61 312 –281 96 1,527 1,855 176 31 –26 8 189 178 32 –29 10 191 The turbulent situation in Brazil and the revaluation of Cash flow1 the local currency have been challenging for La Fonte. Marketing programs have emphasized the strength of the company as a complete provider of locking solutions for all Average number of employees 10,091 10,363 10,091 10,363 1 Excluding non-recurring items 300 250 200 150 100 50 0 SALES / EBITA USD M USD M Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 Sales, USD M EBITA, USD M 60 50 40 30 20 10 0 CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED USD M 1,250 % 50 1,000 750 500 250 0 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 Capital employed, USD M Return on capital employed, % Return on capital employed before goodwill, % 27 60 50 40 30 20 10 0 EBITA / CASH FLOW USD M Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 EBITA, USD M Cash flow, USD M Division Americas types of building. One such example is the Door by Door Solution program featuring a high-quality showroom with various door security solutions. In addition, as a result of Group sharing of best practices, a new profit-center struc- ture has streamlined production, significantly increasing efficiency. Further savings have come from an improved overhead structure. In Chile, Poli has built on its market-leading position through its franchise-like PuntOkey program, selling through dedicated dealer outlets located in high-traffic areas such as shopping malls and subway stations. Current standing Prospects for organic growth in the near term will remain limited until a sustainable upturn in the US economy becomes a reality. A program to expand electromechanical product offerings has been underway, with the majority of them scheduled to launch in 2004. The realignment of the American units that took place in 2001 has had very positive effects in helping the Group through the recession. Operational efficiency has improved throughout the regional organization. On the product development side, there has been a campaign to raise inno- vation levels, shorten time-to-market cycles, maximize resource utilization and minimize production costs. ‘Local ownership’ initiatives have improved accountability and maintained high enthusiasm. Concentrated efforts directed at end-users such as schools, colleges, hospitals and larger companies have cre- ated additional demand not only for individual products but for more complete solutions. For example, HES, Secu- ritron, Sargent and SALock, an outside business partner, have cooperated to develop a business solution targeted at the package delivery industry. It allows recipients of deliv- eries to access and retrieve their package at a time conven- ient for them through the assignment of a unique pin code. Additionally, increased specification activity, further sup- ported by the distribution base, has secured a rising number of projects. The near future A strong brand is particularly important in tough economic times. ASSA ABLOY has more than 25 actively sold brands in the Americas division which stand for quality and relia- bility among professional locksmiths, architects and the construction trade alike. Medeco, Yale, Sargent, Corbin Russwin, Norton, Ceco and Curries, to name a few, are well known brands in the industry. As part of the Group’s new two-year action program, the roles of these individual brands are being developed in specific channels. On the supply side the Americas division has managed to consolidate the number of suppliers by working through two regional purchasing councils. By being more selective with suppliers, the division is able to create a true partner- ship whereby a mutual business commitment yields increased materials quality, services and timely delivery. More and more sourcing agreements are being reached with sister companies within the worldwide ASSA ABLOY AMERICAS – SALES BY PRODUCT GROUP Mechanical locks, lock systems and accessories, 56% Electromechanical and electronic locks, 6% Security doors and fittings, 36% Industrial locks, 2% After some 150 years of existence, the Corbin Russwin, Sargent and Yale brands are widely recognized and accepted in the North American market- place. Each of these driver brands has its own proprietary installed base. Between them, they can always offer their customers more than one alterna- tive in terms of complete door-security solutions. 28 Group. Thus Yale now relies on supplies from TESA in Mexico and Guli in China for its residential range of products. To maximize use of Group resources and products wherever possible, the Americas division has also put in place a number of cross-selling, joint manufacturing and R&D agreements. Increased focus on channel management has proved successful. ASSA ABLOY offers distributors effective pur- chasing tools in the form of software packages, as well as direct order platforms via the Internet which facilitate the order process and serve to build client loyalty. The longer term In the long term, the Americas division will continue to focus on brand positioning and aligning its marketing strat- egy to meet the evolving market needs. It will continue to take advantage of Group synergies for product develop- ment, manufacturing and sales. Important steps are the new consolidated World Class lock manufacturing facility in Mexico, the consolidation of frame and door manufac- turing and of door-closer manufacturing in the USA, and the outsourcing to Mexico of selected products. In some operational groups, the number of R&D initiatives will be scaled back in order to make better use of joint resources. Several new-product initiatives are underway, particu- larly in high-security and electromechanical locks for the construction sector. ASSA ABLOY has launched new train- ing initiatives to improve the know-how of the Group’s Division Americas primary distributors, and has set up a new sales force to concentrate on the growing college and university market. Mexico is a country with strong underlying growth potential from the standpoint of both sales and manufac- turing. ASSA ABLOY also anticipates that the large Brazil- ian market will move forward once political stability is regained. The consolidation of all its Latin American (and indeed all its American) interests within a single market division can only help ASSA ABLOY to exploit synergies and leverage the Group’s inherent strength. KEY PRIORITIES Near future • Turn-around low performers • Focus on excellence in sales and marketing initiatives • Maintain a holistic view of operational excellence Long term • Provide solutions responsive to the increased security needs after 9/11 • Educate the marketplace on the importance of high security and life-safety solutions • Increase market presence of electromechanical products Mexico is a country with strong underlying growth potential from the standpoint of both sales and manufacturing. 29 Division Asia Pacific South Pacific success provides a launch pad for Asian growth ASIA PACIFIC Geoff Norcott “Our top priority is to develop the distribution and sales-force presence on key Asian markets.” ASSA ABLOY’s Asia Pacific division is a vast geographical area with great cultural and economic diversity. The divi- sion currently accounts for 7 percent of ASSA ABLOY’s total sales. It operates four production units and five sales companies and has some 3,500 employees. The new division brings together the Group’s companies in Australia and New Zealand as well as China’s largest lock manufacturer, Guli, and a chain of sales offices in South East Asia. But the region also encompasses India, Japan and Korea, which gives it great potential for growth as the economies of Asia reawaken after years of recession. ASSA ABLOY forecasts strong sales growth in the region over the coming years. In the South Pacific area, both Australia and New Zealand have been spared the economic downturn that has affected much of the rest of the world. The total increase in construction activities – new build and renovation – has been 6–7 percent annually and is forecast to climb into double digits in some segments. In 2003 all ASSA ABLOY companies in Australia and New Zealand have achieved ongoing growth. Lockwood in 30 Australia continues to enjoy a lead- ing market position in both com- mercial and residential sectors, while Interlock is the leading residential supplier in New Zealand. Interlock also has a substantial export business sell- ing to Original Equipment Manu- facturer markets in America and elsewhere and has succeeded in winning new orders despite the weak US economy. Until now most residential sales have gone to renovation, but efforts are underway to increase sales to the first-fit market. Some 130,000 new homes are built in Australia each year, but at present Lockwood has only a limited share of sales to this segment, generated primarily through OEM sales to door and window manufacturers. Interlock has a comparable position in New Zealand. To better exploit the residential segment, Lockwood launched a new concept, the Traka-key system, during the year. This is based on a single trackable registered key. Dur- ing construction the builder can use the single key to open any door in the house. Since the key is tracked, the builder can control its use by subcontractors in order to prevent pilferage. Then, once the house is ready, the new home owner receives a key from Lockwood which overrides the builder’s key. The Traka-key system is cost-effective and highly secure and is only available if the entire house is equipped with locks from Lockwood. It is already helping to increase the company’s sales penetration in this market and has won the support and approval of insurance compa- nies and home building associations. In the region’s Asian markets the elimination of un- profitable products at the beginning of the year had a bene- ficial effect on margins, and the launch of new products produced some growth in the first quarter. However, the region continued to suffer from weak economic activity. This slump has been primarily felt in Hong Kong and Singapore where new construction was formerly booming. Lockwood in Australia has in recent years shifted focus to higher-security products and has successfully taken advantage of the Group’s strength and expertise in this area. One example is the Twin keying system based on technology developed by Assa in Sweden. As a consequence, sales there have been rather slow, although those in Thailand and Malaysia have been satis- factory in the light of market conditions. Expansion hopes for China have not yet been realized, although Guli has retained its position as the country’s leading lock maker. The Chinese market is both fragmented and fast moving. Most lock makers rely more on design than higher security and this represents both a challenge and opportunity for ASSA ABLOY as the market develops in sophistication. High-profile events such as the Beijing Olympics in 2008 provide potential platforms to expose the Group’s philosophies and technology. At the end of 2003 the Guli manufacturing plant in Guangdong province geared up significantly to take on production of commodity items for other Group compa- nies, such as mechanical locks for the UK and door closers for the Group as a whole. Within the Asia Pacific region, steps have been underway for some time to move an Asia Pacific, Key figures Income statement Sales, external Sales, internal Sales Organic growth 2003 2002 SEK M SEK M 2003 2002 AUD M AUD M 1,506 1,490 109 123 1,615 1,613 5% 6% 288 21 309 5% 283 24 307 6% Operating income before goodwill amortization (EBITA)1 Operating margin before goodwill amortization (EBITA) 1 240 205 46 39 14.9% 12.8% 14.9% 12.8% Goodwill amortization Operating income (EBIT)1 –52 188 –53 152 –10 36 –10 29 Operating margin (EBIT) 1 11.8% 9.5% 11.8% 9.5% Capital employed Capital employed – of which goodwill Return on capital employed 1 Return on capital employed before goodwill 1 Cash flow Operating income before goodwill amortization (EBITA)1 Depreciation Net capital expenditure Change in working capital1 Cash flow1 1,513 1,585 839 11.8% 848 5.7% 280 155 320 171 11.8% 5.7% 32.3% 17.3% 32.3% 17.3% 240 56 –53 –28 215 205 58 –74 37 226 46 11 –10 –5 42 39 11 –14 7 43 Average number of employees 3,507 3,696 3,507 3,696 1 Excluding non-recurring items SALES / EBITA CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED AUD M 100 AUD M 20 75 50 25 0 15 10 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 Sales, AUD M EBITA, AUD M 500 400 300 200 100 0 20 15 10 5 0 AUD M % 50 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 Capital employed, AUD M Return on capital employed, % Return on capital employed before goodwill, % 31 EBITA / CASH FLOW AUD M Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 EBITA, AUD M Cash flow, AUD M Division Asia Pacific increasing share of production from Australia and New Zealand to lower-cost countries including China. ASSA ABLOY is beginning to consider these low-cost manufac- turing locations as a part of the Group’s forward product strategy rather than purely as places to make mature products. In the Asia Pacific region new-product programs play a particularly key role in driving business and winning mar- ket share. Every three years, every product in the extensive portfolio is updated. This differs from many other areas, which rely heavily on sales of well established products. Throughout the region costs are being cut back through restructuring the operations of companies and by refining administration functions. This has made it possible to increase sales by some ten percent without having to increase the number of employees. Current standing The main markets for the Asia Pacific division are Australia, New Zealand and China. The leading positions of Lockwood in Australia and Interlock in New Zealand give them good leverage with component suppliers as regards prices and delivery. This puts them in the position of being able both to influence the quality of locking solu- tions offered to the market, and to push for better lock Standards. Some of the smaller, more specialized Group companies such as Abloy and Trimec in Australia and Lockwood Arrow in New Zealand perform an important role as suppliers of electromechanical and other higher-end niche products. They are currently growing at about 20 percent annually. The most promising opportunities for future growth in terms of sales volumes and market share are in Asia, where the market is fast growing. ASSA ABLOY is looking for a number of select acquisitions in the region. These will be made in the next two to three years to give the company a better distribution base through which to move new and existing products. The rapid pace of social and economic change in Asia is increasing the need for the types of security products, solu- tions and services that the Group can provide. Shanghai, for example, has attracted a new wave of foreign invest- ment. Many western companies are establishing businesses there, and there are many other cities like it. A top priority for ASSA ABLOY is to develop its distribution and sales- force presence on key Asian markets. Once this is done, the potential for growth in the Asia Pacific region is strong. In the fast-developing market for electromechanical locks, the ASSA ABLOY Group, including its Global Tech- nologies division, is by far the leading player in the South Pacific area, selling electromechanical products through half a dozen distributors. Trimec sells a large portion of the electric strikes sold in Australia. The region’s objective is to establish a strong position in Asia by coordinating the electromechanical products with core products manufac- tured locally. ASIA PACIFIC – SALES BY PRODUCT GROUP Mechanical locks, lock systems and accessories, 56% Electromechanical and electronic locks, 6% Security doors and fittings, 36% Industrial locks, 2% Guli Security Products Limited is the largest and most advanced manufacturer of high-quality locking products in China. 32 The near future Branding on the Australian market is hardly an issue because Lockwood is by far the leading brand with a strong market share and approximately 65 percent unaided brand recall. But in Asia there are many brands competing for market share. ASSA ABLOY is currently evaluating the true strengths of the Group’s different brands in Asia. The objective of the branding strategy will be to create a group of six or seven major brands, as compared to 20 or 30 today. This brand policy will be initiated in 2004. Once the new brand platforms have been established, attention will focus on boosting local presence in Asia. Where appropriate, this will be achieved by acquiring either a manufacturing company or a base for distribution. The longer term The policy of constant product renewal requires a high pace of innovation that can only be sustained by drawing on the technology of other Group companies. Intra Group Trade within ASSA ABLOY is growing all the time. The South Pacific companies sell many other Group products, and the Guli plant already supplies lever mortise locks as well as rim locks to the UK and light-duty door closers to Australia, New Zealand and elsewhere. The region is now studying what new product lines – for exam- ple, secondary-security items such as door bolts and other less advanced products – can be manufactured at Guli in Division Asia Pacific China. The aim is to create a new package of products that can be used across the entire Group. Further growth in Asia will primarily come through strategic acquisitions which will provide manufacturing and distribution channels. ASSA ABLOY Asia Pacific aims to sustain 5–10 percent organic growth annually. The methodology is to utilize the skills of the Group’s mature companies in the South Pacific to support its ambitious growth objectives in Asia. KEY PRIORITIES Near future • Increase Asian presence • Develop the Chinese market • New brand platforms • Increased cross-selling Long term • Build leading position in Asia • Profitable growth • Increase outsourcing to Asia based on cost leadership • Build new product platforms One of the key priorities in the near future is to develop the Chinese market. 