ASSA ABLOY
Annual Report 2004

Plain-text annual report

Annual Report 2004 Security, safety and convenience 2004 in brief Sales increased to SEK 25,526 M (24,080) with organic growth of 5 percent. Exchange-rate effects had a negative impact of SEK 982 M. (cid:2) Operating income before goodwill amortization (EBITA) amounted to SEK 3,748 M (3,352) – an increase of 12 percent. (cid:2) Earnings per share after tax and full conversion amounted to SEK 4.05 (3.31) – an increase of 22 percent. (cid:2) Operating cash flow increased to SEK 3,439 M (3,265). (cid:2) The two-year Leverage & Growth action program is progressing well, with a long series of specific activities. Annual savings are expected to reach SEK 450 M during the second half of 2005. (cid:2) During 2004 ASSA ABLOY reviewed the Group’s strategies, which can be summarized in three main themes: increasing growth in the current core business, expanding into new markets and new segments, and reducing the cost base. Contents Financials in brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 CEO’s statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Vision, Business Concept and strategy . . . . . . . . . . . . . . . 6 Cash flow analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Leverage & Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Changes in shareholders’ equity . . . . . . . . . . . . . . . . . . . 56 The market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Financial risk management . . . . . . . . . . . . . . . . . . . . . . . 57 ASSA ABLOY’s products . . . . . . . . . . . . . . . . . . . . . . . . 16 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Sustainable development . . . . . . . . . . . . . . . . . . . . . . . . 20 Proposed disposition of earnings . . . . . . . . . . . . . . . . . . . 72 Division EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Audit report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Division Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Comments on ‘Five years in summary’ . . . . . . . . . . . . . . 74 Division Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Five years in summary . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Division Global Technologies . . . . . . . . . . . . . . . . . . . . . . 36 Quarterly information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Report of the Board of Directors for 2004 . . . . . . . . . . . . . 42 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . . 45 The ASSA ABLOY share . . . . . . . . . . . . . . . . . . . . . . . . . 78 Sales and earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Information for shareholders . . . . . . . . . . . . . . . . . . . . . . 81 Income statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Results by division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Executive Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 (cid:2) ASSA ABLOY in brief ASSA ABLOY is the world's leading manufacturer and sup- plier of locking solutions, dedicated to satisfying end-user needs for security, safety and convenience. With over 100 companies in more than 40 countries, and a world market share of around 10 percent, the Group is the strongest global player in the locking industry. The Group operates in all major regions – both mature and developing markets – and enjoys market-leading posi- tions in large parts of Europe and North America and in Australia. In the fast growing area of electromechanical locking solutions, the Group holds leading positions in Identification, Automatic Doors and Hotel Security. Since its formation in 1994, ASSA ABLOY has devel- oped from a regional company with 4,700 employees to a global Group of companies with 29,000 employees and sales of SEK 25.5 billion. As the world’s leading lock Group, ASSA ABLOY offers a more complete range of products than any other company on the market. SALES share of Group total, % EBITA share of Group total, % 32 36 EMEA SALES share of Group total, % EBITA share of Group total, % 42 41 Americas ASSA ABLOY’s Americas division comprises companies in North, Central and South America. The division is the Group’s second-largest, accounting for 32 percent of total sales. During the year it achieved organic growth of 6 percent and an EBITA margin of 17.6 percent. Americas division has 22 pro- duction units, 12 sales companies and 9,800 employees. The main markets are the USA, Canada and Mexico. Some of the division’s leading companies are Corbin Russwin, Curries, Emtek, Phillips and Sargent. ASSA ABLOY’s EMEA division comprises all companies in Europe, the Mid- dle East and Africa. EMEA is the Group’s largest division, accounting for 42 percent of total sales. During the year it achieved organic growth of 3 percent and an EBITA margin of 15.0 percent. EMEA has 42 production units, 30 sales companies and 12,800 employees. The largest markets are Scandi- navia and France, and some of the division’s leading companies are Abloy, Assa, Tesa and Vachette. Edgar Velardo, Emtek, USA Kerstin Pipo, Ikon, Germany Camille Smith, Sargent, USA SALES share of Group total, % EBITA share of Group total, % 19 16 Global Technologies ASSA ABLOY’s Global Technologies division is the Group’s worldwide organization dedicated to high-technology products and services. The division accounts for 19 percent of the Group’s sales and has 2,900 employees. During the year it achieved organic growth of 5 percent and an EBITA margin of 13.0 percent. Global Technologies comprises three business areas: – The Identification Technology Group (ITG), which accounts for 42 percent of Global Technologies’ sales. ITG’s products consist of various types of identification technology for access control, Radio Frequency Identification (RFID) and smart cards. The products are sold under well-known brand names such as HID, Indala, Sokymat and ACG. – Automatic Doors, which accounts for 40 percent of Global Technologies’ sales. This business area consists of Besam, which is the world’s leading supplier of automatic door solutions. – ASSA ABLOY Hospitality, which accounts for 18 percent of Global Technolo- gies’ sales. This business area produces hotel locks and security systems and sells chiefly to hotels and cruise ships. Its two leading companies and brands are Ving- Card and Elsafe. GROUP SALES AND EBITA SEK M 26,000 SEK M 4,000 19,500 13,000 6,500 0 3,000 2,000 1,000 0 95 96 97 98 99 00 01 02 03 04 Sales, SEK M EBITA, SEK M SALES share of Group total, % EBITA share of Group total, % 7 7 Asia Pacific ASSA ABLOY’s Asia Pacific division comprises companies in Australia, New Zealand, China and elsewhere in Asia. Asia Pacific accounts for 7 percent of the Group’s total sales and has 5 production units, 7 sales companies and 3,600 employees. During the year it achieved organic growth of 7 percent and an EBITA margin of 15.1 percent. The division’s largest markets are Australia, New Zealand and China. The largest companies in the division are Lockwood in Australia, Interlock in New Zealand and Guli in China. Financials in brief Sales, SEK M of which: Organic growth Acquired growth Foreign exchange effects, 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 effects, SEK M Operating cash flow, SEK M Return on capital employed, % Return on capital employed before goodwill amortization, % Data per share (SEK/share) Earnings after tax and full conversion (EPS) Earnings after tax and full conversion excluding goodwill Cash earnings after tax and full conversion (CEPS) Shareholders’ equity after full conversion Dividend 2004 2003 Change, % 25,526 24,080 –982 3,748 14.7 2,294 –78 3,3522 13.92 1,9032 3,4393 3,265 11.8 16.0 2004 4.05 6.66 9.06 32.66 2.601 9.62 13.32 2003 3.312 5.892 8.612 31.23 1.25 6 5 5 –4 12 21 –4 5 Change, % 22 13 5 5 108 Number of shares after full conversion (1,000s) 378,717 370,935 1 Proposed dividend. 