33 Division Global Technologies Growing demand for electromechanical products GLOBAL TECHNOLOGIES Following the reorganization, ASSA ABLOY has begun to realize synergies that the three sectors can offer to each other, and to the Group’s geographical regions, from a product Joseph J. Grillo “Electromechanical products offer tremendous advantages to the cus- tomer in terms of security, convenience and flexibility. To reach their maximum potential market penetration these products require a dedicated sales and service support and quick responses to customer feedback.” The Global Technologies division accounts for 17 percent of ASSA ABLOY’s total sales. The division operates ten production units and 41 sales companies and has 2,600 employees. Global Technologies is the Group’s worldwide organization dedicated to high-technology products and services. The division comprises three sectors: • The Identification Technology Group, consisting of highly recognized brands within the electronic access control industry, such as HID, Indala and ACG • Door Automatics, consisting of Besam, the world- leading supplier of automatic door solutions • ASSA ABLOY Hospitality, which includes two leading- brand companies serving the hotel and cruise ship sector: VingCard and Elsafe development and sales perspective as well as in production and distribution. Performance for the Identifica- tion Technology Group (ITG) in 2003 was promising. Sales were good in North Amer- ica, which accounts for 70 percent of ITG’s total sales, and in Europe. In Europe, ITG launched an expansion strategy for increased production, sales and distribution capacity fol- lowed by the introduction of a number of new products. During the year ITG made four strategic acquisitions in Europe to broaden its produc- tion and sales base. In Door Automatics, Besam showed good profit improvement in Europe in 2003. In North America, how- ever, Besam suffered from a temporary downturn in sales due in part to a number of structural problems. The com- pany is actively developing the profitable service side of the business. In addition, Besam expects to realize substantial savings in production costs after co-locating its US manu- facturing base at Yale’s manufacturing facility in Charlotte, North Carolina. This move was completed in 2003. ASSA ABLOY Hospitality’s sales continue to be impacted by poor occupancy rates in the hotel business worldwide and by high overhead costs resulting from excess production capacity. These costs, combined with negative currency exposure at both the point of production in Europe and the point of sale in North America, its biggest single market, continue to weigh on margins. Despite relatively stagnant sales for the Hospitality sec- tor, the Global Technologies division as a whole is doing 34 Besam sells and services a comprehen- sive range of automatic door systems which include swing doors, sliding doors and revolving doors primarily for the retail, healthcare and transport sec- tors. Besam’s door systems are sold together with a comprehensive mainte- nance and service package designed to ensure long reliable operation and to prevent unexpected downtime. well, with good profit margins for both Identification Technology and Door Automatics. Current standing The Identification Technology Group is currently the fastest-growing business in the Global Technologies seg- ment, reporting increased sales and profits on all markets. Its established members are three US manufacturing com- panies – HID, Indala and Card Technologies and Services (CTS) – a US-based Research & Development Center, and four sales and distribution companies in the USA, Europe, Asia and Latin America. During 2003, ITG acquired four additional companies in Europe: Interlock, Metget, Sokymat and ACG. All spe- cialize in the field of Radio Frequency Identification (RFID) technology already used by HID and Indala. RFID is a method of contactless electronic identification using short- range radio links between cards and readers. Its primary Global Technologies, Key figures Income statement Sales, external Sales, internal Sales Organic growth Operating income before goodwill amortization (EBITA)1 Operating margin before goodwill amortization (EBITA) 1 Goodwill amortization Operating income (EBIT)1 Operating margin (EBIT) 1 Capital employed Capital employed – of which goodwill Return on capital employed 1 Return on capital employed before goodwill 1 Cash flow Operating income before goodwill amortization (EBITA)1 Depreciation Net capital expenditure Change in working capital1 Cash flow1 Average number of employees 1 Excluding non-recurring items 2003 SEK M 2002 SEK M 4,093 84 4,177 6% 3,194 91 3,285 0% 542 450 13.0% 13.7% –238 304 7.3% 5,288 4,189 5.6% –186 264 8.0% 5,519 4,380 6.1% 46.5% 45.0% 542 81 –64 –10 549 450 63 –49 76 540 2,574 1,676 1,200 1,000 800 600 400 200 0 SALES / EBITA SEK M SEK M Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 Sales, SEK M EBITA, SEK M 180 150 120 90 60 30 0 CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED EBITA / CASH FLOW SEK M 8,000 % 80 SEK M 200 60 40 20 0 150 100 50 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 EBITA, SEK M Cash flow, SEK M 6,000 4,000 2,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 Capital employed, SEK M Return on capital employed, % Return on capital employed before goodwill, % 35 Division Global Technologies use is in controlling access to commercial, institutional, educational and residential premises. The technology is advancing rapidly through the use of higher frequencies and smarter cards with higher data-storage capacity, more sophisticated encryption techniques and new methods of authenticating cardholders. Thanks to increasing cooperation with ASSA ABLOY companies throughout the Group, Besam’s performance for Door Automatics in Europe and the Asia Pacific region is progressing well, particularly in Sweden, Finland, Germany and Australia. In the North American market, the synergies resulting from the relocation of the company’s US manufac- turing to Yale’s main site are expected to improve perform- ance and will be assisted by the expansion of the servicing side. The Hospitality market shows signs of a more stable market development after the long period of decline follow- ing 11 September 2001. ASSA ABLOY Hospitality is begin- ning to see improvements both from marketing initiatives and from cost and sales synergies derived from closer co- operation with ITG and other Group companies. This will be particularly important in combating rising competition in the large North American market. As one significant move, ASSA ABLOY Hospitality is expanding its profitable business in customer-services con- tracts. This has already been successful in the United King- dom and there is good potential for growth throughout the world as locking solutions for the hospitality industry become increasingly sophisticated and technically complex. The near future To ensure continued growth and healthy profit margins, the ASSA ABLOY Group has entered into a phase where fully leveraging Group strength is a priority. This work has already started within Global Technologies with new initia- tives such as moving or consolidating production and improving supply management systems at the various companies. To make the most of ASSA ABLOY’s know-how and to maximize cost synergies wherever possible, the Group will be making far greater use of joint platforms for sales, key account management, administration and training. ASSA ABLOY has already begun to streamline the supply chain by reducing the number of individual suppliers in the marketplace so as to negotiate and receive more advanta- geous pricing agreements with the suppliers when purchas- ing electronic components and other materials. One of the great assets of a global company like ASSA ABLOY is its strong mix of local, regional and global brands. The Group is currently analyzing the increasingly important issues of joint and multiple branding. ASSA ABLOY Hospitality has been rolled out as a general sales organization for the different underlying brand names. For Door Automatics, Besam, by virtue of its worldwide presence on the market, is a global brand which enjoys high recognition. In the case of Identification, ITG will continue to use a multiple branding approach to address its different customer categories. As the Group increases its focus on vertical market segmentation using joint branding profiles, it is also looking into ways of using the ASSA ABLOY name more widely. GLOBAL TECHNOLOGIES – SALES BY PRODUCT GROUP Mechanical locks, lock systems and accessories, 3% Electromechanical and electronic locks, 97% HID’s iClass technology represents a major investment in a true multi- application smart card. With its higher data storage capacity, faster data transfer and greater security based on encryption of data, the card can, for example, be used to control access by opening doors, to pay for meals in cafeterias and to log on and off a computer network. For added security, iClass cards can carry the holder’s biometric template. 36 The longer term The Global Technologies business is characterized by for- ward-looking locking solutions. The future success of the Global Technologies companies will depend on their ability to compete aggressively by offering exciting new products that will exceed the customer’s expectations. In the Identification sector this means smarter smart cards that offer higher security and a wider range of appli- cations. One area of access control that is on the threshold of expansion is the demand for cards for biometric applica- tions that can store fingerprint and iris authentication data. In the Hospitality sector future growth will depend on making the most of the huge installed base by offering seamless functionality that integrates keys and smart cards. For Door Automatics, higher-margin services offer the best return on invested capital but must be combined with a product range that remains at the forefront of technology. In general there is a bright future for electromechanical locks, which are rolling out on markets throughout the world. These new locks offer great advantages to the cus- tomer in terms of security, convenience and flexibility. During 2003 Global Technologies was under- performing the rest of the Group with a return on capital employed at 6 percent. ASSA ABLOY will increase sales and profit margins by expanding the profitable service businesses and by selective acquisitions of companies that will give ASSA ABLOY access to new products, new mar- kets and greater scope for future growth. KEY PRIORITIES Near future • Capture synergies within the division • Reestablish Besam USA • Improve cost level in ASSA ABLOY Hospitality • Development of acquired companies within ITG Europe Long term • Create combinations of products to penetrate installed base • Increase end-customer value through product solution offerings • Further leverage on Group synergies Division Global Technologies One area of access control that is on the threshold of expansion is the demand for cards for biometric applications that can store fingerprint and iris authentication data. 37 Hotels The greatest advantage for hotels in using electronic locks is the total key control they provide, which eliminates problems with lost or copied keys. The latest generation of electronic hotel locks makes it possible to give every new guest an individual key code. The system can also keep a log of all users who make authorized entries to hotel rooms, for example for cleaning or maintenance. Furthermore, guests can use their room entry cards for transactions in the hotel’s restaurants, shops and casino. 38 i e c n e n e v n o c d n a y t e a s , y t i r u c e S f 39 Report of the Board of Directors for 2003 The Annual Report of ASSA ABLOY AB (publ.), Corporate Organization number 556059-3575, contains the Group’s accounts for the financial year 1 January – 31 December 2003. Important events New President and CEO Bo Dankis was appointed as the new President and CEO of ASSA ABLOY in March 2003. New organization During the year ASSA ABLOY changed its organization with the aims of increasing flexibility and being able to respond to market opportunities more quickly. Eleven regions were reduced to three geographical divisions – EMEA (Europe, Middle East and Africa), Americas (North and South America) and Asia Pacific (Asia, Australia and New Zealand) – plus Global Technologies, a division for the global products Door Automatics, Identification, and solutions for the international Hospitality industry. The Executive Team was reduced from 17 people to seven. Two-year action program (Leverage and Growth) An action program has been launched to leverage Group strength and create a foundation for sustainable growth. Targets have been defined for all divisions (EMEA, Ameri- cas, Asia Pacific and Global Technologies). Under the pro- gram ASSA ABLOY will increase its focus on innovation, market activities, channel management and brand building. Low-performing companies will either be turned round, divested or closed down before the end of 2004. Simplifica- tion of the operational structure and further acceleration in coordinating purchasing will create significant savings. The cost of the program will be SEK 1,320 M with a payback time of less than three years. The greatest costs have been incurred in the EMEA and Americas divisions. For the Group as a whole, items affect- ing liquidity will cost SEK 935 M, chiefly related to a reduction of 1,400 in personnel. Assets have been written down by SEK 385 M. Annual savings from 2005 onwards are estimated at SEK 450 M. Savings of half this amount are estimated for 2004. NON-RECURRING ITEMS SEK M EMEA Americas Asia Pacific Global Technologies Total Total cost 860 230 120 110 1,320 Cash costs 760 50 40 85 935 Write downs Personnel reduction, number 100 180 80 25 385 1,100 100 – 200 1,400 In EMEA the program is directed towards productivity increases, which will be achieved primarily by reducing the number of employees. In Americas the emphasis is on underperforming companies. Asia Pacific’s part of the pro- gram concentrates on consolidation of production, while Global Technologies will direct itself towards realizing synergies in its Identification businesses in Europe. Acquisitions by Global Technologies On 1 January ASSA ABLOY Identification Technology Group acquired Interlock Holding AG in Switzerland. The Swedish company Metget AB was acquired on 1 July and the Swiss company Sokymat SA on 1 November. The com- panies develop, manufacture and market transponders for access-control cards, industrial logistics and other impor- tant applications of radio-frequency identification. The acquisitions will contribute significant synergies as well as high-technology production and development. On 1 November the identification technology business of ACG (Advanced Component Group AG) and the shares in OMNIKEY AG were acquired. ACG is an independent distributor and provider of technology to the market for radio-frequency identification and smart cards. OMNIKEY is a leading manufacturer of readers for smart cards, focus- ing on IT applications. The company complements ASSA ABLOY’s strength in reader technology by adding IT appli- cations. ACG is based in Germany with distribution and sales activities in Europe, the Middle East, Asia, Australia and North and South America. The acquisition gives ASSA ABLOY significant depth and strength throughout the value chain of radio-frequency identification and smart cards, as well as access to important technology and sup- plier contracts. 40 The combined purchase price of these acquisitions on a debt-free basis was SEK 520 M. The goodwill arising in connection with the acquisitions totals SEK 357 M. The companies’ sales in 2004 are estimated at SEK 800–900 M, with limited profitability initially. The acquisitions will contribute to earnings per share from 2004. Acquisitions in Americas The outstanding 20 percent of shares in ASSA ABLOY Door Group were acquired on 1 July from the joint-venture partner SPX Corporation. The purchase price was USD 80 M and gives rise to additional tax-deductible goodwill of USD 60 M. The transaction contributed to earnings per share from the date of acquisition. Acquisitions in EMEA Nemef BV in the Netherlands and Corbin Srl in Italy were acquired from Black & Decker on 5 January 2004 in accor- dance with the contract signed in March 2003. The acquisitions strengthen the Group’s position in the Netherlands and Italy and include well-known brands such as Nemef and Corbin. Nemef manufactures and sells a complete range of locks and cylinders in Apeldoorn, Netherlands. The company was founded in the early 1900s and is one of Europe’s leading manufactures of lock cases. Corbin manufactures lock cylinders in Bologna, Italy and sells locks and padlocks. The acquisition price for the two companies is EUR 66 M. Goodwill arising in connection with the acquisition is about EUR 40 M. The companies have annual sales of EUR 50 M with good profitability. The acquisition will con- tribute to earnings per share from 2004. In 2003 the outstanding minority stakes in effeff and Keso were aquired. Environmental impact Four of the ASSA ABLOY Group’s subsidiaries in Sweden carry out licensable business activities in accordance with Swedish environmental regulations. The Group’s activities liable to license and registration affect the external environ- ment chiefly through the subsidiaries Assa AB, Assa Indus- tri AB, AB FAS Låsfabrik and FIX AB. The companies operate machine shops and foundries and associated surface-coating plants, which have an impact on the exter- nal environment through the discharge of water, air and solid waste. The subsidiaries Assa AB, Assa Industri AB, AB FAS Låsfabrik and FIX AB are actively addressing environmen- tal issues, and are certified in accordance with ISO 14001. Most units outside Sweden carry out licensable business activities and hold comparable licenses under local legisla- tion. Legal disputes In the 2002 Annual Report ASSA ABLOY reported that the company Ibertech in Texas had sued VingCard. The parties subsequently settled and the suit was withdrawn. The costs resulting from the dispute have a negligible effect on the income statement. ASSA ABLOY is involved in other disputes that require no further disclosure at this time. Accounting principles The new recommendations of the Swedish Financial Accounting Standards Council for 2003 have been adopted from 1 January 2003. This has not required any adjustment of figures for previously reported periods. In all other respects accounting principles are unchanged from previ- ous years. Changed accounting principle in 2004 From 2004 ASSA ABLOY will adopt the Swedish Financial Accounting Standards Council’s Recommendation RR 29 ‘Employee benefits’. The rules are based on IAS 19. Pensions and other remuneration after retirement have pre- viously been reported in accordance with each country’s local rules. The move to RR 29 will after deduction for deferred tax have a negative effect of some SEK 700 M on the Group’s shareholders’ equity. ASSA ABLOY will report this effect as a correction to the opening shareholders’ equity on 1 January 2004. The move itself will thus have no effect on income or cash flow. Nor will there be any change to the ASSA ABLOY Group’s obligations to its employees. 41 Change to IFRS in 2005 From 2005 ASSA ABLOY will report according to Inter- national Financial Reporting Standards (IFRS, formerly IAS). The Interim Report for the first quarter of 2005 and the 2005 Annual Report will include a reconciliation com- paring the 2004 financial reports according to IFRS and according to the company’s current accounting principles. The recommendations of the Swedish Financial Accounting Standards Council have gradually moved towards IFRS, but there still remain a number of differ- ences between the two. Based on what is known today, the main differences between ASSA ABLOY’s current account- ing principles and the future IFRS will be: • Reporting of employee benefits (but this difference will disappear with the introduction of RR 29 in 2004) • Reporting of financial instruments, which means that many instruments will be reported at current market value and which will also intensify the need to allow reporting of hedging transactions • Goodwill and certain intangible assets will no longer be amortized. Instead, regular impairment tests will be per- formed. The company’s financial reports will also be affected by changed requirements for classification and explanation under IFRS. These changes will probably affect the com- pany’s Key Financial Information, but the differences can- not yet be quantified. For the present, reporting routines will be reviewed in order to be able to collect the data required for future IFRS reporting. During 2004 the company will also record informa- tion for use in the comparisons to be included in the Quarterly Reports and Annual Report for 2005. A project group headed by the CFO and a number of working groups to address these issues have been set up. It is planned to use the figures for the third quarter of 2004 as a test of the new routines. Preliminary training of relevant personnel has been undertaken and will be augmented throughout 2004. In the last quarter of 2004 ASSA ABLOY plans to give the stock market and analysts additional information about the effects that the introduction of IFRS will have on the com- pany’s financial reporting. Outlook for the future ASSA ABLOY expects to report stable sales in SEK in 2004. At present exchange rates, sales growth due to organic growth and to acquisitions will be offset by nega- tive translation effects and by discontinued volumes from low-performing companies. The operating margin before goodwill amortization, EBITA, is expected to increase, mainly as a result of the Leverage and Growth action pro- gram. After excluding payments related to restructuring, the strong cash flow is expected to continue. In the long term ASSA ABLOY expects security-driven demand to increase. Focus on customer benefit and on innovation, and the leveraging of ASSA ABLOY’s strong positions, will accelerate growth and improve profitability. 42 Corporate governance ASSA ABLOY’s objective is that its activities should gener- ate good long-term returns for its shareholders and other stakeholders. An effective scheme of corporate governance for ASSA ABLOY comprises a number of interactive com- ponents, which are described below. RTIN G E X Owners Annual General Meeting Nomination Committee T E R N A L Board of Directors Audit Committee Remuneration Committee A U D I T I N CIAL REPO Executive Management Management philosophy • Policies and guidelines Internal control and risk management G FINAN The Board has a Remuneration Committee consisting of three people. There is also an Audit Committee, which like- wise consists of three people. The purpose of these commit- tees is to assist the Board in giving deeper and more effi- cient consideration to these matters. The Audit Committee has three meetings a year, one of which forms the annual year-end accounting meeting, held in conjunction with the ordinary Board meeting. The com- pany’s auditor participates in the Audit Committee’s meet- ings. The Committee’s duties include review of financial policy and control of the company’s financial reporting, internal reporting and control systems and legal risks. There is an ongoing dialog with the appointed auditor. The Audit Committee consists of Melker Schörling (Chairman), Gustaf Douglas and Per-Olof Eriksson. DECENTRALIZED ORGANIZATION From 2003 a Nomination Committee has also been set Ownership ASSA ABLOY’s principal shareholders are Wärtsilä Corpo- ration (7.6 percent of the capital and 22.8 percent of the votes), Investment AB Latour/SäkI (8.0 percent of the capital and 17.3 percent of the votes) and Melker Schörling (3.0 per- cent of the capital and 4.5 percent of the votes). The number of shareholders at year-end was 26,214. ASSA ABLOY’s share capital at year-end amounted to SEK 366 M, distrib- uted among 19,175,323 Series A shares and 346,742,711 Series B shares. All shares give the holders equal rights to the company's assets and earnings. Each Series A share carries 10 votes and each Series B share one vote. Annual General Meeting The Annual General Meeting must be held within six months of the end of the company’s financial year. Share- holders who are recorded in the share register on the nomi- nated day and who have notified their intention to attend may take part in the Meeting. Board of Directors The Board consists of nine members, two employee repre- sentatives and two deputy employee representatives. The Board meets on not less than four occasions a year, at least one of which is a meeting combined with a visit and an in- depth review of a country in which the company has opera- tions. During 2003, seven Board meetings were held. The Board decides on the Group’s overall strategy and the acquisition of companies and real estate. In addition, the Board is responsible for the organization and adminis- tration of the Group in accordance with the Swedish Com- panies Act. Working procedures for the Board and instruc- tions for the President have been set down in written form and are reviewed annually. up with the tasks – before each General Meeting – of preparing for the selection of Directors, the setting of Directors’ remuneration and associated issues. The Nomi- nation Committee consists of Gustaf Douglas (Chairman), Georg Ehrnrooth and Melker Schörling. Remuneration of Board and Management Remuneration of the Board is in accordance with decisions taken at the Annual General Meeting. There are no sepa- rate fees for committee work. The Chairman of the Board and the Directors receive fees that are decided by the Board within the framework of a total sum decided by the Annual General Meeting, which is currently SEK 3.6 M (1.9). The Chairman and other Directors have no pension benefits or severance pay agreements. The President and the employee representatives do not receive a Director’s fee. Remunera- tion of the President and the Executive Team is determined by the Remuneration Committee and approved by the Board. The Remuneration Committee also determines the remuneration of all executives who report directly to mem- bers of the Executive Team. The Remuneration Committee consists of Georg Ehrnrooth (Chairman), Melker Schörling and Sven-Christer Nilsson. The Remuneration Committee held two meetings in 2003. Remuneration of the Executive Team consists of basic salary, variable bonuses, other benefits, and pensions. Bonuses are given chiefly for improvement in operating income compared with the previous year in the recipient’s area of responsibility. Bonuses may also be based on organic growth. Bonus payments of these types are capped at a maxi- mum of two-thirds of basic salary. The Executive Team also receives bonuses based on improvement in earnings per share. The maximum payment of SEK 2 M per person applies if earnings per share increase by 25 percent compared with the previous year. Half of this type of bonus payment is paid out 43 Corporate governance the following year, while the other half is retained for four years and grows at the same rate as the Group’s return on capital employed. It is paid out only if the person concerned is still employed by ASSA ABLOY at the end of the period. Basic pension arrangements for the President and others in the Executive Team are through participation in the ITP plan or equivalent. In addition, the President and certain other senior executives have the right to retire with a pension at the earliest on reaching the age of 60. The pension is based on basic salary at the time of retiring and is 70 percent of this salary between the ages of 60 and 65 and 50 percent of this salary after the age of 65 for the remainder of life. The Presi- dent has a severance payment agreement providing 100 per- cent of his basic salary for 24 months. The payment is made only where the company terminates the contract. The Presi- dent is also entitled to reimbursement for any losses resulting from relocation. Others in the Executive Team receive a sever- ance payment of 100 percent of their basic salary for a maxi- mum of 12 months. Salary and ongoing pension contribu- tions were paid to the former President up to 26 March 2003. No remuneration has been paid since that date. REMUNERATION AND OTHER BENEFITS PAID TO SENIOR OFFICE-HOLDERS Salaries/ Fees Pension costs Bonus Other bene- Social costs fits Total Other Board members President Other senior executives (6 people) Total 1 3 5 19 28 0 4 4 4 5 9 0 1 1 0 1 3 4 8 1 4 12 33 50 SEK M Chairman Executive Team shareholdings in ASSA ABLOY Members of the Executive Team hold Series B shares and options, and have taken part in the convertible debenture loan 2001/06 Series 1–4 through purchase of shares in ASSA ABLOY Incentive 2001 Holding S/A, as detailed in the table below. Shares have been purchased at market value in line with the offer made to all employees in 2001. EXECUTIVE TEAM SHAREHOLDINGS IN ASSA ABLOY AT 31 DECEMBER Series B shares Incentive program 1 Options 2 2003 2002 2003 2002 2003 2002 Bo Dankis 86,000 86,000 10,750 10,750 Göran Jansson 351,784 351,784 60,000 60,000 Hans Johansson 646,821 646,821 60,000 60,000 Geoff Norcott 60,000 60,000 81,065 81,065 Thanasis Molokotos 25,000 25,000 55,000 55,000 Joseph J. Grillo 32,500 32,500 Åke Sund 175,000 190,751 60,000 60,000 1 Equivalent number of Series B shares at conversion prices EUR 15.8–25.3. 2 Equivalent number of Series B shares at conversion price SEK 118. 44 Incentive programs ASSA ABLOY is constantly striving to strengthen the moti- vation of its personnel and their involvement in the Group’s continuing development. Since 1995 there have been several Incentive programs, which also aim to increase employees’ shareholdings in ASSA ABLOY. Over 4,000 employees in more than 15 countries are taking part in the current Incentive program. Executive management ASSA ABLOY’s business operations are divided into four divisions. The Executive Team (Group Management) con- sists of the CEO, the heads of the Group’s four divisions, the Deputy CEO (who is also CFO) and an Executive Vice President responsible for market and business develop- ment. The composition of this group gives a geographical and strategic spread of responsibility designed to ensure rapid, short decision-making paths. Management philosophy ASSA ABLOY’s firm conviction is that people make the dif- ference. The Group’s management philosophy is based on trust, positive thinking, and respect for local conditions and values. The four cornerstones of Vision, Realism, Ethics and Courage play a central role in the Group. Policies and guidelines The Group’s most important policies and guidelines con- cern environmental issues, financial control, the Group’s brands, and communication issues. The environmental policy provides guidance for the Group’s environmental work and is based on international Standards in this field, such as ISO 14001, the UN Global Compact and the OECD’s Guidelines. Common financial, reporting and investment policies set the frameworks for financial control and monitoring. Guidelines concerning brands aim to protect and develop the major assets that the Group’s brands represent. The ASSA ABLOY brand is used as an endorsement brand standing behind the local brands. ASSA ABLOY’s communication policy aims to treat all interested parties in the same way; to present important information at the right time and in the right way; to meet legal requirements and observe relevant stock market rules; and to maintain a high level of ethics. Internal control and risk management The Board has overriding responsibility for an efficient sys- tem of internal control and risk management, while the President is responsible for executing internal control and risk management. Risk management includes assessing the risks that the company is exposed to. This includes identify- ing business risks, determining where they come from and estimating their potential impact. In the annual budget process, the Executive Team establishes business frameworks while also laying the basis for a high degree of decentralization of the Group’s opera- tions. Internal financial reporting is based on the Group’s various benchmarking units. Results are monitored against budgets and against previous years’ performance. Continu- ous benchmarking among all the Group’s units forms an important part of the control and monitoring of opera- tions. For information about financial risks see Page 55. Decentralized organization The Group tries to achieve a simple, ‘flat’ organization in which all its businesses are divided into benchmarking units included in the Group’s four operating divisions. A bench- marking unit may be either a factory or a sales company. The Group currently has more than 70 factories and more than 80 sales companies. The local management group for a benchmarking unit has operational responsibility for its earnings, and as a rule reports direct to the management of its division. This makes for a ‘flat’ organization with rapid, short decision- making paths. The multinational management is important in ensuring understanding of, and sensitivity to, local needs, business procedures and distribution requirements. These are vital in achieving success because of the very local nature of the lock industry. Corporate governance External audit The 2003 Annual General Meeting appointed Pricewater- houseCoopers as auditors for the period up to the 2006 Annual General Meeting. PricewaterhouseCoopers is undertaking the audit of ASSA ABLOY AB, the Group and a substantial majority of its subsidiaries round the world. The audit also covers the administration of ASSA ABLOY AB by the Board of Direc- tors and the President. The audit is carried out in accordance with generally accepted auditing standards. The auditing of annual finan- cial statements for legal entities outside Sweden is in accordance with legal requirements and other applicable regulations in the countries concerned and with generally accepted auditing standards as defined by the International Federation of Accountants (IFAC) for the issue of audit reports for the legal entities. The Group’s accounting and valuation principles com- ply with Sweden’s Annual Accounts Act and the recom- mendations and pronouncements of the Swedish Financial Accounting Standards Council, in accordance with the list- ing contract of the Stockholm Stock Exchange. For remuneration of auditors, see Note 4. Financial reporting External financial information is provided at regular inter- vals via Quarterly Reports issued as press releases, and via the Annual Report. News and other important information that could affect the share price are issued via press releases. Coinciding with press releases and the presenta- tion of quarterly and year-end results, telephone confer- ences and meetings with analysts and investors are held. All Reports and press releases are simultaneously published on ASSA ABLOY’s website, www.assaabloy.com. ORGANIZATIONAL STRUCTURE Executive Team EMEA Americas Asia Pacific Global Technologies Benchmarking units 45 Sales and earnings 2003 2002 Operating income before depreciation and amortization • Organic growth for comparable units was 0 percent (2) • Operating margin before amortization of goodwill and excluding non-recurring items (EBITA) was 13.9 percent (14.2) • Earnings per share excluding non-recurring items amounted to SEK 3.31 (3.53) Sales The Group’s sales fell in 2003 to SEK 24,080 M (25,397). Exchange-rate effects affected sales negatively by SEK 2,660 M compared with 2002. In local currencies, sales increased by 5 percent. Organic growth by comparable units accounted for 0 percent (2) growth, while acquired units made a positive contribution of 5 percent (15). CHANGES IN SALES % Acquired growth Organic growth Currency effects 5 0 –10 –5 15 2 –4 13 Mechanical locks, lock systems and accessories accounted for 54 percent (57) of sales. Sales of electromechanical and electronic locks rose to 24 percent (23). Sales of security doors and fittings also increased to 19 percent (17), while industrial locks retained their share of the Group’s total sales at 3 percent (3). SALES BY PRODUCT GROUP % 2003 2002 Mechanical locks, lock systems and accessories Electromechanical and electronic locks Security doors and fittings Industrial locks Cost structure 54 24 19 3 57 23 17 3 Total remuneration costs including social costs and pension costs amounted to SEK 8,351 M (8,750), which represents 35 percent (34) of sales. The average number of employees was 28,708 (28,754). The average number of employees in the Parent Com- pany was 43 (37). The Group’s material costs totaled SEK 6,527 M (7,055), which represents 27 percent (28) of sales. Other costs, primarily other purchases, totaled net SEK 4,951 M (5,047), which represents 21 percent (20) of sales. Depreciation of tangible fixed assets amounted to SEK 861 M (920), which represents 4 percent (4) of sales. Non-recurring items Non-recurring items of SEK 1,320 M represent the costs incurred in connection with the Leverage and Growth pro- gram. SEK 935 M are costs affecting cash flow, with pay- ments expected to be made in 2004 and 2005, and SEK 385 M represent writedown of property, machinery, equipment and inventories. In connection with the program the num- ber of employees is being reduced by 1,400. Operating income Operating income (EBIT) excluding non-recurring items amounted to SEK 2,393 M (2,638). The operating margin was 9.9 percent (10.4). Depreciation and amortization for the year totaled SEK 1,856 M (1,907), of which SEK 959 M (957) represented goodwill. (EBITDA), adjusted for non-recurring items, amounted to SEK 4,249 M (4,545). The corresponding margin was 17.6 percent (17.9). Consolidated operating income before goodwill amortization (EBITA) amounted to SEK 3,352 M (3,595) and was affected negatively by exchange-rate effects totaling SEK 405 M. The operating margin before goodwill amortization was 13.9 percent (14.2). Income before tax Income before tax and non-recurring items totaled SEK 1,903 M (2,015). This represents a reduction of 6 percent compared with the previous year, with negative currency effects of SEK 186 M. Financial items amounted to SEK –497 M (–631). The improvement is due to lower interest rates and reduced net debt. Profit margin – defined as income before tax and non-recurring items in relation to sales – amounted to 7.9 percent (7.9). The Parent Company’s income before tax amounted to SEK -439 M (-24). Tax The Group’s tax charge totaled SEK 556 M (689), which corresponds to an effective tax rate of 35.5 percent (34.2) after adjusting for non-recurring items and tax pertaining to them. Earnings per share Earnings per share excluding non-recurring items amounted to SEK 3.31 (3.53), affected by negative cur- rency effects of SEK 0.22 per share. Earnings per share excluding goodwill and non-recurring items amounted to SEK 5.89 (6.13), with negative currency effects of SEK 0.49 per share. 