2 Excluding non-recurring items. 3 Excluding restructuring payments. CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED 4 INCOME BEFORE TAX / OPERATING CASH FLOW 4 EARNINGS PER SHARE 4 % 30 25 20 15 10 5 0 SEK M 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 SEK M 30,000 25,000 20,000 15,000 10,000 5,000 0 95 96 97 98 99 00 01 02 03 04 Capital employed, SEK M Return on capital employed, % Return on capital employed before goodwill amortization, % 4 Data for 2001 and 2003 excludes non-recurring items. 95 96 97 98 99 00 01 02 03 04 Income before tax, SEK M Operating cash flow, SEK M SEK 7 6 5 4 3 2 1 0 95 96 97 98 99 00 01 02 03 04 Earnings per share, SEK Earnings per share excluding goodwill, SEK 1 CEO’s statement A clear strategy for better security How many keys do you have on your keyring? The fact that we nearly always carry keys and access cards around with us demonstrates our daily need for security. And the fact that we have so many different keys on our keyring shows how fragmented the lock industry still is. It is neither particularly secure nor convenient to carry a full keyring around. There is clearly a need for some inno- vative new solutions. And to be able to create and launch innovative solutions calls not just for good ideas, but also for worldwide resources in development, marketing, logis- tics and manufacturing. ASSA ABLOY is the only truly global player in our industry. In the past ten years we have acquired many of the lock industry’s strongest companies and built a lock Group that is world-leading in both size and vigor. But the fact that you are still carrying all those keys around on your ring shows that, despite our success, we have yet to achieve our biggest victories. We have restructured a whole indus- try and are now ready to take the next step, which is to change our industry – to change how companies, institu- tions and private individuals relate to security and to locks. Our task now is to exploit our size, our market position and our worldwide presence to become the leader both in strength of innovation and in cost management. That, in essence, is what we are saying in the new strategy and vision that we defined and presented during 2004. 2004 was, above all, a good business year for ASSA ABLOY. We are back to good organic growth of 5 percent. The Group’s operating margin has improved markedly and we are continuing to deliver strong cash flow. During the year work under our Leverage & Growth action program continued. We set out to solve a number of specific struc- tural issues, turn round a handful of underperforming com- panies and work towards a long-term improvement in our organic growth. As a result of our restructuring measures efficiency has improved. We have sold two companies, and we are now expecting profitability from the companies that 2 were not performing to the required level before. During the year we also worked hard to develop our marketing and sales operations and we are continuing with that. A refined business strategy In 2004 we decided to take the next step in developing our industry. We have therefore clarified and simplified our busi- ness strategies, which we have condensed into three main themes. The first theme is to increase growth in our core business by strengthening cooperation with architects, door manufacturers, suppliers of security systems and distributors all over the world. In short, to become even better at what we are already good at. The second theme is concerned with expanding in markets and in segments with higher growth. This covers three principal markets: the consumer market, where customers actively choose their own security solu- tions; the market for electronic access-control; and the fast- growing Chinese market, where we need to increase our presence. The third theme is to try to gain more benefit from our advantages of scale and thereby radically lower our costs. This requires greater specialization of our factories, better utilization of production capacity in low-cost coun- tries, and continuing coordination of our purchasing. People make the company We are now investing more resources – both centrally and in the divisions – to develop the expertise that our employ- ees possess. We are therefore launching a comprehensive skills development program in Human Resources, while in communications we are working to strengthen our com- pany culture and our common values. In just ten years we have built a remarkable Group – and we must now invest in further development of our own employees, with the over- all purpose of achieving our business goals and our Vision. Our future is directed towards developing and selling security solutions – solutions that reduce the number of keys on our keyrings and that, above all, improve the security of everything that is important in our lives. Stockholm, February 2005 Bo Dankis President and CEO 3 Secure access – safe and convenient for teachers and students 4 Colleges and universities Many college and university sites have a mixture of open and closed areas, in With their high data storage capacity, fast data transfer and ability to use encryption and biometric information, which students, teachers and other staff must all feel safe. cards can also be used to log on to computer networks and An electronic card system allows everyone to be securely to make payments, for example in university cafeterias. identified and given authorized access to the places they And it is quick and easy to invalidate lost cards or restore need to go. security after a break-in. 5 Vision, Business Concept and Strategy Placing locks at the heart of every security solution Over the last ten years ASSA ABLOY has built a world- leading lock Group and changed the structure of the locking industry. This has been achieved through acquisitions and through improving the performance of the acquired compa- nies. The Group was formed in 1994 when Securitas and Wärtsilä merged their lock businesses. Over the last ten years ASSA ABLOY has increased its sales from SEK 3 billion to SEK 25.5 billion. At the same time the number of companies has increased to more than 100, with operations in over 40 countries. In the light of the Group's rapid development – with acquisitions that have led to involvement in new markets and technologies – ASSA ABLOY has carried out a full, fact- based review of the Group’s strategies for existing and poten- tial markets, and of expected future developments. The work has resulted