46 PARENT COMPANY EUR M1 2003 SEK M 2003 SEK M 2002 – – – – –26 – 22 – – – –4 4 –48 – –48 – – – – – – –234 – 202 – – – – – – – –161 – 533 – – – –32 372 33 –440 – –439 – – 296 –692 – –24 –2 – –26 –48 –439 Income statements Sales Cost of goods sold Gross income Selling expenses Administrative expenses R&D costs Other operating income Other operating expenses Goodwill amortization Non-recurring items Operating income Income from shares and shareholdings in subsidiaries Financial items Share in earnings of associated companies Income before tax Tax Minority interests Net income Earnings per share after tax and before conversion, SEK after tax and full conversion, SEK after tax and full conversion, SEK Note 2 4 5 7 3, 6 8 9 10 16 after tax and full conversion but excluding goodwill, SEK 1 Average EUR/SEK rate: 9.12. 2 Excluding non-recurring items. EUR M1 2003 2,640 GROUP SEK M 2003 24,080 SEK M 2002 25,397 –1,602 –14,613 –15,526 1,038 9,467 9,871 –434 –184 –49 20 –23 –105 –145 118 – –55 1 64 –61 –2 1 –3,957 –1,679 –447 180 –212 –959 –1,320 1,073 – –497 7 583 –556 –18 9 3.302 0.07 3.312 5.892 –4,039 –1,742 –429 119 –185 –957 – 2,638 – –631 8 2,015 –689 –56 1,270 3.53 3.53 3.53 6.13 47 Comments by division ASSA ABLOY is organized into three geographical divi- sions and one product division. The geographical divisions, EMEA (Europe, Middle East and Africa), Americas (North and South America) and Asia Pacific (Asia, Australia and New Zealand), consist of a number of local lock companies which are active mainly on a local market. The product division, Global Technologies, covers Identification, Door Automatics and Hospitality, which all serve a global market. The column ‘Other’ includes common Group functions. EMEA Sales totaled EUR 1,116 M (1,152), with 1 percent negative organic growth. Operating income before goodwill amorti- zation and excluding non-recurring items amounted to EUR 149 M (155), with an operating margin (EBITA) of 13.4 percent (13.4). Return on capital employed before goodwill amounted to 29.0 percent (27.0). Operating cash flow before interest paid amounted to EUR 172 M (190). EMEA’s two largest market areas, France and Scandi- navia, maintained stable volumes and margins in weak market conditions. France has strengthened its position in the Do-It-Yourself sector. Eastern Europe, Benelux and Finland showed good organic growth during the year, while Italy, the United Kingdom and Africa have lost sales volume. The improved incomes in the United Kingdom, Germany and Benelux are due to structural changes made earlier. Americas Sales totaled USD 1,073 M (1,095), with 2 percent negative organic growth. Operating income before goodwill amorti- zation and excluding non-recurring items amounted to USD 176 M (178), with an operating margin (EBITA) of 16.5 percent (16.3). Return on capital employed before goodwill amounted to 43.8 percent (39.2). Operating cash flow before interest paid amounted to USD 189 M (191). Demand in the commercial sector was weak, especially in the first half-year. The Architectural Hardware Group, which represents about 40 percent of Americas, succeeded in improving its profitability with unchanged volumes. The Door Group is the unit most affected by the weak market because of the relatively large dependence of its sales on new construction. Duties on imported steel had an adverse effect on profitability. South America and Mexico also showed weak development. The Residential Group showed strong growth with good profitability. Asia Pacific Sales totaled AUD 309 M (307), with 5 percent organic growth. Operating income before goodwill amortization and excluding non-recurring items amounted to AUD 46 M (39), with an operating margin (EBITA) of 14.9 percent (12.8). Return on capital employed before goodwill amounted to 32.3 percent (17.3). Operating cash flow before interest paid amounted to AUD 42 M (43). Australia and New Zealand showed good development of both profits and margins throughout the year, but devel- opment was weaker in South East Asia and China. New construction has fallen back in the formerly expanding markets of South East Asia. Global Technologies Sales totaled SEK 4,177 M (3,285), with 6 percent organic growth. Operating income before goodwill amor- tization and excluding non-recurring items amounted to SEK 542 M (450), with an operating margin (EBITA) of 13.0 percent (13.7). Return on capital employed before goodwill amounted to 46.5 percent (45.0). Operating cash flow before interest paid amounted to SEK 549 M (540). Global Technologies is developing well, with good sales growth and margin development. The EBITA operating margin was affected by dilution effects from acquisitions. The Identification business developed positively, espe- cially in North America, with good growth and improved margins. The acquisitions in Europe are initially producing weaker profitability there. Strong aftermarket sales in the Door Automatics busi- ness more than compensated for weaker new-project sales. Europe and Asia are showing good development, while North America was restructured during the year. The Hospitality market stabilized during the year, although at a low level. Profitability is weak. 48 Results by division EMEA1 EUR M Americas2 USD M Asia Pacific3 AUD M Global Technologies4 SEK M Other SEK M Total SEK M 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 1,081 1,112 1,069 1,086 35 40 4 9 1,116 1,152 1,073 1,095 –1% 1% –2% 2% 149 155 176 178 288 21 309 5% 46 283 24 307 6% 39 4,093 3,194 84 91 4,177 3,285 6% 0% –544 –544 –665 –665 24,080 25,397 24,080 25,397 0% 2% 542 450 –217 –206 3,352 3,595 13.4% 13.4% 16.5% 16.3% 14.9% 12.8% 13.0% 13.7% Sales, external Sales, internal Sales Organic growth EBITA 5 EBITA / Sales 13.9% 14.2% –959 –957 14,766 16,214 9.6% 9.9% Goodwill amortization Operating income (EBIT) 5 –37 112 –38 117 –41 135 –39 139 –10 36 –10 29 –238 –186 304 264 –217 –206 2,393 2,638 Operating margin (EBIT) 5 10.1% 10.1% 12.6% 12.8% 11.8% 9.5% 7.3% 8.0% 9.9% 10.4% Capital employed – of which, goodwill 939 521 1,099 1,046 1,109 552 696 677 280 155 320 171 4,189 4,380 5,288 5,519 136 –178 22,984 26,701 Return on capital employed 5 10.6% 10.2% 12.4% 12.2% 11.8% 5.7% 5.6% 6.1% Return on capital employed before goodwill 5 EBITA 5 Depreciation Net operating capital expenditure Change in working capital 5 Cash flow 5 Items not affecting cash flow Interest paid and received Operating cash flow 29.0% 27.0% 43.8% 39.2% 32.3% 17.3% 46.5% 45.0% 34.4% 33.3% 149 55 –39 7 172 155 56 –48 27 190 176 31 –26 8 189 178 32 –29 10 191 46 11 39 11 –10 –14 –5 42 7 43 542 81 –64 –10 549 450 63 –49 76 540 –217 –206 3,352 3,595 5 –8 79 62 3 1 897 950 –694 –839 –52 168 405 3,723 4,111 –5 62 –5 –520 –581 –520 –581 3,265 3,525 Average number of employees 12,481 12,972 10,091 10,363 3,507 3,696 2,574 1,676 55 47 28,708 28,754 SEK M EMEA1 Americas2 Asia Pacific3 Global Technologies4 Other Total Sales, external Sales, internal Sales Organic growth EBITA 5 EBITA / Sales 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 9,858 10,168 8,625 10,545 1,506 1,490 4,093 3,194 24,080 25,397 318 364 32 88 109 123 84 91 10,176 10,532 8,657 10,633 1,615 1,613 4,177 3,285 –544 –544 –665 –665 –1% 1% –2% 2% 5% 6% 6% 0% 24,080 25,397 0% 2% 1,359 1,417 1,428 1,728 240 205 542 450 –217 –206 3,352 3,595 13.4% 13.4% 16.5% 16.3% 14.9% 12.8% 13.0% 13.7% 13.9% 14.2% –959 –957 14,766 16,214 9.6% 9.9% Goodwill amortization –338 –343 –331 –375 Operating income (EBIT) 5 1,021 1,074 1,097 1,353 –52 188 –53 152 –238 –186 304 264 –217 –206 2,393 2,638 Operating margin (EBIT) 5 10.1% 10.1% 12.6% 12.8% 11.8% 9.5% 7.3% 8.0% 9.9% 10.4% Capital employed – of which goodwill Return on capital employed 5 10.6% 10.2% 12.4% 12.2% 11.8% 5.7% 5.6% 6.1% 4,728 5,056 5,010 5,930 839 848 4,189 4,380 8,519 10,064 7,528 9,711 1,513 1,585 5,288 5,519 136 –178 22,984 26,701 Return on capital employed before goodwill 5 29.0% 27.0% 43.8% 39.2% 32.3% 17.3% 46.5% 45.0% 34.4% 33.3% EBITA 5 Depreciation 1,359 1,417 1,428 1,728 505 514 250 312 Net operating capital expenditure –357 –437 –212 –281 Change in working capital 5 66 247 61 96 Cash flow 5 1,573 1,741 1,527 1,855 240 56 –53 –28 215 205 58 –74 37 226 542 81 –64 –10 549 450 63 –49 76 540 –217 –206 3,352 3,595 5 –8 79 3 1 897 950 –694 –839 –52 168 405 3,723 4,111 1 Europe, Middle East and Africa. 2 North and South America. 3 Asia, Australia and New Zealand. 4 Door Automatics, Hospitality and Identification. 5 Excluding non-recurring items. 49 Financial position • Capital employed amounts to SEK 22,984 M (26,701) • Net debt was reduced to SEK 12,290 M (13,989) • Net debt / equity ratio is 1.15 (1.13). SEK M Capital employed – of which, goodwill Net debt Minority interests Shareholders’ equity 2003 22,984 14,766 12,290 16 2002 26,701 16,213 13,989 331 10,678 12,381 Capital employed Capital employed in the Group – defined as total assets less interest-bearing assets and non-interest-bearing liabilities including deferred tax liabilities – amounted to SEK 22,984 M (26,701). The return on capital employed, adjusted for non-recurring items, was 9.6 percent (9.9). Intangible assets amounted to SEK 14,933 M (16,386). The change is explained mainly by depreciation and the weak US dollar. During the year goodwill of SEK 1,096 M arose from acquisitions. A valuation model based on dis- counted future cash flow is used for regular impairment tests of goodwill. No writedown took place in 2003. Tangible fixed assets amounted to SEK 5,329 M (6,175). Investments in tangible fixed assets, less sales of tangible fixed assets, totaled SEK 694 M (839). Deprecia- tion according to plan amounted to SEK 861 M (920). Deferred tax receivables amounted to SEK 507 M (486). One reason for the increase is that most of the non- recurring items are not tax-deductible until later tax years. Accounts receivable totaled SEK 4,131 M (4,242) and inventories totaled SEK 3,030 M (3,595). The average col- lection period for accounts receivable was 56 days (57). Material throughput time averaged 108 days (121), the improvement being due to the systematic efforts being undertaken by the Group to reduce capital tied up in inventory. Net debt Net debt amounted to SEK 12,290 M (13,989), of which pension liabilities accounted for SEK 723 M (1,023). The reduction of net debt can be attributed primarily to the strong operational cash flow and to exchange-rate effects. External financing The Group’s long-term loan financing consists mainly of an EMTN program for a maximum of EUR 1,500 M (1,500), a Nordic MTN program for EUR 300 M (300) and a Swedish Commercial Paper program for SEK 5,000 M (3,000). At year-end the EMTN program was being utilized for SEK 5,443 M, the Commercial Paper program for SEK 1,493 M and the Nordic MTN program for SEK 1,814 M. During the year the Group’s financing options were increased with a global Commercial Paper of USD 1,000 M, which was being utilized for SEK 1,795 M at year-end. There is also a Multi-Currency Revolving Credit (MCRF) agreement for a maximum of EUR 820 M (825), which at year-end was not being utilized at all. The interest coverage ratio, defined as income before tax, plus net interest, divided by net interest, amounted to 4.7 (3.9). Periods for fixed-interest-rate borrowings are generally short, averaging less than one year. This is partly because Group revenues largely follow the trends in each country, and partly due to the strong cash flow. Cash and cash equivalents amounted to SEK 880 M (1,408). Cash and cash equivalents are invested in banks with high credit ratings. Shareholders’ equity Shareholders’ equity in the Group totaled SEK 10,678 M (12,381) at year-end. The return on capital employed amounted to 9.9 percent (9.9). The equity ratio was 35.9 percent (38.2). The net debt / equity ratio, defined as net debt divided by shareholders’ equity, was 1.15 (1.13). 50 ASSETS Fixed assets Intangible fixed assets Tangible fixed assets Shares in subsidiaries Receivables from subsidiaries Other financial fixed assets Deferred tax receivables Total fixed assets Current assets Inventories Accounts receivable Other receivables Receivables from subsidiaries Short-term investments Cash and bank balances Total current assets TOTAL ASSETS Assets pledged SHAREHOLDERS’ EQUITY AND LIABILITIES Shareholders’ equity Restricted equity Share capital Restricted reserves Unrestricted equity Unrestricted reserves Net income Total shareholders’ equity Minority interests Provisions Provisions for pensions Deferred tax liability Other provisions Total provisions Long-term liabilities Long-term loans Long-term loans to subsidiaries Convertible debenture loans Other long-term non-interest-bearing liabilities Total long-term liabilities Current liabilities Short-term loans Tax liability Accounts payable Liabilities to subsidiaries Accrued expenses and prepaid income Other current liabilities Total current liabilities TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES Contingent liabilities 1 EUR/SEK rate on 31 Dec: 9.07. Note 11 12 13 14 10 15 24 24 26 21 16 10 7 17 19 18 20 26 22 Balance sheets GROUP PARENT COMPANY EUR M1 SEK M 31 Dec 2003 31 Dec 2003 31 Dec 2002 SEK M EUR M1 SEK M 31 Dec 2003 31 Dec 2003 31 Dec 2002 SEK M 1,646 588 14,933 5,329 16,386 6,175 – – 23 56 – – 210 507 – – 182 486 0 1 2,556 248 5 – 3 8 23,187 2,248 41 – 1 5 22,276 2,762 41 – 2,313 20,979 23,229 2,810 25,487 25,085 334 455 66 – 41 79 975 3,288 3,030 4,131 599 – 375 713 8,848 29,827 3,595 4,242 703 – 410 1,082 10,032 33,261 5 46 49 40 1,005 131 1 366 9,118 1,185 9 366 10,343 402 1,270 – – 5 829 2 70 906 3,716 None 40 982 321 –48 – – 47 – – 48 7,514 8,021 19 633 8,213 33,700 2 198 8,269 33,354 None None 366 8,905 2,911 –439 366 8,905 3,394 –26 1,177 10,678 12,381 1,295 11,743 12,639 2 16 331 80 31 103 214 881 – 100 11 992 421 28 164 – 205 85 903 723 283 935 1,023 310 – 1,941 1,334 7,987 8,317 – 907 100 – 916 80 8,994 9,312 3,821 250 1,489 – 1,862 776 8,198 5,289 463 1,546 – 2,001 604 9,903 – – – – – 648 248 100 – 996 – – 2 – – – – – – – – – – 5,875 2,248 907 – 6,020 2,762 916 284 9,030 9,982 – – 19 723 – 13 1,417 12,852 9,917 5 1 44 12 55 25 1,425 12,927 10,733 3,288 29,827 33,261 3,716 33,700 33,354 77 696 446 795 7,213 7,213 51 Cash flow • Operating cash flow amounted to SEK 3,265 M (3,525) • Net capital expenditure amounted to SEK 694 M (839) Relationship between cash flow from operating activities and operating cash flow SEK M Cash flow from operating activities 2003 2002 Net capital expenditure Tax paid Operating cash flow Acquisitions Operating cash flow SEK M Operating income before goodwill amortization and non-recurring items (EBITA) Depreciation (excluding goodwill amortization) Net capital expenditure Change in working capital Interest paid and received Items not affecting cash flow Operating cash flow Operating cash flow / Income before tax 3,352 897 –694 168 –520 62 3,265 1.72 3,595 950 –839 405 –580 –6 3,525 1.75 Total outlay on acquisitions amounted to SEK 1,254 M (3,335). Acquired net debt totaled SEK 169 M (92). Acqui- sitions made during the year were financed by internally generated cash flow. 2003 3,180 –694 779 3,265 2002 3,847 –839 517 3,525 The Group’s operating cash flow amounted to SEK 3,265 M (3,525), equivalent to 172 percent (175) of income before tax. The Parent Company’s cash flow amounted to SEK Change in net debt Net debt was reduced primarily by the strong cash flow and by translation differences applying in particular to debts in the USA. SEK M Note 2003 Net debt at 1 January Operating cash flow Tax paid Acquisitions New share issues Dividend Translation differences Net debt at 31 December 26 13,989 –3,265 779 1,355 2002 15,534 –3,525 517 3,569 – –1,244 457 –1,025 12,290 354 –1,216 13,989 452 M (141). Net capital expenditure Direct net capital expenditure on tangible fixed assets totaled SEK 694 M (839), equivalent to 81 percent (91) of depreciation of tangible fixed assets falling due during the financial year. The reduced level of capital expenditure is explained principally by the Group’s long-term efforts to optimize capital expenditure. Change in working capital SEK M Inventories Accounts receivable Short-term receivables Current working liabilities Change in working capital 2003 274 –120 6 8 168 2002 169 197 122 –83 405 The program to reduce the Group’s material throughput times in its inventories has generated a contribution to cash flow of SEK 274 M (169) during the year. The average throughput time is now 108 days (121). The increased capital tied up in accounts receivable is due chiefly to the stronger sales towards the end of the year. 52 Cash flow analysis Note EUR M1 2003 GROUP SEK M 2003 SEK M 2002 PARENT COMPANY EUR M1 2003 SEK M 2003 SEK M 2002 OPERATING ACTIVITIES Operating income Depreciation and amortization Adjustment for non-recurring items Adjustment for items not included in cash flow Cash flow before interest and tax Interest paid and received Dividends received Tax paid on income Cash flow before changes in working capital Changes in working capital Cash flow from operating activities INVESTING ACTIVITIES Net capital expenditure Investments in subsidiaries Sales of shares in subsidiaries Investments in associated companies Other investments 5 25 25 25 25 25 25 25 118 204 145 7 473 –57 – –86 330 18 348 –76 –120 – 1 –5 1,073 1,856 1,320 62 4,311 –520 – –779 3,012 168 3,180 –694 –1,096 – 8 –45 2,638 1,907 – –6 4,539 –580 – –517 3,442 405 3,847 –839 –3,425 – –9 5 –4 0 – – –3 –40 32 – –11 32 21 –1 –100 – – – –32 372 3 – – –29 –367 296 – –100 294 194 –8 –912 – – – 3 – – 375 –570 316 –2 119 –124 –5 4 –1,962 312 – – Cash flow from investing activities –200 –1,827 –4,268 –101 –920 –1,646 FINANCING ACTIVITIES New share issues Dividends paid Net cash effect of changes in borrowings Cash flow from financing activities – –50 –144 –194 – –457 –1,315 –1,772 1,244 –354 –322 568 CASH FLOW 25 –46 –419 146 CASH AND CASH EQUIVALENTS 2 Cash and cash equivalents at 1 January Cash flow Effect of translation differences Cash and cash equivalents at 31 December 24 1 Average EUR/SEK rate: 9.12 2 EUR/SEK rate on 31 Dec: 9.07 155 –46 –12 97 1,408 –419 –109 880 1,418 146 –156 1,408 – –50 179 129 49 22 49 – 71 – –457 1,635 1,178 1,260 –354 886 1,792 452 141 200 452 – 652 59 141 – 200 53 Changes in shareholders’ equity GROUP SEK M Closing balance 31 December 2001 Repurchase of own convertible securities Translation differences for the year Total changes in shareholders’ equity not reported in the income statement Transfers between unrestricted and restricted reserves Net income Dividend Converted shares New share issue* Closing balance 31 December 2002 Translation differences for the year Total changes in shareholders’ equity not reported in the income statement Transfers between unrestricted and restricted reserves Net income Dividend Share capital 354 Restricted reserves 9,291 2 10 366 –307 125 1,234 10,343 –1,225 Closing balance 31 December 2003 366 9,118 * New share issue liquidity reduced by SEK 16 M for costs of issue after tax. Unrestricted reserves 2,201 –108 –1,643 –1,751 307 1,270 –354 1,672 –1,255 –1,255 1,225 9 –457 1,194 Total 11,846 –108 –1,643 –1,751 0 1,270 –354 127 1,244 12,381 –1,255 –1,255 0 9 –457 10,678 The accumulated translation difference since 1 January 1999 amounts to SEK –1,998 M (–743). This year’s translation differences include currency effects from hedging operations of SEK –130 M. PARENT COMPANY SEK M Closing balance 31 December 2001 Repurchase of own convertible securities Share capital 354 Premium reserve 6,885 Reserve fund 645 Total changes in shareholders’ equity not reported in the income statement Net income Dividend Converted shares New share issue Closing balance 31 December 2002 Net income Dividend 2 10 366 125 1,250 8,260 Closing balance 31 December 2003 366 8,260 645 645 Unrestricted reserves 3,856 –108 –108 –26 –354 3,368 –439 –457 2,472 Total 11,740 –108 –108 –26 –354 127 1,260 12,639 –439 –457 11,743 54 Financial risk management ASSA ABLOY is exposed to a variety of financial risks through its international business operations. Organization and activities ASSA ABLOY’S Finance Policy, which is reviewed annually by the Board of Directors, constitutes a framework of guidelines and regulations for the management of financial risks and financial activities. ASSA ABLOY’S financial activities are coordinated centrally within the subsidiary ASSA ABLOY Treasury SA in Switzerland, which acts as the Group’s internal bank. External financial transactions are conducted by the internal bank, which also handles transactions involving foreign currencies and interest rates. The internal bank achieves many economies of scale when borrowing funds, fixing interest rates and exchanging cur- rency flows. Currency risks Currency risks affect ASSA ABLOY mainly through trans- lation of capital employed and net debt, through transla- tion of income in foreign subsidiaries, and through flow of goods between countries. Translation exposure The effect arising on translation of capital employed is limited by the fact that financing is largely done in local currency. The capital structure in each country is optimized based on local legislation. So far as this constraint allows, the cur- rency exposure and gearing per currency should reflect the overall exposure and gearing for the whole Group to limit the effect from movements in individual currencies. The internal bank uses currency derivatives to supply the appro- priate funding and eliminate currency exposure. The table ‘Net debt by main currencies’ shows the use of currency forward contracts in association with funding, for main currencies. The forward contracts are used to neutral- ize the exposure arising between net debt and internal needs. Net debt by main currencies (in millions) Currency exposure Forward External contracts borrowing Currency USD EUR SEK GBP Other 791 291 1,684 83 92 482 –609 193 83 92 0 310 900 1,493 0 0 11,884 632 –880 723 –69 12,290 Total internal bank (SEK) 11,884 Overdrafts and other (SEK) Cash and cash equivalents (SEK) Provisions for pensions (SEK) Accrued financial items (SEK) Net debt (SEK) Exposure of Group earnings A general strengthening of the Swedish krona by one per- cent has a negative impact of about SEK 230 M on Group sales and SEK 6 M on Group earnings. Transaction exposure Currency risks in the form of transaction exposure, or the relative values of exports and imports of goods, are limited in the Group. Nevertheless subsidiaries within the ASSA ABLOY Group hedge their transaction exposure by means of inter- nal currency forward contracts with the internal bank. The policy is to hedge approximately 70 percent of currency flows from imports and exports forecasted to arise within the next twelve months. External contracts – volume of contracts maturing in 2004 (SEK M) Contracts, nominal value* 1,579 Total sales 2003 24,080 * sum of absolute values using exchange rates at inception of contracts. The internal bank hedges the exposure transferred from the subsidiaries. Open positions that may arise should always be kept below 1 percent equivalent of the Group’s total assets. 55 Financial risk management Interest rate risks Interest rate fluctuations have a direct impact on ASSA ABLOY’s net interest expense, but there is also an indirect effect on the Group’s operating income as a result of the impact of interest rates on the economy as a whole. The internal bank is responsible for identifying and managing the Group’s interest rate exposure. Interest duration in the Group is generally short, with an average duration of less than a year. At year-end, the average interest rate duration was about 8 months. External funding and interest rate swap The table ‘External funding / Net debt’ below gives an overview of interest rate swaps associated with debt. The internal bank swaps the full Euro EMTN loan to floating rates. Sensitivity analysis An increase of one percentage point in market rates would have a negative impact of SEK 89 million on interest expense for the year 2004. Effective interest rate by main currencies* Liquidity risks USD EUR SEK GBP Average for the Group 2.0% 3.4% 3.9% 3.9% 2.9% * These are the effective rates on external borrowing at year-end. Financing costs on total net debt amounted to 3.5% at year-end. Financing and liquidity risks are defined as the risks of being unable to meet payment obligations as a result of inadequate liquidity or difficulties in obtaining credit from external sources. The internal bank is responsible for exter- nal borrowing and external investments. ASSA ABLOY strives to have access, on every occasion, to both short-term and long-term loan facilities. The available facilities should include a reserve (facilities confirmed but not used) equiva- lent to 10 percent of the Group’s total sales. EXTERNAL FUNDING / NET DEBT (IN MILLIONS) Credit facilities Confirmed programs EMTN Program Global CP Program Commercial Paper Program MTN Program Committed Multi-Currency RF A Multi-Currency RF B Incentive Program Bank loan Overdrafts and other Total credit facilities Cash and cash equivalents Provisions for pensions Accrued financial items Net debt Amount SEK End of facility Utilized Cur- rency SEK Average interest Interest rate swap rate duration associated Prin- cipal 600 250 1,493 200 5,443 1,795 1,493 1,814 EUR USD SEK EUR 2.9 years 22 days 37 days fixed quarterly EUR USD 100 60 fixed quarterly fixed six-monthly 0 0 907 432 632 12,516 –880 723 –69 12,290 Yes No No No No Yes 13,608 Dec-06 7,197 5,000 2,722 2,449 4,990 907 432 994 38,299 n/a n/a Jun-06 Feb-05 Feb-07 Nov-06 Feb-06 n/a 56 Maturity structure The column ‘End of facility’ in the table ‘External funding / Net debt’ shows that duration until repayment of debts contracted by the internal bank is not concentrated in the short term. Where there are many transactions with different maturities, the duration is computed by weighted average. At year-end, the total average duration was 22 months. Ratings Standard & Poor’s Moody’s Credit risks Short term Long term Outlook A2 P2 A – n/a stable stable Financial risk management exposes ASSA ABLOY to cer- tain counterparty risks. This exposure arises, for instance, from the placement of surplus cash, through the use of derivative instruments and from trade receivables. ASSA ABLOY policy is to minimize the potential credit risk from cash surplus by having no cash in bank accounts and by using cash available from subsidiaries to amortize ASSA ABLOY debt. This objective is mainly controlled through the cash pool network put in place by the internal bank. Approximately 75 percent of commercial sales were settled through cash pools in 2003. Nevertheless the Group may deposit surplus funds on a short-term basis with banks to match maturities. Derivative instruments are allocated to banks according to risk factors set in the Finance Policy to limit counter- party risk. The internal bank enters into derivative contracts exclu- sively with banks participating in the syndicated credit sys- tem or with banks rated AAA and AA. An ISDA (full net- ting of transactions in case of default by one counterparty) is agreed in the case of interest derivatives. Financial risk management Trade receivables are spread over a large number of individual clients, thus minimizing credit risk. Financial instruments and accounting treatments Financial derivative instruments such as currency and interest-rate forwards are used to the extent necessary. The object of using derivative instruments is solely to reduce exposure to financial risks. Financial derivative instruments are not used with speculative intent. Currency derivatives hedging funding All contracts hedging funding activity will mature within 12 months. Interest spreads are amortized into interest expense and income over the life of the contracts. The remaining spot parts of the contracts are revalued to the year-end spot market rates and charged to the income state- ment. The fair value of these contracts exceeds book value by SEK 2 M. No currency options were held at end of year. Currency derivatives hedging transaction exposure Subsidiaries do not revalue their forward contracts on an ongoing basis. Currency effects from forward contracts are recorded when the underlying transactions are realized. Interest spreads are amortized into interest expense and income over the life of the contracts. The positions which may from time to time exist between internal contracts and their external hedge with banks are revalued to the year- end spot market rates and charged to the income statement. The year-end fair value of the external currency forward contracts with bank hedging transactions exposure exceeds book value by SEK 28 M. Interest rate derivatives Interest income and expense are recorded on an accrual basis. The fair value of interest rate derivatives is not recog- nized in the balance sheet. The year-end fair value of the outstanding contracts was SEK 112 M. 57 Notes Note 1 Accounting and valuation principles The Group’s accounting and valuation principles comply with Sweden’s Annual Accounts Act and the recommenda- tions of the Swedish Financial Accounting Standards Council. The new recommendations of the Financial Accounting Standards Council for 2003 were adopted from1 January 2003. This has not required any adjustment of figures for previously reported periods. In all other respects account- ing principles are unchanged from previous years. Consolidated accounts The consolidated financial statements include the Parent Company and companies in which the Parent Company held more than 50 percent of the votes at year-end, as well as companies in which the Parent Company exercises con- trol by some other means. The consolidated income state- ment includes companies acquired during the year, with values as from the date of acquisition. Income from compa- nies sold during the year is included in the consolidated income statement for the period up to date of disposal. The consolidated financial statements are prepared in accor- dance with the purchase method, which means that the acquisition value of shares in subsidiaries is eliminated against their shareholders’ equity at the time of acquisition. In this context, shareholders’ equity in subsidiaries is deter- mined on the basis of the fair value of assets, liabilities and provisions at the date of acquisition. If the acquisition value of shares in a subsidiary exceeds the acquired shareholders’ equity as computed above, the difference is reported as goodwill, which is amortized according to plan. If the acquisition value of shares in subsidiaries is less than the acquired shareholders’ equity, a provision for negative goodwill is made, which is dissolved in accordance with a defined plan. Minority interests Minority interests in the year’s income statement and share- holders’ equity are based on subsidiaries’ accounts pre- pared in accordance with the Group’s accounting princi- ples. Minority participations in subsidiaries’ equity are shown as a separate item in the consolidated balance sheet. Associated companies Associated companies are defined as companies which are not subsidiaries but companies in which the Parent Com- pany has shareholdings which, directly or indirectly, repre- sent at least 20 percent of all participations. Participations in associated companies are reported in accordance with the equity method. The consolidated income statement includes shares in the income before tax of associated com- panies. In cases in which the acquisition value of shares in associated companies was higher than the shareholders’ equity in the acquired company at the acquisition date, the difference is amortized on the same basis as consolidated goodwill, following an analysis of the character of the surplus value, and is charged against share in earnings of associated companies. Participation in tax on associated companies’ income is included in the Group’s tax expense. In the consolidated balance sheet, shareholdings in associ- ated companies are reported at the acquisition value, adjusted for dividends and participation in income after the date of acquisition. In determining the equity share, untaxed reserves are attributed to shareholders’ equity after deduction for estimated tax. Translation of foreign subsidiaries The Group applies the so-called current method for trans- lating the accounts of all foreign subsidiaries that are con- sidered to operate with a high degree of independence. The current method means that all balance sheet items except net income are translated at the closing-day rate. Net income is translated at the average rate and the difference arising thereby is taken directly to unrestricted reserves. Subsidiaries’ income statements are translated at the aver- age rate for the financial year. Subsidiaries operating in high-inflation countries, e.g. Romania, are translated using the monetary method. The Group hedges to a limited extent its investments in foreign net assets. Hedging is implemented through loans and forward exchange contracts. These are valued at the exchange rate prevailing at year-end. Exchange rate differ- ences on hedging operations are eliminated from the income statement and, like differences that arise when for- eign net assets are translated, are carried directly to share- holders’ equity in the balance sheet. Interest differentials on forward contracts are annualized and reported in the income statement. 