in a refined business strategy whose goal is to further strengthen the Group’s position by driving organic growth and improving efficiency. ASSA ABLOY’s new busi- ness strategy is more precise than before, and the Group’s Vision and Business Concept have been updated in line with the strategy. Vision “ASSA ABLOY will be the most successful and innovative company in our markets by placing locks at the heart of security and providing safe and secure solutions that give true added value to our customers. Our solutions make people around the world feel safer and more secure, creating more freedom in their lives.” Business Concept “ASSA ABLOY provides safe and secure solutions that are well-designed, convenient and cost-efficient. Through customer relevance and innovation, our solutions create superior value for businesses and for people at work, at home and at leisure.” Financial objectives The primary financial objective for the ASSA ABLOY Group is that 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 reduced return on capital employed. The goal is to achieve the secondary financial objectives detailed below and on the next page by 2008 at the latest. FINANCIAL OBJECTIVES ORGANIC GROWTH: • About 5% a year over a business cycle MARGIN IMPROVED TO 16–17% • Stand-alone improvements • Leverage Group synergies STRONG CASH FLOW: • The long-term positive trend in operating cash flow should be maintained CAPITAL RATIONALIZATION: • Inventory reductions • Maintained capital expenditure level 6 20% Return on capital employed Secondary financial objectives: • Sales should, on average, grow organically at about 5 percent a year over a business cycle. • The EBITA margin should be improved to 16–17 per- cent. This should be achieved mainly by exploiting syner- gies within the Group. • The long-term positive trend in ASSA ABLOY’s opera- ting cash flow should be maintained. • Capital employed should be maintained at the present absolute level in spite of organic growth. Measures to make production more specialized will reduce capital tied up in inventory. Given the potential to increase uti- lization of current production capacity, capital expendi- ture can be maintained at today’s level – below current depreciation. Strategy For a number of years ASSA ABLOY has followed a strat- egy model based on three phases of development: 1. Global platform. Build a worldwide presence and add new areas of expertise. 2. Leverage synergies and develop the Group’s strength. 3. Customer value. Accelerate organic growth by creating value for customers. ASSA ABLOY has accomplished the main objectives in the the first phase and created a global platform, although there are still areas of expertise that can be added. As regards exploiting the Group’s size and advantages of scale, a major step towards correcting some structural imperfec- tions was taken last year with the launch of the Leverage & Growth action program. The locking industry today The world of locks and locking solutions is changing. New players are entering the arena, both from emerging markets and from other industries. The rapid development of new technologies is impacting all parts of the industry. ASSA ABLOY’s present competitors are improving their prod- ucts, their quality and their sales strategies. The way people buy locks is changing and so are the various channels through which ASSA ABLOY’s products are distributed. In several market segments there are trends towards providing holistic safety and security solutions rather than offering individual products. Customers are similarly shifting focus from traditional products to a comprehensive notion of safety and security. At the same time customers’ preferences are polarizing. While some are willing to pay a higher price for well- known, innovative brand names, others are satisfied with finding a low-price alternative that will meet basic security requirements. ASSA ABLOY is now well positioned to meet these market changes. A refined business strategy ASSA ABLOY’s new strategies aim to realize the Group’s Vision, fulfill the Group’s Business Concept and achieve the Group’s financial objectives. The refined strategy is based on three overriding themes subdivided into seven main activities, as detailed overleaf: Americas division’s new manufacturing plant in Guadalajara, Mexico. 7 Vision, Business Concept and Strategy Theme 1. Grow our core business 1. Lead the specification markets Architects and security consultants play an important role in choosing security solutions for new construction. ASSA ABLOY’s goal is to strengthen the Group’s resources and ability to market high-security solutions in the specification segment. 2. Develop channels to market A clear majority of ASSA ABLOY’s sales goes through frag- mented local distribution. The Group’s goal is to develop existing and new channels and to influence end-users of ASSA ABLOY’s products more effectively. 3. Develop the door and window OEM markets In many geographical markets ASSA ABLOY has a low market share of the important door and window OEM markets. The Group’s goal is to improve ASSA ABLOY’s ability to adapt to large customers’ specific requirements. Theme 2. Expand into new markets and segments 4. Capture and develop consumer opportunities Customers are demanding security solutions, but the con- sumer market is currently fragmented. ASSA ABLOY’s goal is to increase the Group’s presence in the consumer segment through all channels and to offer integrated solutions that meet customers’ needs for safety and security. 5. Grow electromechanical door solutions The electromechanical door solutions segment is showing rapid growth. ASSA ABLOY’s goal is to increase market shares and lower costs by developing Standards, adapting wireless and similar technologies for use with locks, and leveraging the Group’s worldwide strength. Efforts will also be made to use sales channels such as electric installers to reach a larger market. 6. Develop the Asian potential Asia in general and China in particular provide a potential market for growth. ASSA ABLOY’s goal is to develop the Group’s presence on domestic Asian markets and to benefit from low-cost manufacturing. Theme 3. Radically reduce our break-even cost 7. Capture purchasing and production synergies and adopt Lean methods Because of its many acquisitions, the Group has a complex and fragmented production capacity. ASSA ABLOY’s goal is to use the Group’s size to realize purchasing synergies, to benefit from economies of scale in production, and to adopt Lean methods to achieve even more cost-efficient production throughout the Group. Some production will be moved to low-cost countries. BUSINESS STRATEGY Grow our core business 1. Lead the specification markets 2. Develop channels to market 3. Develop the door and window OEM markets novation In Custo m e r r e l e v a n c e Expand into new markets and segments 4. Capture and develop consumer opportunities 5. Grow electromechanical door solutions 6. Develop the Asian potential Cost effic i e n c y Radically reduce our break-even cost 7. Capture purchasing and production synergies and adopt Lean methods 8 Leverage & Growth Progress during 2004 The two-year Leverage & Growth action program was launched towards the end of 2003 to leverage the Group’s strength and create a basis for sustainable growth. Under- performing companies should be turned round by the end of 2004, or else divested. The cost of the program amounted to SEK 1,320 M and it would involve a reduc- tion of 1,400 in the number of people employed. The largest part of the program affects EMEA division and is directed towards raising productivity, which is being achieved primarily by reductions in the workforce. Americas division’s part of the program, which was completed during the year, mainly concerned underperforming units. Asia Pacific division’s part of the program is concentrating on consolidation of production, while Global Technologies divi- sion is focusing on realizing synergies in the Identification business in Europe and on strengthening its competitiveness in Hospitality. Work under the action program is proceeding well, with a long list of specific activities. Two underperforming units in Americas division have been divested during the year, while other underperforming units have been improved. No further divestments under the action program are planned. In 2004, payments made under the action program amounted to SEK 321 M of the planned total of SEK 935 M, and 750 of the 1,400 employees affected left the Group. Negotiations concerning 1,150 of the 1,400 redun- dancies have been completed. The action program will be completed during 2005. In 2004 ASSA ABLOY achieved savings of SEK 150 M. Dur- ing 2005, the action program is expected to generate addi- tional savings of SEK 200 M, making SEK 350 M in all. From the second half of 2005 onwards, the Group’s annual savings are expected to reach SEK 450 M. Total cost Still to be spent at 31 Dec 2004 ESTIMATED COST SAVINGS FROM THE LEVERAGE & GROWTH ACTION PROGRAM LEVERAGE & GROWTH (SEK M) Division EMEA Americas Asia Pacific Global Technologies Total 1 Of the total cost, SEK 385 M relates to write-down of assets. 860 230 120 110 1,3201 513 25 33 15 586 SEK M 500 400 300 200 100 0 04 05 06 From the second half of 2005, annual savings are expected to be SEK 450 M. 9 Besam doors – efficient entrances for millions of people all over the world 10 Shopping centers and offices 50 million people a day pass through our doors in stores, shopping Shops must seem welcoming but must deter shoplifting. Offices must admit staff and visitors while protecting com- centers, hospitals and office buildings. Automatic doors mercial data worth far more than any security system. In provide convenience for everyone, including parents with fire or emergency, rapid escape is vital. The balance of secu- baby carriages and people in wheelchairs. rity, safety and access control can best be met by sophisti- cated systems incorporating locks, door controls and per- sonal identification. 11 The market The security market – two worlds in one Today ASSA ABLOY is the world’s leading lock Group. As the Group has grown, its product range too has expanded to include a number of product groups, in addition to locks, that are crucial to security. Hence when assessing ASSA ABLOY’s market it has become relevant not just to consider the lock market but to widen the perspective to the security market in general. higher security. Increased threats in the world around us, in the form of crime, violence and terrorism, create insecurity, which in turn increases security awareness. This drives the develop- ment of more advanced security solutions and upgrades of existing lock solutions to obtain increased protection. However, this section also contains product groups where ASSA ABLOY estimates the total security market at around 200 billion Euro. The market can be divided into two sections, Security Services and Electronic Security Products, and Mechanical Security Products. ASSA ABLOY has no manufacturing. These include, for ex- ample, fire protection, X-ray scanners and CCTV surveillance cameras, and also Security Services, which mainly comprise guards and surveillance. Security Services and Electronic Security Products Electronic Security Products include electronic cylinders, auto- matic doors and products for access control, which form part of ASSA ABLOY’s product portfolio. The annual growth in the market for Electronic Security Products in which ASSA ABLOY is mainly active is around 10 percent. The development of Security Services and Electronic Secu- rity Products is driven mainly by the general trend towards Mechanical Security Products As well as locks themselves, Mechanical Security Products also include products such as handles, strikes, hinges, door closers, exit devices and door and window fittings. The development of Mechanical Security Products is driven mainly by new construction, which means that this section of the market is expected to grow at about the same rate as GDP. However, a substantial aftermarket creates stability and makes The product groups that ASSA ABLOY manufactures today mean that the Group is active in about 15 percent of the total security market. ASSA ABLOY’s market can therefore be estimated at around 30 billion Euro, which in turn gives the Group a market share of around 10 percent. Three quarters of this business is in Mechanical Security Products and the remaining one quarter in Electronic Security Products. ASSA ABLOY’s growth target is based on the expected growth in these two markets. SECURITY SERVICES AND ELECTRONIC SECURITY PRODUCTS MECHANICAL SECURITY PRODUCTS EUR billion 120 100 80 60 40 20 0 Other Doors and windows Logical authorization control Automatic doors Access control Surveillance cameras (CCTV) Fire alarms X-ray inspection systems Intrusion protection Other IT security Alarm centers Security guards Locks, exit hardware and door closers Door and window hardware Interior hardware The main product areas where ASSA ABLOY is active are shown in boldface. 12 the market less sensitive to changes in the economic climate, as does the fact that ASSA ABLOY’s operations are geographi- cally distributed over a large number of countries with different economic cycles. Distribution channels for security products A characteristic of today’s security market is that security prod- uct manufacturers such as ASSA ABLOY are usually isolated from end-users behind at least one layer of distributors. Locksmiths and similar firms are among the most impor- tant distributors of Mechanical Security Products, but other players have a significant role too. Many manufacturers of doors and windows integrate lock cases and other security items into their products before delivery to customers. Whole- salers of building materials and locks play important parts in delivering the solutions specified by manufacturers for different construction projects. Retailers such building material super- markets and ironmongers serve the consumer market. In the case of Electronic Security Products, products flow from manu- facturers to end-users mainly via security installers and special- ized distributors. But the products are also sold through inte- grators who often offer turnkey solutions for the installation