58 Exchange rates The rates for currencies used in the Group were as follows (weighted average for the year and rate at year-end): profits arising from intra-Group sales have been eliminated in their entirety. Argentina Australia Bermuda Brazil Canada Switzerland Chile China Czech Republic Denmark Estonia Euroland United Kingdom Hong Kong Hungary Indonesia Israel India Japan Kenya Lithuania Mauritius Mexico Malaysia Nigeria Norway New Zealand Poland Romania Russia Singapore Slovenia Slovakia Thailand USA Uruguay South Africa Zimbabwe ARS AUD BMD BRL CAD CHF CLP CNY CZK DKK EEK EUR GBP HKD HUF IDR ILS INR JPY KES LTL MUR MXN MYR NGN NOK NZD PLN ROL RUR SGD SIT SKK THB USD UYU ZAR ZWD Average rate Year-end rate 2.70 5.23 8.14 2.61 5.74 6.01 2.46 5.41 7.20 2.48 5.56 5.82 0.012 0.012 0.97 0.29 1.23 0.58 9.12 13.24 1.04 0.036 0.87 0.28 1.22 0.58 9.07 12.81 0.93 0.035 0.00094 0.00085 1.78 0.17 0.070 0.11 2.64 0.29 0.75 2.12 1.66 0.16 0.067 0.09 2.63 0.27 0.64 1.89 0.061 0.052 1.14 4.68 2.08 1.08 4.72 1.93 0.00024 0.00022 0.26 4.63 0.039 0.22 0.19 8.07 0.29 1.08 0.25 4.23 0.038 0.22 0.18 7.20 0.25 1.08 0.0099 0.009 Revenue recognition Revenue recognition of sales of goods is reported at the time of delivery to the customer in accordance with the conditions of sale. All sales are reported less VAT, dis- counts, returns and freight. Intra-Group sales are elimi- nated from the consolidated income statement. Intra-Group sales Transfer pricing between Group companies is carried out at arm’s length basis and thus at market prices. Internal 59 Leasing Only operational leasing of limited scope occurs in the Group, and the leasing payments are expensed at a con- stant rate over the period of the contract. Research and development Research costs are expensed as they are incurred. The costs of development work are included in the balance sheet only to the extent that they are expected to generate future eco- nomic benefits. Such costs for development work are depre- ciated on a straight-line basis. Other development costs are expensed as they are incurred. Depreciation according to plan Depreciation according to plan is based on the historical cost of assets, with due consideration of the estimated economic life of the asset. A depreciation period of five years is applied for intangible rights. Group goodwill is amortized over 10–20 years, depending on the type of company acquired. Goodwill in well-established companies with independent and well- known brands is amortized over 10 years. Goodwill in com- panies that, in addition, constitute a strategic acquisition in terms of products or markets is amortized over 20 years. The depreciation period for office buildings is 50 years, and for industrial buildings 25 years. A depreciation period of 7–10 years is applied to machinery and other technical facilities. Equipment and tools are depreciated over 3–6 years. Tax The income statement reports all tax that is to be paid or received for the current year, adjustments relating to tax due for previous years, and changes in deferred tax. Tax sums have been calculated as nominal amounts in accordance with the tax regulations in each country and in accordance with tax rates that have either been decided or have been notified and can confidently be expected to be confirmed. For items reported in the income statement, associated tax effects are also reported in the income statement. The tax effects of items reported directly against shareholders’ equity are themselves reported against shareholders’ equity. Deferred tax is accounted for under the balance sheet liability method. This means that deferred tax is accounted for on all temporary differences between the book values of assets and liabilities and their taxable values. Deferred tax receivables relating to tax losses carryforward or other future tax allowances are reported to the extent that it is probable that the allowance can be set against taxable income in future taxation. Deferred tax liabilities relating to temporary differences resulting from investments in Notes subsidiaries are not reported in ASSA ABLOY’s consoli- dated accounts since the Parent Company can always con- trol the time at which the temporary differences are can- celed and it is not considered likely that such cancelation will occur in the foreseeable future. In the Parent Company, because of the relationship between accounting and taxa- tion, deferred tax liabilities on untaxed reserves are shown in the Parent Company’s accounts as part of untaxed reserves. Cash flow statement The cash flow statement has been prepared according to the indirect method. The reported cash flow includes only transactions involving cash payments. As well as cash and bank balances, cash and cash equiva- lents are taken to include short-term investments that (a) are exposed to only small risks of change in value and (b) are traded on an open market for known sums and have a matu- rity date less than three months from the date of acquisition. Intangible and tangible fixed assets Intangible and tangible fixed assets are reported at acquisition value after deduction for accumulated depreciation. Expendi- ture on improvements that raise an asset’s performance above its original level increases the book value of the asset. Expen- diture on repairs and maintenance is shown as a cost. Tangi- ble and intangible fixed assets are depreciated on a straight- line basis over the asset’s expected useful life. If the book value of an asset exceeds its estimated scrap value, the asset is immediately written down to its scrap value. A valuation model based on discounted future cash flow is used for regu- lar impairment tests of goodwill. Inventories Inventories are valued in accordance with the FIFO (First in, first out) principle at the lower of acquisition value and net realizable value at year-end. Deductions are made for internal profits arising from deliveries between Group companies. Work in progress and finished goods include both direct costs incurred and an allocation of indirect manufacturing costs. Receivables Receivables are valued in the amounts that after individual assessment are expected to be received. Foreign currencies Receivables and liabilities are valued at the year-end rate. The forward rate has been used when exchange rates have been hedged by means of forward contracts. Transactions in foreign currencies are translated at the rate current on the transaction date. When the currency effects of future budg- eted flows are hedged, the hedging instrument is not revalued for the changed exchange rates. The full effect of changes in exchange rates is shown in the income statement at the time that the hedging instrument falls due for payment. Provisions Provisions have been made for all obligations attributable to the fiscal year or prior fiscal years which, on the closing date, were likely to be incurred, but which were uncertain as to amount or date of payment. Pensions Methods for calculating pension costs and pension liabili- ties vary between countries. Companies follow their coun- try’s local rules and the reported figures are consolidated in the Group accounts. Recommendation RR 29 ‘Employee benefits’ will be adopted from 1 January 2004. Note 2 Sales by country 1 2003 8,686 2,108 1,585 1,261 1,089 914 852 731 709 691 650 545 455 390 358 311 260 255 244 240 234 197 195 128 124 110 79 69 42 568 2002 10,376 2,061 1,602 1,079 981 863 797 993 663 733 487 600 418 381 396 273 178 299 268 228 190 198 194 180 116 96 66 64 46 571 24,080 25,397 SEK M USA France United Kingdom Germany Sweden Australia Spain Mexico Finland Canada Netherlands Norway Denmark Italy Asia (excluding China) Belgium Switzerland Middle East China Czech Republic New Zealand South Africa South America Central America (excluding Mexico) Russia Portugal Baltic countries Poland Romania Other countries Total 1 Sales to customers in each country. 60 Note 3 Salaries, wages, other remuneration and Note 4 Auditors’ fees Notes social costs Salaries, wages and other remuneration (including performance- related bonuses awarded to managing directors, shown in brackets) Group SEK M Audit PricewaterhouseCoopers Others Assignments other than audit PricewaterhouseCoopers Others Total Group Parent Company 2003 2002 2003 2002 24 4 7 3 38 25 6 11 6 48 2 – 3 1 6 2 – 4 1 7 Note 5 Depreciation and amortization SEK M Goodwill Intangible rights Machinery Equipment Buildings Land and land improvements Group Parent Company 2003 2002 2003 2002 959 35 491 255 115 1 957 30 530 255 134 1 – 1 – 2 – – 3 – 0 – 3 – – 3 Total 1,856 1,907 Note 6 Operational leasing agreements SEK M Leasing fees paid during the year: SEK M Group 2003 276 Group 2003 Parent Company 2003 9 Parent Company 2003 2003 403 (3) 278 (1) 243 (1) 123 (0) 480 (1) 467 (2) 57 (0) 576 (2) 120 (0) 47 (0) 93 (0) 212 (1) 115 (–) 2002 338 (5) 273 (–) 270 (1) 115 (1) 426 (1) 484 (1) 47 (0) 564 (2) 103 (0) 43 (–) 98 (0) 217 (1) 98 (–) 2,143 (13) 2,575 (19) 74 (1) 17 (–) 62 (1) 107 (0) 58 (–) 215 (1) 267 (1) 149 (0) 41 (0) 79 (2) 75 (0) 14 (–) 69 (1) 100 (0) 54 (1) 268 (1) 257 (–) 112 (–) 32 (–) 69 (1) Parent Company 46 (0) 45 (4) SEK M Sweden Finland Norway Denmark Germany United Kingdom Belgium France Netherlands Czech Republic Canada Australia New Zealand USA China Romania Israel Italy South Africa Mexico Spain Switzerland South America Other countries Total Sweden 6,426 (30) 6,701 (35) Nominal value of agreed future leasing fees: Due for payment in 2004 Due for payment in 2005 Due for payment in 2006 Due for payment in 2007 Due for payment in 2008 Social costs (including pensions shown in brackets) Group SEK M Total Sweden 2003 2002 Due for payment in 2009 or later 1,925 (384) 2,049 (401) Total Parent Company 25 (12) 31 (17) Note 7 Non-recurring items Absence for illness 1 SEK M Parent Company Provision for restructuring Women 2003 Men 2003 Total 2003 Write-downs of fixed assets and inventories Total 215 91 64 43 33 58 504 10 10 10 10 10 10 60 Group 2003 2002 935 385 1,320 – – – % aged 29 or younger – of which, long-term absence for illness aged 30–49 – of which, long-term absence for illness aged 50 or more – of which, long-term absence for illness Total 1 During the period 1 July – 31 December 2003. 1.1 – 1.9 – 0.9 – 1.7 – – 0.3 – – – 0.2 0.4 – 1.3 – 0.3 – 1.0 Note 8 Income from participations in Group companies SEK M Dividends Liquidation loss Write-downs of shares in subsidiaries Income from disposal of shares in subsidiaries Total 61 Parent Company 2003 2002 733 – –700 – 33 280 –79 – 95 296 Notes Note 9 Financial items Note 11 Intangible fixed assets Group Parent Company 2003 2002 2003 2002 0 – 48 0 211 – 19 – 3 478 –27 – 12 535 –12 Goodwill SEK M Opening acquisition value Purchases/acquisitions Reclassifications Translation differences –721 –861 –363 –584 Closing accumulated acquisition value – – –497 –631 –531 –440 –643 –692 Group Parent Company Opening amortization Reclassifications Write-downs Amortization for the year Translation differences Closing accumulated amortization 2003 2002 2003 2002 Closing net book value Group 2003 2002 18,943 18,513 1,030 2,629 – 167 –1,888 –2,366 18,085 18,943 –2,730 –2,142 – –5 1 –2 –959 –957 374 370 –3,320 –2,730 14,766 16,213 SEK M Dividends Interest income and similar income items 176 Interest income from Group companies Exchange-rate differences Interest expenses and similar expense items Interest expenses from Group companies Total Note 10 Tax SEK M Current tax paid Tax attributable to prior years Deferred tax Total –572 –596 –92 109 –7 –86 –556 –689 – – – – – –2 – –2 Intangible rights SEK M 2003 2002 2003 2002 Group Parent Company Explanation for the difference between nominal Swedish tax rate and effective tax rate based on income before tax and excluding non-recur- ring items of SEK 1,320 M. Opening acquisition value Purchases/acquisitions Non-recurring items are expected to be wholly tax-deductible in future tax years. Deferred tax has been applied to some SEK 350 M of non-recurring items, but not to the remainder because of existing deductions for losses in the countries concerned. Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value 407 62 –22 –1 –36 409 46 –2 0 –46 410 407 Percent Swedish rate of tax on income Effect of foreign tax rate Non-deductible goodwill amortization Other non-deductible expenses Other Effective tax rate before restructuring costs Group 2003 2002 28.0 –3.5 7.4 5.4 –1.8 35.5 28.0 –6.6 11.7 3.4 –2.3 34.2 Opening amortization –235 –222 Sales/disposals Reclassifications Write-downs Amortization for the year Translation differences Closing accumulated amortization 2 4 – –35 21 2 0 –3 –30 18 –243 –235 Deferred tax liabilities and deferred tax receivables are made up as follows: Closing net book value 167 172 1 3 – – – 4 0 – – – –1 – –1 3 – 1 – – – 1 – – – – 0 – 0 1 SEK M Deferred tax liabilities Fixed assets Inventories Short-term receivables and liabilities Deferred tax receivables Fixed assets Inventories Short-term receivables and liabilities Provisions Tax-deductible losses Group 2003 2002 188 228 75 20 75 7 283 310 95 82 5 179 146 507 85 82 77 112 129 486 62 Note 12 Tangible fixed assets Buildings SEK M Opening acquisition value Purchases/acquisitions Sales/disposals Reclassifications Translation differences Machinery Group 2003 2002 SEK M 3,012 3,041 Opening acquisition value 117 –51 27 179 –18 88 Purchases/acquisitions Sales/disposals Reclassifications –231 –278 Translation differences Notes Group 2003 2002 5,321 5,967 474 –249 17 –686 529 –69 –185 –921 Closing accumulated acquisition value 2,874 3,012 Closing accumulated acquisition value 4,877 5,321 Opening depreciation –861 –813 Opening depreciation Sales/disposals Reclassifications Write-downs Depreciation for the year Translation differences 21 –13 –155 –115 98 5 –20 –16 –134 117 Sales/disposals Reclassifications Write-downs Depreciation for the year Translation differences –2,904 –3,058 206 9 –177 –491 487 58 60 –2 –530 568 Closing accumulated depreciation –1,025 –861 Closing accumulated depreciation –2,870 –2,904 Closing net book value 1,849 2,151 Closing net book value 2,007 2,417 The taxable value of the Group’s Swedish buildings was SEK 90 M. Equipment Land and land improvements SEK M Opening acquisition value Purchases/acquisitions Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value Opening depreciation Sales/disposals Reclassifications Write-downs Depreciation for the year Translation differences Closing accumulated depreciation Closing net book value Group 2003 2002 681 707 23 –4 –13 –42 645 –8 0 2 –10 –1 1 –16 629 10 –1 28 –63 681 –8 – 0 – –1 1 –8 673 The taxable value of the Group’s Swedish land was SEK 12 M. SEK M 2003 2002 2003 2002 Group Parent Company Opening acquisition value 1,467 1,527 Purchases/acquisitions Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value 212 267 –189 –122 33 –7 –197 –198 1,326 1,467 Opening depreciation –787 –783 Sales/disposals Reclassifications Write-downs Depreciation for the year Translation differences 164 –5 –15 99 15 –2 –255 –255 143 139 Closing accumulated depreciation –755 –787 Closing net book value 571 680 Construction in progress SEK M 14 5 –2 – – 17 –9 2 – – –2 – –9 8 26 3 –15 – – 14 –13 7 – – –3 – –9 5 Group 2003 2002 273 254 63 Notes Note 13 Shares in subsidiaries Parent Company ASSA ABLOY Scandinavia AB Timelox AB AA Besam AB Metget AB Aug. Stenman AB Organization number, Registered Office 556061-8455 Eskilstuna 556214-7735 Landskrona 556204-8511 Landskrona 556514-7997 Ronneby 556047-9148 Eskilstuna ASSA ABLOY Global Technology Management AB 556645-4087 Stockholm ASSA ABLOY Svensk Fastighets AB 556645-0275 Stockholm ASSA ABLOY OY ASSA ABLOY Norge a.s. ASSA ABLOY Danmark A/S ASSA ABLOY Deutschland GmbH Lips Nederland BV Ambouw B.V. Striffler Nederland B.V. VEMA Sales B.V. ASSA ABLOY France SAS Interlock Holding AG ASSA ABLOY Ltd Yale Security Products SpA Mul-T-Lock Ltd 1094741-7 Joensuu 979207476 Moss CVR 10050316 Herlev HR B 66227 Berlin 23028070 Dordrecht 31021889 Hoevelaken 08017187 Amersfoort 18066659 Amsterdam 412140907 R.C.S. Versailles CH-020.3.913.588-8 Zürich 2096505 Willenhall 79370 Aprilia, Latina 520036583 Yavne ASSA ABLOY Holdings (SA) Ltd 1948/030356/06 Johannesburg ASSA ABLOY Inc Abloy Holdings Ltd 39347-83 Salem, Oregon 1148165260 St Laurent ASSA ABLOY Australia Pacific Pty Ltd ACN 095354582 Oakleigh, Victoria ASSA ABLOY South Asia Pte Ltd 199804395K Singapore Effeff International Security Systems Co. 3172 Tianjin Yale Security Mexico, S.A de C.V. Grupo Industrial Phillips, S.A de C.V. Lips Technology BV ASSA ABLOY Innovation AB ASSA ABLOY Hospitality AB ASSA ABLOY Treasury S.A. YSM9612049Y4 Mexico D.F. GIP980312169 Mexico 33274584 Amsterdam 556192-3201 Eskilstuna 556180-7156 Stockholm CH-660-2045998-0 Geneva 205,500,000 ASSA ABLOY Reinsurance S.A. CH-660-1690000-9 Geneva ASSA ABLOY Int. Management Services Ltd Codas Electrónica S.A. ASSA ABLOY Asia Pacific Ltd Total EC21330 Bermuda 8805 Buenos Aires 53451 Hong Kong Note 14 Other financial fixed assets Shares in associated companies Group Talleres Agui S.A. Låsgruppen Wilhelm Nielsen AS Cerraduras de Colombia Cerracol S.A Renato Fattorini SRL Other Total Organization number, Registered Office A20065744 Astigarraga 934372816 Bergen 00008028 Bogotá 8727 Pavia 300,000 100,100 120 1,000,000 Number of shares 4,802 305 182,682 – – 64 Number of shares % of share capital Book value SEK M 70 15,000 1,000 30,491 400 1,000 1,000 800,000 150,000 60,500 2 3,515 25 25 180 12,499,999 10,736 1,330,000 240,000 13,787,856 100,220 100 1 48,190,000 100,000 1 231,299,904 27,036,635 400 2,500 1,000 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98 100 100 90 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1 100 14 40 0 53 0 0 0 631 538 376 1,394 70 29 1 2 1,582 59 976 598 1,079 184 2,319 13 242 28 0 225 862 0 1 5 11,354 17 423 0 72 23,187 % of share capital Book value SEK M 40 50 29 25 – 17 15 2 1 2 37 Notes 2003 2002 907 916 Note 14 Continued Note 19 Convertible debenture bonds Group Parent Company SEK M SEK M 2003 2002 2003 2002 Shares in associated companies Other shares and participations Long-term receivables Total 37 79 94 41 47 94 210 182 – 41 – 41 – 41 – 41 Note 15 Inventories SEK M Materials and stock items Work in progress Finished goods Paid in advance Total Note 16 Number of shares Group 2003 2002 825 967 1,031 1,152 1,210 1,390 28 22 3,030 3,595 INCENTIVE 2001 has a variable interest rate equivalent to 0.9 x EURIBOR + 54 basis points. Convertible debenture loans within INCENTIVE 2001 can be converted in October/November 2006. Full conversion at a conversion rate of EUR 15.80 for Bond 1, of EUR 19.00 for Bond 2, of EUR 22.10 for Bond 3 and of EUR 25.30 for Bond 4 will add 5,017,432 shares. The dilution effects with full conversion will amount to 1.35 percent of share capital and 0.92 percent of the total number of votes. The program has a total value of EUR 100 M. Note 20 Accrued expenses and prepaid income Group Parent Company SEK M 2003 2002 2003 2002 Personnel-related expenses Interest expenses Other Total 747 43 801 66 1,072 1,134 1,862 2,001 13 24 7 44 21 29 5 55 Number of shares on 31 December 2002 Number of shares on 31 December 2003 Series A shares Series B shares Share capital Note 21 Assets pledged 19,175,323 346,742,711 365,918,034 SEK M 19,175,323 346,742,711 365,918,034 Relating to long-term liabilities to credit institutions: Group 2003 2002 46 0 46 49 0 49 Real-estate mortgages Chattel mortgages Total Note 22 Contingent liabilities SEK M Guarantees Guarantees on behalf of subsidiaries Other Total Group Parent Company 2003 2002 2003 2002 120 567 9 696 123 321 2 109 103 7,104 7,110 – – 446 7,213 7,213 Regarding legal disputes see Report of the Board of Directors, Page 41. All shares have a par value of SEK 1.00 and provide the holders with equal rights to the Company's assets and earnings. Each Series A share carries 10 votes and each Series B share one vote. The average number of shares during the year, rounded to the nearest thousand, was 365,918 thousand (359,952 thousand). The average number of shares after full conversion, similarly rounded, was 370,935 thousand (366,716 thousand). The proposed dividend is SEK 1.25 per share or a maximum total dividend of SEK 457 M. Note 17 Long-term liabilities due for payment later than five years after the financial year-end SEK M Liabilities to credit institutions Other liabilities Total Group 2003 2002 44 1 45 50 1 51 Note 18 Corporate credit line Check credits granted to the Group totaled SEK 903 M (928), of which SEK 264 M (117) was utilized. 