of perimeter security, access control and IT security. Trends One of the most obvious trends in the security market is the increased demand for electronic products. Another clear trend is increased technical standardization, which makes it easier to integrate the different components of security solutions with one another. This means that, to remain competitive, manufac- turers will be forced to specialize and focus on specific product segments. Distribution is changing too. A number of door and win- dow manufacturers, DIY chains and other players are gaining strength by consolidation. The role of some locksmiths is mov- ing towards increased use of electronics; conversely, IT integra- tors are starting to offer physical security solutions to an ever greater extent. Another clear trend is that manufacturers in low-cost coun- tries in Asia and elsewhere are increasing their market shares in the low-price segments of the western world. In some European countries this type of import has increased by nearly 50 percent a year over the last five years. A change can also be seen in the demand for different levels of security solution. In the past the greatest potential was in the middle segment, but now cus- tomers increasingly choose either a high-security solution or a low-priced alternative. Major differences between markets There are substantial differences between markets. Americans spend more than twice as much on exit devices as Europeans. Conversely, northern Europeans spend three to four times more than Americans on high-security locks for their homes. Auto- matic doors are also significantly more common in Europe than ELECTRONIC SECURITY PRODUCTS MECHANICAL SECURITY PRODUCTS Manufacturing Manufacturing Intruder alarms CCTV Access control Locks Exit hardware Door/ window hardware Route to market Distributors Route to market Wholesalers Door/ window OEM Integrators. dealers, installers Locksmiths Distributors Retail Building contractors Primarily commercial end-users Commercial and residential end-users 13 The market the USA. Electromechanical products are now far more widely used in the commercial segment than in private homes. In the long term these differences are likely to disappear. Assuming that all security and safety solutions could be used equally widely in Europe and in the USA, a rough estimation indicates that the total value of the market could be doubled. Informing and developing the market to reduce the international differ- ences in these market segments is a major challenge for ASSA ABLOY. Americas division In the USA the commercial segment, including schools, hospi- tals and companies, is ASSA ABLOY’s most important market. Interest in security has risen significantly. Product development is carried out in close collaboration with insurance companies, police and fire services, customer organizations and other lead- ers of opinion. In general the residential segment in the USA has lower lock Standards than in Europe. Instead, alarms play a major role in security awareness. However, the media are giving more and more coverage to the fact that better locks are a proactive measure while alarms are a reactive measure when damage has already been done. The residential segment is growing also as a result of rising housing construction. South America Much of South America is a fragmented market and there are few established security Standards. However, the region has a major need for security solutions and is a future growth market. GLOBAL-LEVEL COMPETITORS Sales (EUR M) ASSA ABLOY Ingersoll-Rand (Security & Safety) Black & Decker (Hardware and Home Improvement) Doma Kaba Stanley Works (Security Solutions) 0 500 1,000 1,500 2,000 2,500 3,000 There are five main players in terms of competition at global level. Competitors In the USA the largest competitor is Ingersoll-Rand with brands including Schlage and with other strong brands in the commer- cial segment. Other major players on the American market include Stanley Works and, in the residential segment, Black & Decker. EMEA division EMEA division is characterized by striking differences between different national markets. Although local consolidation has come quite a long way in many countries in EMEA division, the market as a whole remains fairly fragmented. Western Europe In many European countries EU Standards for security prod- ucts are now established and have become a driver for increased sales. They have raised previously low national requirements and thereby also raised the quality of products. However, Standards only cover the level of security provided, not shape or dimensions. In these respects the national differ- ences remain. A survey conducted by ASSA ABLOY shows that western European households believe that there are too few types of electromechanical and electronic locks available for private homes, especially when compared with locks in hotels and modern cars. The survey indicates that more than 50 percent of households would have chosen an electronic door-lock if they had been aware of the alternatives available. Eastern Europe Currently eastern Europe has a lower standard of locks than other parts of Europe. Foreign products – e.g. Swedish or Ger- man – are perceived as superior. The positive development in Russia is continuing. Middle East The largest markets in the Middle East are Saudi Arabia, Iran, Israel and the United Arab Emirates. Here ASSA ABLOY has its strongest foothold in Israel, where the Group company Mul-T-Lock is market leader. Africa With the exception of South Africa, security Standards for both the residential and the commercial segments are generally low in African countries. South Africa is currently the largest mar- ket in Africa, and ASSA ABLOY is the market leader there. 14 The market Global Technologies division Identification Technology Group (ITG) Because the technological differences between markets are small, cards and card readers for both smart cards – based on radio-frequency identification (RFID) – and traditional con- tact-based methods of access control form a worldwide product segment. Demand for products of this type continues to increase and growth was strong in 2004. The market remains fairly fragmented and the strongest competition comes from the global players and from security integrators such as Tyco, Honeywell and GE Infrastructure. Automatic Doors There are a great many local differences between different parts of the world in what they ask of automatic door solutions. Nonetheless, the requirements of the largest customer segments – airports, hospitals, hotels, restaurants and stores – are so simi- lar everywhere that the product segment is best marketed glob- ally. The market is growing and margins improving, especially in Europe but also in the USA where competition is fiercest. Consolidation is ongoing, and the strongest competitors, in addition to the global players Dorma and Stanley Works, include Agta Record from Switzerland, Boon Edam from the Netherlands and Horton Automatics in the USA. ASSA ABLOY Hospitality The primary target group for ASSA ABLOY Hospitality includes large international hotel and restaurant chains, which makes it desirable to organize this business on a global basis. Continuing low demand in the travel industry accounts for the present weakness of the hospitality market. Terrorism, political disturbances and natural catastrophes can all be viewed as causes. At the same time there are contrary trends, for example price pressure in the aviation industry which is likely to lead to more traveling in the future. The largest competitors are Onity and Saflok. Competitors The largest competitor in the EMEA division is the Swiss com- pany Kaba, which focuses primarily on high-security solutions. Other major players include Dorma and Abus in Germany, Sécuridev in France and Evva in Austria. Asia Pacific division Australia and New Zealand The lock markets in Australia and New Zealand are relatively consolidated. ASSA ABLOY’s companies, headed by Lock- wood in Australia and Interlock in New Zealand, are the clear market leaders. Growth remains healthy in both residential and commercial segments. China China is the fastest-growing market in Asia, with a major movement of population from country to town. Today the market is undeveloped in terms of security Standards and pro- duces an abundance of low-quality products that are mostly exported. ASSA ABLOY has established its own manufactur- ing plants in China and now faces a major challenge in educat- ing and developing the distribution chain towards products offering higher security. Rest of Asia In other parts of Asia, ASSA ABLOY is represented by sales offices. During the year ASSA ABLOY acquired BEST Met- aline, one of the largest players on the Korean market. Japan and India are other important markets with potential for expansion. Competitors In Australia and New Zealand competition comes largely from imports from low-cost countries, as well as some global compe- tition. In China the lock market is still very fragmented, and even the largest companies have low market shares. Tri-Circle, whose business is strongly focused on padlocks, is the largest lock manufacturer in China. More than half of Tri-Circle’s sales are exports. In Japan the market leader is Miwa. 15 ASSA ABLOY’s products Increased demand for total security solutions ASSA ABLOY has a world-leading position not just in sales, but also in the form of a strong and highly varied range of products. The development of ASSA ABLOY’s products starts from the differing needs of customers. A continuous flow of innovative new products is the single most important source of organic growth. Focused product development is thus a critical success factor. ASSA ABLOY works all the time to develop its products in ways that will satisfy the end-user’s requirements for security, safety, convenience and design. To meet these cus- tomer requirements more comprehensively, the Group focuses on developing total security solutions. Together with a complete mechanical or electromechanical product, these total solutions include installation and after-sales service as well. Design growing in importance Design is becoming an ever more important factor in selling ASSA ABLOY’s products. Customers appreciate being given greater choice regarding shape, color and finish, and this adds value to the product. During the year the Group has launched a number of products where design has played a major role in the development process. Sales of these ‘designed’ products are rising faster than sales of Brighthandle – Design is becoming more important for lock products. 16 standard products. A good example of a designed product is Brighthandle. Modular platforms Many of ASSA ABLOY’s products, and especially mechani- cal locks, contain similar components. This creates a power- ful opportunity to exploit economies of scale among the Group’s many companies. Product development and pro- duction are focused on a number of efficient modular plat- forms which can then be used by all companies. Likewise, many different ASSA ABLOY companies can utilize compo- nents produced in a single plant. ASSA ABLOY also works constantly to coordinate its purchasing and to limit the number of suppliers to the Group so as to improve its procurement performance. New electromechanical products ASSA ABLOY’s fastest growing product segment is electro- mechanical products for doors and windows. The develop- ment of improved technologies has opened up new opportu- nities to incorporate better components in tailored solutions. These new electromechanical components provide greater convenience, for example by automating doors and locks. ASSA ABLOY’s SALES BY PRODUCT GROUP Security doors, 20% Mechanical products, 53% Electromechanical products, 27% Simpler use with electronic authentication. The iClass card combines RFID and a smart card. 17 ASSA ABLOY’s products Mechanical products Mechanical locks and accessories continue to form the core of the ASSA ABLOY product range, accounting for over half the Group’s worldwide sales. Mechanical locks pro- vide the two primary functions of any security device: iden- tification (the key) and mechanical strength (the lock). There is a clear trend towards higher levels of security. In many developing countries, rising standards of living mean that more people feel the need for greater security. Simpler locks are being replaced by modern high-security locks. In developed markets there is a similar demand for the peace of mind that higher security provides. The Group’s huge installed base of locks in these markets cre- ates a solid foundation for new installations and upgrades – and the products are continually being improved. Modularization of the various product components is an important part of the development of new mechanical lock products. The Evolution series of lock cases from the Swedish company Assa AB is an example of modulariza- tion. The modular series of lock cases makes it possible to provide new functions in the products, while the com- pany can continue to utilize and improve existing lock components. In comparison with the company’s previous series of lock cases, Evolution provides a better range of products with 60 percent fewer components. Another advantage of using modular platforms when developing products is that ASSA ABLOY achieves economies of scale in its purchase of materials. This also reduces the capi- tal tied up in materials and makes it possible to automate the production process more fully. Modular platforms also mean that improvements and updates are applied to the whole prod- uct range and that new requirements from customers can quickly be incorporated in the products. Electromechanical products The market for electromechanical door systems is growing faster than the traditional mechanical lock market. ASSA ABLOY has developed a communication Standard that links together the various components around the door and also makes the individual components more intelligent. This makes it simpler to install doors and door frames, which opens up new channels to the market. Another advantage of ASSA ABLOY’s new communication Stan- dard is that it gives customers a greater ability to check that their electromechanical doors are working as intended. A growing trend in electromechanical lock products is to incorporate of an identification unit (reader) directly in the lock. The new Evolution series of locks – an example of modular product development put into practice. 