65 Notes Note 23 Average number of employees by country and by gender Women Men Total USA Mexico France China United Kingdom Sweden Germany Finland Australia Spain Czech Republic Romania South America Norway South Africa Italy New Zealand Netherlands Israel Canada Switzerland Denmark Belgium Other countries Total Parent Company Sweden 2003 1,919 2,113 926 1,035 2002 2,040 2,215 953 1,132 2003 4,505 1,282 1,491 1,008 2002 4,505 1,398 1,467 1,029 813 492 471 420 392 310 460 351 156 219 324 253 145 100 67 60 122 118 64 175 854 444 470 435 419 290 450 304 138 230 391 266 144 83 73 60 94 140 61 160 946 790 790 687 589 667 362 470 546 468 345 285 362 320 273 256 184 154 117 306 935 669 747 706 574 654 347 379 392 491 470 303 369 236 278 255 142 167 97 298 2003 6,424 3,395 2,417 2,043 1,759 1,282 1,261 1,107 981 977 822 821 702 687 669 538 507 420 340 316 306 272 181 481 2002 6,545 3,613 2,420 2,161 1,789 1,113 1,217 1,141 993 944 797 683 530 721 861 569 513 319 351 315 236 307 158 458 11,505 11,846 17,203 16,908 28,708 28,754 23 19 20 18 43 37 Gender split in Company management Group Board of Directors Executive Team Total Women 2003 2 – 2 Men 2003 11 7 18 Total 2003 13 7 20 Note 24 Cash and cash equivalents Group Parent Company SEK M 2003 2002 2003 2002 Cash and bank balances Short-term investments Cash and cash equivalents 713 167 880 1,082 326 1,408 633 19 652 198 2 200 Short-term investments shown in the consolidated balance sheet at year-end were SEK 375 M (410), of which SEK 208 M (84) were either non-realizable receivables with a term to maturity of more than three months or investments in securities. These items are not classified as cash and cash equivalents and are not included in the above table. Short-term investments shown in the Parent Company’s balance sheet were SEK 19 M (2). 66 Notes Group 2003 2002 –713 –1,082 –375 –410 –60 –64 8,894 9,232 3,821 5,289 723 1,023 12,290 13,989 Note 25 Cash flow Note 26 Net debt SEK M ADJUSTMENTS FOR NON-CASH ITEMS Change in pension provisions Adjustment for non-cash items PAID AND RECEIVED INTEREST Interest paid Interest received Paid and received interest CHANGE IN WORKING CAPITAL Inventory increase/decrease (–/+) Accounts receivable increase/decrease (–/+) Other short-term receivables increase/decrease (–/+) Trade and other short-term payables increase/decrease (+/–) Change in working capital Group 2003 2002 SEK M 62 62 –6 –6 Cash and bank balances Short-term interest-bearing investments Long-term interest-bearing receivables Long-term interest-bearing liabilities Short-term interest-bearing liabilities –697 –796 Pension provisions 177 216 Total –520 –580 274 –120 6 8 168 169 197 122 –83 405 –952 –1,070 258 231 –694 –839 NET CAPITAL EXPENDITURE Purchases of tangible fixed assets Sales of tangible fixed assets Net capital expenditure INVESTMENTS IN SUBSIDIARIES Acquired assets and liabilities according to acquisition analyses: Intangible fixed assets Tangible fixed assets Inventory Accounts receivable Other receivables Long-term liabilities Accounts payable Other short-term liabilities Less, acquired net debt Purchase price Less, acquired cash and cash equivalents Less, unpaid part of purchase price Less/Plus, paid parts of purchase price relating to previous years Investments in subsidiaries INVESTMENTS IN ASSOCIATED COMPANIES Investments in associated companies Investments in associated companies OTHER INVESTMENTS Investments in other shares Investments in / sales of other financial assets Other investments –1,106 –2,630 –156 –116 –196 –172 96 137 90 169 –244 –254 –489 –243 24 125 284 92 –1,254 –3,335 23 198 140 – –63 –230 –1,096 –3,425 8 8 –31 –14 –45 –9 –9 – 5 5 67 Proposed disposition of earnings As shown in the consolidated balance sheet, the Group’s unrestricted equity amounts to SEK 1,194 M (1,672). No transfer to the Group’s restricted equity is required. The following unappropriated earnings are available for disposition by the shareholders at the Annual General Meeting: Net income for the year: SEK –439 M Unappropriated earnings brought forward: SEK 2,911 M Total: SEK 2,472 M The Board of Directors and the President propose that a dividend of SEK 1.25 per share, a maximum total of SEK 457 M, be distributed to shareholders and that the remainder be carried forward to the new financial year. Stockholm, 5 February 2004 Georg Ehrnrooth Chairman Melker Schörling Vice Chairman Carl-Henric Svanberg Vice Chairman Bo Dankis President Gustaf Douglas Per-Olof Eriksson Lotta Lundén Sven-Christer Nilsson Patricia O’Driscoll Mats Persson Employee representative Seppo Liimatainen Employee representative Our audit report was issued on 6 February 2004 PricewaterhouseCoopers AB Anders Lundin Authorized Public Accountant 68 Audit report To the General Meeting of the shareholders of ASSA ABLOY AB Corporate Organization number 556059-3575 We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the Board of Directors and the President of ASSA ABLOY AB (publ.) for the financial year 2003. These accounts and the administration of the Company are the responsibility of the Board of Directors and the President. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and dis- closures in the accounts. An audit also includes assessing the accounting principles used and their application by the Board of Directors and the President, as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the Company in order to be able to determine the liability, if any, to the Company of any Board member or the President. We also examined whether any Board member or the President has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts and the consolidated accounts have been prepared in accordance with the Annual Accounts Act and, thereby, give a true and fair view of the Company’s and the Group’s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. We recommend to the General Meeting of shareholders that the income statements and balance sheets of the Parent Company and the Group be adopted, that the profit for the Parent Company be dealt with in accordance with the proposal in the administration report and that the members of the Board of Directors and the President be discharged from liability for the financial year. Stockholm 6 February 2004 PricewaterhouseCoopers AB Anders Lundin Authorized Public Accountant 69 Comments on ‘Five years in summary’ 1999 Continued good organic growth and benchmarking between the operational units produced further improve- ments in margins. During the year a total of eleven compa- nies were acquired. The major acquisitions were Lock- wood, Australia’s leading lock manufacturer; effeff, a world-leading manufacturer of electric strikes; and Mul-T-Lock, Israel’s leading manufacturer of locks and high-security cylinders. The acquisitions were financed in part by a fully subscribed share issue, which brought in SEK 2.0 billion. During the year a bonus issue and split were also carried out. 2000 Continued good organic growth and benchmarking between the operational units produced further improve- ments in margins. Yale Intruder Security, the lock division of Williams plc, was acquired during the year. A new share issue to provide part of the financing for the Yale Intruder Security acquisition was 99.9 percent subscribed and brought in SEK 1.5 billion. 19.8 million Series B shares were also issued as part payment to Williams plc. The American company HID Corporation, a world leader in the field of contactless cards and card readers using radio- frequency identification technology, was also acquired at the end of the year. 2001 Organic growth was held back by rationalization of the product range, mainly in acquired units. The reported oper- ating margin was reduced by dilution from acquired units. Nine companies in total were acquired during the year – including a majority stake in the US steel-door manufac- turer UDP, plus Tesa in Spain, Phillips in Mexico and Interlock in New Zealand – which added strength in both geographical and product terms. In 2001 ASSA ABLOY changed its financing, largely replacing the previous bank financing with capital-market- based long-term bonds and short-term financing. A con- vertible-based incentive program for the Group’s employ- ees was launched. 2002 The year saw continuing improvements and growth despite difficult market conditions. ASSA ABLOY’s long-term efforts to reduce working capital and achieve cost-efficient capital expenditure produced a very strong cash flow. Operating cash flow after payment of tax amounted to SEK 3 billion, an increase of 67 percent over 2001. A more pre- cise focus was directed towards Group-wide purchasing, with targets set for reducing the number of suppliers and exploiting Group synergies. Besam, the world leader in door automatics, was acquired during the year. 2003 Business was affected by weak demand in major markets in Europe and North America. Substantial negative exchange- rate effects due mainly to the weak US dollar reduced fig- ures for both sales and income. The main acquisitions were in Europe in the Identification sector. Following the appointment of Bo Dankis as the Group’s new President and CEO, a new organization consisting of four divisions (EMEA, Americas, Asia Pacific and Global Technologies) was implemented. The Executive Team was reduced from 17 people to seven. A two-year action pro- gram entitled ‘Leverage and Growth’ was launched towards the end of the year. Restructuring costs linked to the action program amounted to SEK 1,320 M. The aims of the program are to realize Group synergies and strengthen sustained organic growth. 70 Five years in summary (Amounts in SEK M unless stated otherwise) 19991 20001 2001 2002 2003 10,277 14,394 22,510 25,397 24,080 5 13 1,861 667 1,382 1,194 981 619 1,218 1.24 8,534 3,246 2,998 267 5,269 18.1 13.5 11.6 9.5 15.6 28.7 17.9 16.2 49.2 0.57 5.3 8.7 5 32 2,705 985 2,107 1,720 1,402 915 1,756 1.25 19,779 12,078 8,560 560 10,659 2.76 2.73 3.88 5.81 30.58 0.90 184.50 18.8 14.6 12.0 9.7 13.7 34.2 16.7 13.3 43.1 0.80 5.5 8.5 3 44 4,020 1,721 3,159 2,133 1,476 949 2,338 1.422 27,861 16,371 15,534 481 11,846 2.992 2.982 5.392 8.072 35.80 1.00 151.00 17.9 14.0 10.22 7.32 9.72 32.92 13.32 8.92 35.6 1.31 3.5 9.0 2 15 4,545 1,907 3,595 2,638 2,015 1,270 3,525 1.75 26,701 16,213 13,989 331 12,381 3.53 3.53 6.13 9.08 35.85 1.25 99.50 17.9 14.2 10.4 7.9 9.9 33.3 13.4 9.9 38.2 1.13 3.9 27.2 0 5 4,249 1,856 3,352 1,073 583 9 3,265 1.722 22,984 14,766 12,290 16 10,678 3.302 3.312 5.892 8.612 31.23 1.25 85.50 17.6 13.9 9.92 7.92 9.62 34.42 13.32 9.92 35.9 1.15 4.7 17.8 314,409 324,200 12,654 352,453 356,712 16,881 353,751 361,730 24,211 365,918 370,935 28,754 365,918 370,935 28,708 Sales and income Sales Organic growth, % Acquired growth, % Operating income before depreciation (EBITDA) Depreciation and amortization Operating income before goodwill amortization (EBITA) Operating income (EBIT) Income before tax (EBT) Net income Cash flow Operating cash flow Operating cash flow / Income before tax (EBT) Capital employed and financing Capital employed – of which goodwill Net debt Minority interests Shareholders’ equity Data per share, SEK Earnings per share after tax and before conversion Earnings per share after tax and full conversion (EPS) Earnings per share after tax and full conversion excluding goodwill Cash earnings per share after tax and full conversion (CEPS) Shareholders’ equity per share after full conversion Dividend per share (for 2003, as proposed by the Board) Price of Series B share at year-end 2.16 2.003 2.61 4.103 16.953 0.74 119.50 Key data Gross margin (EBITDA), % Operating margin before goodwill amortization (EBITA), % Operating margin (EBIT), % Profit margin (EBT), % Return on capital employed, % Return on capital employed before goodwill, % Operational return on capital employed, % Return on shareholders’ equity, % Equity ratio, % Net debt / Equity ratio, times Interest coverage ratio, times Interest on convertible debenture loan after tax, SEK M Number of shares, thousands Number of shares after full conversion, thousands Average number of employees 1 Key data for 1999 and 2000 have been adjusted for changes in accounting principles. 2 Excluding non-recurring items. 3 Adjusted for new share issue with a correction factor of 0.987. 71 Quarterly information THE GROUP IN SUMMARY (Amounts in SEK M unless stated otherwise) Q1 2002 Q2 2002 Q3 2002 Q4 Full year 2002 2002 Q1 2003 Q2 2003 Q3 2003 Q4 Full year 2003 2003 Sales Organic growth1 Gross income 6,303 6,245 6,459 6,389 25,397 6,124 5,930 5,930 6,096 24,080 0% 4% 3% 2% 2% 0% –2% 0% 2% 0% 2,408 2,438 2,506 2,520 9,871 2,390 2,299 2,333 2,445 9,467 Gross income / Sales 38.2% 39.0% 38.8% 39.4% 38.9% 39.0% 38.8% 39.3% 40.1% 39.3% Operating income before depreciation (EBITDA) 1,104 1,106 1,172 1,163 4,545 1,078 993 1,044 1,135 4,249 Gross margin (EBITDA) Depreciation Operating income before goodwill amortization (EBITA) Operating margin before goodwill amortization (EBITA) Goodwill amortization Non-recurring items Operating income (EBIT) Operating margin (EBIT) Financial items Income before tax (EBT) Profit margin (EBT) Tax Minority interest Net income OPERATING CASH FLOW Operating income before goodwill amortization (EBITA) Depreciation Net operating capital expenditure Change in working capital Paid and received interest Adjustment for non-cash items Operating cash flow Operating cash flow / Income before tax 17.5% 17.7% 18.1% 18.2% 17.9% 17.6% 16.7% 17.6% 18.6% 17.6% –242 –239 –239 –231 –950 –232 –223 –219 –223 –897 863 867 933 932 3,595 846 770 824 912 3,352 13.7% 13.9% 14.5% 14.6% 14.2% 13.8% 13.0% 13.9% 15.0% 13.9% –232 –232 –247 –246 –957 –244 –237 –238 –240 –959 – 630 – 635 – 686 – 686 – 2,638 – 602 – 533 – –1,320 –1,320 586 –648 1,073 10.0% 10.2% 10.6% 10.7% 10.4% 9.8% 9.0% 9.9% 11.0%3 9.9%3 –171 –154 –165 –141 –631 –135 –129 –120 –113 –497 461 484 523 547 7.3% 7.7% 8.1% 8.6% –162 –170 –184 –173 468 407 467 –758 583 7.6% 6.9% 7.9% 9.2%3 7.9%3 –165 –143 –165 Q4 Full year 2002 2002 –14 284 Q1 2002 863 242 –155 –155 –160 8 643 1.40 –13 301 Q2 2002 867 239 –17 322 Q3 2002 933 239 –12 363 932 231 –212 –138 –335 148 137 274 –169 –145 –107 12 –24 886 1,002 1.83 1.91 –1 994 1.82 2,015 7.9% –689 –56 1,270 3,595 950 –839 405 –581 –5 3,525 1.75 –7 257 Q2 2003 770 223 –4 299 Q3 2003 824 219 –184 –163 –190 –83 291 258 –169 –107 –156 21 –11 22 –83 –4 –845 –556 –18 9 Q4 Full year 2003 2003 912 223 3,352 897 –694 168 –520 62 –4 299 Q1 2003 846 232 –157 –298 –88 29 564 578 1,054 1,069 3,265 1.21 1.42 2.26 1.903 1.723 CHANGE IN NET DEBT Q1 2002 Q2 2002 Q3 2002 Q4 Full year 2002 2002 Q1 2003 Q2 2003 Q3 2003 Q4 Full year 2003 2003 Net debt at beginning of period 15,534 14,987 12,640 15,116 15,534 13,989 13,702 13,405 12,829 13,989 Operating cash flow Paid tax Acquisitions New share issue Dividend Translation differences Net debt at end of period Net debt / Equity ratio, times –643 –886 –1,002 –994 –3,525 –564 –577 –1,054 –1,069 –3,265 162 148 216 149 101 3,151 38 121 517 3,569 – –1,2442 – 354 – – – – –1,2442 354 333 106 – – 97 39 – 457 151 675 – – 198 535 – – 779 1,355 – 457 –215 –936 226 –291 –1,216 –162 –312 –348 –203 –1,025 14,987 12,640 15,116 13,989 13,989 13,702 13,405 12,829 12,290 12,290 1.26 1.04 1.21 1.13 1.13 1.10 1.12 1.09 1.15 1.15 CAPITAL EMPLOYED AND FINANCING Capital employed – of which goodwill Net debt Minority interest Shareholders’ equity Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 27,285 25,209 28,035 26,701 26,452 25,683 24,743 22,984 15,744 14,531 16,956 16,213 15,755 15,137 14,910 14,766 14,987 12,640 15,116 13,989 13,702 13,405 12,829 12,290 437 389 402 331 315 295 143 16 11,861 12,180 12,517 12,381 12,435 11,983 11,772 10,678 1 Organic growth relates to comparable units after adjusting for acquisitions and changes in exchange rates. 2 New share issue liquidity is reduced by SEK 16.3 M for costs of issue after tax. 3 Excluding non-recurring items. 72 DATA PER SHARE SEK Earnings per share after tax and before conversion Earnings per share after tax and full conversion Earnings per share after tax and full conversion excluding goodwill Cash earnings per share after tax and full conversion Q1 2002 0.80 0.81 1.45 2.15 Q2 2002 0.85 0.84 1.48 2.17 Q3 2002 0.88 0.88 1.55 2.24 Q4 Full year 2002 2002 1.00 1.00 1.65 2.52 3.53 3.53 6.13 9.08 Q1 2003 0.82 0.82 1.48 2.13 Q2 2003 0.70 0.71 1.34 2.10 Q3 2003 0.82 0.81 1.46 2.09 Q4 Full year 2003 2003 0.961 0.971 1.611 2.291 3.301 3.311 5.891 8.611 Shareholders’ equity per share after full conversion 35.76 35.64 36.53 35.85 35.85 36.01 34.77 34.14 31.23 31.23 NUMBER OF SHARES Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Number of shares before conversion, thousands 353,799 355,340 358,276 359,952 365,918 365,918 365,918 365,918 Number of shares after full conversion, thousands 361,730 363,222 366,089 366,716 370,935 370,935 370,935 370,935 1 Excluding non-recurring items. Definitions Organic growth: Change in sales for comparable units after adjust- ments for acquisitions and currency-rate effects. Capital employed: Total assets less interest-bearing assets and non- interest-bearing liabilities including deferred tax liability. Operational return on capital employed: Income before tax plus net interest and goodwill amortization as a percentage of average capital employed. Gross margin (EBITDA): Operating income before depreciation and amortization as a percentage of sales. Operating margin before goodwill amortization (EBITA): Operating income before goodwill amortization as a percentage of sales. Operating margin (EBIT): Operating income as a percentage of sales. Profit margin (EBT): Income before tax as a percentage of sales. Operating cash flow: See consolidated cash flow statement. Net capital expenditure: Investments in tangible fixed assets less disposals of tangible fixed assets. Depreciation: Depreciation/amortization of intangible and tangible fixed assets. Net debt: Interest-bearing liabilities less interest-bearing investments. Capital employed excluding goodwill: Total assets less interest-bearing assets and non- interest-bearing liabilities including deferred tax liability and goodwill. Equity ratio: Shareholders‘ equity including minority interests as a percentage of total assets. Interest coverage ratio: Income before tax plus net interest divided by net interest. Return on shareholders’ equity: Net income plus interest expenses after tax for convertible debenture loans as a percentage of average shareholders‘ equity after full conversion. Return on capital employed before goodwill: Income before tax plus net interest and goodwill amortization as a percentage of average capital employed excluding goodwill. Return on capital employed: Income before tax plus net interest as a percent- age of average capital employed. Earnings per share after tax and full conversion: Net income plus interest expenses after tax for convertible debenture loans per weighted aver- age number of shares after full conversion. Earnings per share after tax and full conversion excluding goodwill: Net income excluding goodwill amortization plus interest expenses after tax for convertible deben- ture loans per weighted average number of shares after full conversion. Cash earnings per share after tax and full conversion: Net income plus interest expenses after tax for convertible debenture loans, plus depreciation and amortization, plus profit share from minority interests, less profit share from associated com- panies and adjustments for changes in deferred tax, per weighted average number of shares after full conversion. Shareholders‘ equity per share after full conversion: Shareholders‘ equity plus convertible debenture loans per share after full conversion. 73 The ASSA ABLOY share ASSA ABLOY AB has been listed on the Stockholm Stock Exchange since 8 November 1994. In October 1995, the share was moved to the A list. The share capital at year-end amounted to SEK 365,918,034, distributed among 19,175,323 Series A shares and 346,742,711 Series B shares. All shares have a par value of SEK 1.00 and provide the holders with equal rights to the Company's assets and earnings. Each Series A share carries 10 votes and each Series B share one vote. The trading lot is 200 shares. Trading During the year a total of 713 million shares (355) were traded, which is an average of 2.9 million shares (1.4) per trading day and represents about 203 percent (101) of the issued shares. Ownership structure The number of shareholders at year-end was 26,214 (21,450). Investors outside Sweden, including Wärtsilä Corporation, account for 49 percent (57) of the capital. Share price movement Dividend and dividend policy The price of the ASSA ABLOY share fell by 14 percent in 2003. During the same period, the Stockholm Exchange All-Share index (SAX) rose by 30 percent. The share’s clos- ing price at year-end was SEK 85.50, corresponding to a market capitalization of SEK 31,286 M. Including all shares due for conversion, the market capitalization is calculated to be SEK 31,715 M. The Board of Directors and President propose that SEK 1.25 per share (1.25) be paid, a maximum total of SEK 457 M, as a dividend to shareholders for the 2003 financial year, corre- sponding to a direct return of 1.5 percent (1.3) on the Series B share. The aim is that, in the long term, the dividend should correspond to approximately one-third of ASSA ABLOY's average earnings after standard tax of 28 percent, but always taking into account ASSA ABLOY's long-term financial requirements. SHARE PRICE MOVEMENT AND TRADING 1994–2003 DIVIDEND PER SHARE 1995–2003 SEK 200 175 150 125 100 75 50 25 5 100,000 75,000 50,000 25,000 95 96 97 98 99 00 01 02 03 (c) SIX B share Afv General index Shares traded 1,000s (incl. off-floor trading) Data per share SEK 1.25 1.00 0.75 0.50 0.25 0.00 95 96 97 98 99 00 01 02 03 Dividend per share, SEK SEK/share 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 Earnings after tax and full conversion Dividend Direct yield, % 5 Earnings after 28% standard tax Dividend, % 6 Share price at end of period Highest share price Lowest share price Shareholders’ equity 0.56 0.22 1.6 0.60 36.7 13.24 15.16 5.23 4.37 0.93 0.30 1.0 0.95 31.6 29.28 28.97 12.38 5.40 1.23 0.43 0.8 1.36 31.6 51.24 52.95 28.69 8.64 1.76 0.60 0.8 1.79 33.5 75.65 92.73 48.07 9.93 2.00 3 0.74 0.6 2.27 32.6 119.50 140.00 73.21 2.73 0.90 0.5 2.91 30.9 184.50 206.70 110.50 16.95 3 30.58 3 2.98 2 1.00 0.7 3.28 2 30.5 151.00 186.00 94.50 35.80 3.53 1.25 1.3 3.88 32.2 99.50 159.50 76.50 35.85 3.31 2 1.25 4 1.5 3.69 2 33.9 85.50 110.00 67.00 31.23 Number of shares (1,000s) 7 221,684 265,396 295,448 295,448 324,200 356,712 361,730 370,935 370,935 1 Adjustment made for new issues. 2 Excluding non-recurring items. 3 Key data adjusted following change in accounting principle. 4 Proposed dividend. 5 Dividend as percentage of share price at end of period. 6 Dividend as percentage of earnings per share after 28% standard tax. 7 After full conversion. 74 Share capital Year Transaction 1989 1994 1994 1994 1996 1996 1997 1998 1999 1999 1999 1999 1999 2000 2000 2000 2001 2002 2002 100:1 split Bonus issue Non-cash issue New share issue Conversion of C shares into A shares New share issue Converted debentures Converted debentures before split Bonus issue 4:1 split New share issue Converted debentures after split and new issues Converted debentures New share issue Non-cash issue Converted debentures New share issue Converted debentures Number of shares after full conversion * SEK 1 per share – balanced number of shares. Source: SIS Ägarservice AB och VPC AB. A shares C shares B shares Share capital, SEK* 20,000 2,000,000 1,428,550 50,417,555 1,714,260 60,501,066 60,501,066 66,541,706 66,885,571 67,179,562 268,718,248 295,564,487 295,970,830 301,598,383 313,512,880 333,277,912 334,576,089 344,576,089 346,742,711 351,760,143 1,746,005 2,095,206 3,809,466 4,190,412 4,190,412 4,190,412 16,761,648 18,437,812 18,437,812 18,437,812 19,175,323 19,175,323 19,175,323 19,175,323 19,175,323 19,175,323 2,000,000 2,000,000 53,592,110 64,310,532 64,310,532 70,732,118 71,075,983 71,369,974 285,479,896 314,002,299 314,408,642 320,036,195 332,688,203 352,453,235 353,751,412 363,751,412 365,918,034 370,935,466 ASSA ABLOY’s 10 largest shareholders Data is based on the share register at 31 December 2003 or the latest known information. Owner Wärtsilä Corporation 1 SäkI Melker Schörling and companies 1 Investment AB Latour 1 Robur unit trusts Nordea unit trusts Alecta A shares 10,546,425 7,118,818 1,510,080 The Third Swedish National Pension Fund AMF Pension Fund The Fourth Swedish National Pension Fund Other shareholders Total number 19,175,323 B shares 17,270,350 954,200 9,296,636 21,162,421 16,090,578 11,791,731 10,271,332 8,961,869 8,860,000 7,488,400 234,595,194 346,742,711 Capital % Voting rights % Accumulated % 7.6 2.2 3.0 5.8 4.4 3.2 2.8 2.4 2.4 2.0 64.2 100.0 22.8 13.4 4.5 3.9 3.0 2.2 1.9 1.7 1.6 1.4 43.6 100.0 22.8 36.2 40.7 44.6 47.6 49.8 51.7 53.4 55.0 56.4 100.0 100.0 1 In 2004 Melker Schörling and companies as well as Investment AB Latour have acquired Wärtsilä Corporation’s A shares. Source: SIS Ägarservice AB and VPC AB. Ownership structure 31 December 2003 Shareholding 1–1,000 1,001–5,000 5,001–20,000 20,001–50,000 50,001–500,000 500,001– Total Source: SIS Ägarservice AB. No. of shareholders Percent No. of shares Capital % Voting rights % 21,290 3,593 753 237 247 94 26,214 81.2 13.7 2.9 0.9 0.9 0.4 100.0 6,058,624 8,208,387 7,659,430 7,661,615 39,905,254 296,424,724 365,918,034 1.7 2.2 2.1 2.1 10.9 81.0 100.0 1.1 1.5 1.4 1.4 7.4 87.2 100.0 75 The ASSA ABLOY share Convertible debentures for personnel In 2001 a further convertible debenture, Incentive 2001, The ASSA ABLOY Group has issued convertible deben- tures to employees in the Group. The first debenture was issued in 1995 and about 400 employees participated in the issue. The debenture amounted to about SEK 75 M and ran from 29 June 1995 to 30 June 2000. The second debenture was issued in 1997. A total of 1,400 employees participated in this issue. This debenture amounted to SEK 250 M and ran from 8 December 1997 to 2 December 2002. was issued, based on four series of convertible bonds each with a value of EUR 25 M. The only difference between the series of bonds is the conversion price. The debenture was offered to employees in 16 countries, and 4,500 employees decided to participate. On full conversion, at a conversion price for Series 1 of EUR 15.8, Series 2 of EUR 19, Series 3 of EUR 22.1 and Series 4 of EUR 25.3, an additional 5,017,432 shares would be created. The convertible bonds can be converted in October/November 2006. Financial analysts who follow ASSA ABLOY Company ABG Sundal Collier Alfred Berg Fondkommission AB CAI Cheuvreux Carnegie Cazenove CSFB Deutsche Bank Dresdner Kleinwort Wasserstein Enskilda Securities Goldman Sachs Hagströmer & Qviberg Handelsbanken Human Securities AB JP Morgan Kaupthing Bank Sverige AB Lehman Brothers Merrill Lynch Morgan Stanley Nordea Swedbank UBS Name Anders Jegers Lars Norrby Sasu Ristimäki Anders Idborg Ilan Chaitowitz Patrick Marshall Mattias Karlkjell Colin Grant Anders Trapp Nick Paton Patric Lindqvist Mikael Sens Telephone number E-mail +44 207 9055 631 +46 8 572 359 65 +44 207 621 5173 +46 8 676 86 88 +44 207 155 8207 +44 207 888 0289 +46 8 463 55 00 +44 207 475 9161 +46 8 522 297 57 +44 207 774 6987 +46 8 696 20 84 +46 8 701 12 51 anders.jegers@abgsc.com lars.norrby@alfredberg.se sristimaki@caicheuvreux.com andidb@carnegie.se ilan.chaitowitz@cazenove.com patrick.marshall@csfb.com mattias.karlkjell@db.com colin.grant@drkw.com anders.trapp@enskilda.se nick.paton@gs.com patric.lindqvist@hagqvi.com mise03@handelsbanken.se Mattias Eriksson +46 8 506 520 62 mattias.eriksson@humansecurities.se Andreas Willi Peder Frölén Brian Hall +44 207 325 4853 +46 8 791 47 86 +44 207 102 4726 andreas.p.willi@jpmorgan.com peder.frolen@kaupthing.se brhall@lehman.com Raymond Greaves +44 207 996 4783 raymond_greaves@ml.com Daniel Cunliffe Magnus Behm +44 207 425 2057 +46 8 534 920 08 daniel.cunliffe@morganstanley.com magnus.behm@nordea.com Anders Bruzelius +46 8 585 912 88 anders.bruzelius@swedbank.com Anders Fagerlund +46 8 453 73 30 anders.fagerlund@ubs.com Öhman J:or Fondkommission AB Johan Gahm +46 8 402 52 68 johan.gahm@ohman.se 76 Information for shareholders Annual General Meeting Nomination Committee The Annual General Meeting of ASSA ABLOY will be held at Norra Latin, Drottninggatan 71b, Stockholm at 15.00 on Tuesday 27 April 2004. Shareholders are entitled to attend if they are registered at VPC, Värdepapperscentralen (Swedish Central Securities Depository and Clearing Organization), no later than Friday 16 April 2004 and if they have notified ASSA ABLOY of their intention to attend the Annual General Meeting. The duty of the Nomination Committee is, before each Annual General Meeting, to consider in advance the choice of Board members, the remuneration of the Board and associated matters. The Committee is appointed at the Annual General Meeting. The current members of the Nomination Committee before the 2004 Annual General Meeting are Gustaf Douglas (chairman), Georg Ehrnrooth and Melker Schörling. Registration in the share register Dividend ASSA ABLOY’s share register is kept by VPC. Only hold- ings registered by a shareholder are recorded under the shareholder’s own name in the register. Shareholders with nominee-registered shares can attend the Annual General Meeting only if they register their holdings under their own names. Shares must be registered to the shareholder by Fri- day 16 April 2004 at the latest. Friday 30 April 2004 has been set as the qualification day for dividends. If the Annual General Meeting decides to follow the recommendation of the Board of Directors, dividends are expected to be distributed by VPC AB on Wednesday 5 May 2004. ASSA ABLOY Reports can be ordered from: Notification of intention to attend Shareholders must notify ASSA ABLOY of their intention to attend the Annual General Meeting no later than 4 p.m. on Wednesday 21 April 2004 via: – www.assaabloy.com – Telephone: +46 8 506 485 00 +46 8 506 485 85 – Fax: ASSA ABLOY AB, Bolagsstämman, – Post: Box 70340, SE-107 23 Stockholm, Sweden. The notification should state: – Name – Personal identity number or Corporate Organization number – Address and daytime telephone number – Number of shares held Shareholders who are to be represented by a proxy should send a form of appointment with their notification. Those who represent corporate bodies should present a copy of their proof of registration or similar document confirming their due authority. ASSA ABLOY AB – www.assaabloy.com – Telephone: +46 8 506 485 00 +46 8 506 485 85 – Fax: ASSA ABLOY AB – Post: Box 70340 SE-107 23 Stockholm Sweden Financial information from ASSA ABLOY will be published as follows: Interim reports: First quarter: 27 April 2004 Second quarter: 21 July 2004 Third quarter: 2 November 2004 Fourth quarter and Year-end Report: February 2005 2004 Annual Report: March 2005 77 Board of Directors Georg Ehrnrooth Melker Schörling Carl-Henric Svanberg Bo Dankis Gustaf Douglas Per-Olof Eriksson Georg Ehrnrooth Chairman Born 1940 Master of Science (Engineering) Board Chairman: Varma Mutual Pension Insurance Co Vice Chairman: Rautaruukki Corporation Board member: Nokia Corporation, Sampo plc, Sandvik AB (publ) and Oy Karl Fazer Ab Member of the ASSA ABLOY Board since 1994 Holdings through company: 251,680 Series B shares Melker Schörling Vice Chairman Born 1947 Master of Business Administration Board Chairman: Securitas AB, Hexagon AB, Karlshamns AB and Attendo Senior Care Board member: Hennes & Mauritz AB Member of the ASSA ABLOY Board since 1994 Holdings privately and through company: 5,310,0801 Series A shares and 9,296,636 Series B shares Carl-Henric Svanberg Vice Chairman Born 1952 Master of Science, Bachelor of Economics President and CEO of Telefonaktiebolaget LM Ericsson President and CEO of ASSA ABLOY from 1994 to March 2003 Board member: Hexagon AB Member of the ASSA ABLOY Board since 1994 Holdings through company: 3,912,991 Series B shares and Incentive 2001 convertibles corre- sponding to 60,000 Series B shares Bo Dankis President and CEO Born 1954 Master of Science President and CEO of the ASSA ABLOY Group since March 2003. Employed since 1997 Member of the ASSA ABLOY Board since 2003 Holdings: 86,000 Series B shares and Incentive 2001 convertibles corresponding to 10,750 Series B shares Gustaf Douglas Born 1938 MBA, Harvard Business School Principal owner of Investment AB Latour and SäkI Board Chairman: Investment AB Latour, Boxholms Skogar AB, Stockholm Chamber of Commerce, Säkl AB and IFS AB Vice Chairman: Attendo Senior Care and Securitas AB Board member: The Svenska Dagbladet Foundation and Moderata Samlingspartiet Member of the ASSA ABLOY Board since 1994 Holdings through Investment AB Latour: 6,746,425 Series A shares1 and 21,162,421 Series B shares through SäkI AB: 7,118,818 Series A shares and 954,200 Series B shares Per-Olof Eriksson Born 1938 Master of Engineering, Doctor of Technology h.c. Board Chairman: SAPA AB, Thermia AB, Odlander, Fredriksson & Co. and Consolis Oy Board member: AB Custos, SSAB Svenskt Stål AB, AB Volvo and Preem Petroleum AB. Member of the Royal Swedish Academy of Engineering Sciences Member of the ASSA ABLOY Board since 1995 Holdings: 10,000 Series B shares 1 Including transactions during 2004 78 Lotta Lundén Sven-Christer Nilsson Patricia O’Driscoll Seppo Liimatainen Mats Persson Joakim Järrebring Per-Edvin Nyström Seppo Liimatainen Born 1950 Employee representative, Federation of Salaried Employees in Industry and Services Member of the ASSA ABLOY Board since 2003 Holdings: 2,600 Series B shares and Incentive 2001 convertibles corresponding to 125 Series B shares Mats Persson Born 1955 Employee representative, Swedish Metal Workers Union Member of the ASSA ABLOY Board since 1994 Holdings: 0 Deputy Members Joakim Järrebring Born 1976 Employee representative Member of the ASSA ABLOY Board since 2003 Holdings: 0 Per-Edvin Nyström Born 1955 Employee representative, Swedish Metal Workers Union Member of the ASSA ABLOY Board since 1994 Holdings: 7,727 Series B shares and Incentive 2001 convertibles corresponding to 125 Series B shares Lotta Lundén Born 1957 Bachelor of Economics Previous positions: Business Area Manager of IKEA of Sweden, Commercial Director of IKEA Singapore and Malaysia, Managing Director of Guldfynd/Hallbergs Guld, General Manager of Coop Forum Sverige Member of the ASSA ABLOY Board since 2003 Holdings: 0 Sven-Christer Nilsson Born 1944 Bachelor of Science (Computer Science) Partner in Startupfactory, a venture capital company Board Chairman: The National Swedish Public Service Broadcasting Foundation and Xelerated, Inc. (USA) Board member: TeliaSonera AB, CEVA, Inc. (USA) and Startupfactory B.V. (The Netherlands) Member of the ASSA ABLOY Board since 2001 Holdings: 0 Patricia O’Driscoll Born 1959 Bachelor of Sociology Chief Executive Officer of Northern Foods plc Member of the ASSA ABLOY Board since 2003 Holdings: 0 79 Executive Team Hans Johansson Born 1955 Master of Science Responsible for EMEA Executive Vice President Employed since the Group was formed Holdings: 646,821 Series B shares and Incentive 2001 convertibles corresponding to 60,000 Series B shares Thanasis Molokotos Born 1958 Master of Science Responsible for Americas Executive Vice President Employed since 1996 Holdings: 25,000 Series B shares and Incentive 2001 convertibles corresponding to 55,000 Series B shares Geoff Norcott Born 1947 Bachelor of Engineering Hons. (Industrial), 1st class Responsible for Asia Pacific Executive Vice President Employed since 1999 Holdings: Options corresponding to 81,065 Series B shares and Incentive 2001 convertibles corresponding to 60,000 Series B shares Åke Sund Born 1957 Graduate Diploma in Marketing Executive Vice President responsible for Market and Business Development Employed since the Group was formed Holdings: 175,000 Series B shares and Incentive 2001convertibles corresponding to 60,000 Series B shares Bo Dankis Born 1954 Master of Science President and Chief Executive Officer Employed since 1997 Holdings: 86,000 Series B shares and Incentive 2001 convertibles corresponding to 10,750 Series B shares Göran Jansson Born 1958 Graduate Diploma in Business Administration Deputy CEO and Chief Financial Officer Employed since 1997 Holdings: 351,784 Series B shares and Incentive 2001 convertibles corresponding to 60,000 Series B shares Joseph J. Grillo Born 1957 Bachelor of Finance and Economics Responsible for Global Technologies Executive Vice President Employed since 2001 Holdings: Incentive 2001 convertibles correspon- ding to 32,500 Series B shares Left to right: Åke Sund, Bo Dankis, Göran Jansson, Geoff Norcott, Hans Johansson, Thanasis Molokotos and Joseph J. Grillo. 80 Production: n3prenör Photo: Craig Bartlett, August Eriksson, Ulf Huett Nilsson, Lars Nybom and others. Printed by Strokirk-Landströms 2004. We are the world’s largest lock Group and the only global player in our industry. We will draw benefit from our size to become true leaders in both innovation and cost-efficiency. Bo Dankis President and CEO ASSA ABLOY AB (publ) P.O. Box 70340, SE-107 23 Stockholm, Sweden · Visiting address: Klarabergsviadukten 90 Tel: +46 8 506 485 00 · Fax: +46 8 506 485 85 Corporate Organization no.: 556059-3575 www.assaabloy.com 

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