18 ASSA ABLOY’s products Security doors On the American market, ASSA ABLOY is also a major manufacturer of security doors. During the year the Ameri- cas division launched a new range of electromechanical doors and door frames with a pre-installed cable harness and contacts ready to connect up the lock unit. Such pre- wiring of the doors and door frames simplifies installation, and doors and frames can easily be upgraded and fitted with electromechanical locks later. This is the Americas division’s first step towards the ‘intelligent door’, with com- ponents that are connected to the existing wiring and can intercommunicate via the Hi-O communication Standard. Shared Technologies The growing use of electronics in doors, and the need to integrate doors into access control systems, for example, places new demands on lock and door products. In 2004 a central unit, Shared Technologies, was created to take responsibility for the standardization of electronics in ASSA ABLOY’s Group-wide platforms. The goal is that standardization should result in lower development costs and shorter development times for new products. ASSA ABLOY aims to make the Group’s products easier than competitive products to use and to integrate in new or existing security systems. For this rea- son interfaces are open and designed to permit simple inte- gration into other systems. To enable ASSA ABLOY to develop the right platforms for future products, local customers are involved in the process of definition and development. This allows the Group to undertake generation-planning of its products and to foresee when the market will be ready for new security solutions. CoreStreet In 2004 ASSA ABLOY intensified its cooperation with the American company CoreStreet, which is aimed at develop- ing a new system of secure identification in electromechani- cal locks. Using both fixed and wireless communication links, the new system makes it possible to provide central administration of access control to control points without a fixed connection, such as freight containers, trucks and the cockpit doors of aircraft. The system is based on CoreStreet’s CRT technology (CoreStreet Real Time™), which makes it possible to con- trol both authentication and authorization securely, using a very small data format. Doors pre-wired for electronic locking can be installed more cheaply and simply. Hi-O – Highly Intelligent Operation – the platform for intelligent communication between the various components of the door environment. 19 Sustainable development Improved documentation and supervision ASSA ABLOY’s work towards sustainable development is founded on the four Cornerstones of Vision, Realism, Ethics and Courage laid down when the Group was formed in 1994. The primary strategy for achieving sustainable development is constantly to integrate all measures concerned into the Group’s day-to-day work. ASSA ABLOY has identified the areas where such measures are desirable, relevant and advantageous for the Group. The main areas are environmental responsibility, business ethics and social responsibility. Within these primary classifications a large number of issues have to be addressed. A comprehensive analysis of the Group’s risks and opportuni- ties in the field of sustainable development was initiated in 2002, together with an audit of the current position. The analysis, cover- ing all the main elements of the value-chain, was completed in 2003 and showed that the industry as a whole – as well as ASSA ABLOY specifically – belongs to a medium-risk rather than a high-risk segment. ASSA ABLOY has defined the issues that need to be addressed and analyzed how important they are to sustain- able development and what opportunities ASSA ABLOY has to influence each individual link in the value-chain. For example, ASSA ABLOY’s most important raw materials are metals. Mining and extraction operations often carry risks of major environmental damage and also problems in defending the human rights of workers. However, ASSA ABLOY has little ability to influence the mining industry. This is partly because trading in metals takes place on commodity exchanges where the producer is often unknown, and partly because ASSA ABLOY is a small player on this market and a long way down the value-chain. The use of lock products is, in a broad view, uncontrover- sial, but there remains much for the Group to do. ASSA ABLOY concentrates on taking action in areas where the Group’s impact is greatest. Risks and opportunities ASSA ABLOY has identified risks in the following areas: • Risks related to operations in, and suppliers from, countries of low production costs. These include environmental, ethi- cal and social issues. • Problems of business ethics, such as bribery and conflicts of interest, arise in many markets where ASSA ABLOY is active. ASSA ABLOY has therefore established a zero- tolerance policy regarding bribes, for example. • Environmental problems of historical origin arising in pro- duction operations. Many plants now forming part of the Group have occupied the same site for a long time, in some cases more than a century. Instances of soil pollution requir- ing clean-up are arising. ASSA ABLOY is already undertak- ing remedial measures, and is investigating where there are risks of environmental damage. The costs of these cleaning operations are relatively small. • There are still production operations today that give rise to envi- ronmental impact – for example, the use of organic solvents. Vision • The world leader in safe and secure lock solutions. • Leading in size and thought. Realism • Develop the core business. • Know your business. Vision People make the difference Realism Ethics Ethics • High ethical standards. • Trust and respect other people. Courage • Lead and embrace change. • Innovate. Collaboration Courage 20 The list of potential risk could be extended, especially at a time when some business operations are being moved to low-cost countries. However, there are many opportunities too, which contribute to the economic argument for ASSA ABLOY to intensify its involvement in sustainable development. Directives and organization ASSA ABLOY has produced a number of directives that apply to the whole Group. These are documented and in many cases translated into several languages. The documents are available to everyone on the website www.assaabloy.com. Ultimately it is the Board of Directors that takes responsi- bility for these directives, and ASSA ABLOY’s President and CEO reports to the Board on relevant activities. The CEO also has operational responsibility and heads the control group dealing with such issues. There is an executive with primary responsibility for sustainable development in the Parent Com- pany and at least one person with similar responsibility in each division. In each subsidiary, the Managing Director and/or the Human Resources Director is responsible for ethical and social issues and the Environmental Director for environmental issues. • Business ethics – Fair competition and antitrust legislation – Bribery – Records and reports – Government investigations – Conflict of interest • Workers’ rights, human rights, consumer interests and com- munity outreach – Child labor – Forced or bonded labor – Freedom of association and collective bargaining – Working hours, overtime and overtime compensation – Discrimination, harassment, equal opportunities, gender balance and diversity – Employee privacy – Alcohol and/or drug abuse – Human rights under special circumstances – Consumer interests – Community outreach • Environment, health & safety issues – Environment – Health & safety Management systems Group Management has decided that ASSA ABLOY should implement certifiable environmental management systems meeting ISO 14001 in all Group production plants that gener- ate significant environmental impact. A Code of Conduct has been produced detailing the values and guidelines that apply in ASSA ABLOY. All Group companies should ensure that the guidelines are followed locally. An overriding system for managing and following up sustainability issues is in course of preparation in the Parent Company. Responsibility for the environment ASSA ABLOY has carried out an analysis of all links in the value- chain and identified the most significant environmental impacts. The analysis revealed major differences between companies in the impact they have on the environment. Thus manufacturing companies have greater impact than those that just sell products. From the Group point of view it is important to concentrate com- mon efforts on production in the first instance. A survey is also in hand to assess historical environmental impacts on soil and ground water at all plants with a relevant risk pattern. This should be complete before 2007. To ensure that the Group’s suppliers act correctly, a special Another goal is to eliminate all use of chlorinated solvents questionnaire has been put to many of them since 2002. The questionnaire currently covers quality and environmental issues and is being expanded to include human rights and working conditions. The Code of Conduct provides further rules of behavior for suppliers. Ethics and social responsibility ASSA ABLOY adopted its Code of Conduct in October 2004. The Code is based on a series of internationally accepted con- ventions ratified in most countries. It can naturally not replace local laws, which in many cases are more specific, but it expresses the values and guidelines that should apply within the Group. ASSA ABLOY is a Group active throughout the world, and major cultural differences inevitably exist between employ- ees in different countries. It is nevertheless valuable from the Group point of view that employees should share the same val- ues on many issues. An action that constitutes acceptable behavior in one part of the world may create problems for other employees within the Group. Our Code of Conduct covers the following subjects, among others: and hexavalent chromium. In 2004 ASSA ABLOY listed all its planned environmental measures in an Environmental and Stakeholder Integrity Pro- gram together with time schedules for carrying out all Group- wide and local projects. In addition, ASSA ABLOY intends to implement relevant parts of the EU’s directives on Waste Elec- trical and Electronic Equipment (WEEE) and the Restriction of Hazardous Substances (RoHS) in electrical and electronic equipment within firm time frames. External auditing Since March 2004 ASSA ABLOY has been included in the FTSE4Good series of indexes, which judges companies on their work on environmental and social issues with a view to encouraging socially responsible investment. Rating institutes and unit trusts also actively follow ASSA ABLOY’s progress in sustainable development. Ongoing developments ASSA ABLOY continually monitors the evolution of the laws and conventions governing issues in the field of sustainable development. However, probably the most important factor is the common platform of values concerning such issues that is being built up in the Group. 21 Yale – keeping safe what we value most, for more than a century 22 Safe houses Many of our customers today are look- ing for secure protection for their homes and holiday ASSA ABLOY’s goal is clear: by placing its locks at the heart of every security solution, the Group can provide houses. As the world’s leading lock Group, ASSA ABLOY solutions that will make people around the world feel safer can offer customers everything from individual products to and more secure and able to live their lives more freely. convenient integrated solutions for their home security. 23 Division EMEA Focus on the Leverage & Growth program CHARACTERISTICS OF THE EMEA DIVISION The division operates in a strongly diversified market with significant local differences. Many and varied companies with good knowledge of their own markets’ requirements. No clearly defined boundary between the residential and commercial segments. Bo Dankis, President and CEO of ASSA ABLOY and head of EMEA division. Introduction The EMEA division comprises companies in Europe, the Middle East and Africa. EMEA is the Group’s largest divi- sion and accounts for 42 percent of total sales. During the year the division achieved an organic growth of 3 percent and an EBITA margin of 15.0 percent. The EMEA division has 42 production units, 30 sales companies and 12,800 employees. The division is organized into eleven geographi- cal market regions, each with its own management group which is responsible for the region’s marketing strategy, finances and business development. EMEA’s divisional man- agement is based in Stockholm, Sweden. ASSA ABLOY’s largest markets in the division are Scandinavia and France, and the leading companies are Abloy, Assa, Tesa and Vachette. A strongly diversified market The EMEA division companies operate in a strongly diver- sified market with significant local differences. Different traditions in the markets of northern Europe, southern Europe, the Middle East and Africa, reinforced by different Building Standards and different climates, mean that there are many different needs to be met. ASSA ABLOY’s strength is that its companies have excellent knowledge of customers’ requirements in each local market, which wins them high levels of repeat business and provides a strong basis for their operations. ASSA ABLOY also has strong links with distributors and good knowledge of local lock Standards. The aftermarket accounts for a significant frac- tion of the division’s sales, which means that local brands serve an important function. No clear boundary between the residential and commercial segments In Europe there is no clearly defined boundary between products for the residential segment and products for the commercial segment. Many products currently sell to cus- tomers in both segments. An interior door lock for an office will serve equally well in a home. In this respect the European market contrasts with, for example, the American market. 24 Report on the year Division EMEA, Key figures 2004 saw good demand for ASSA ABLOY’s products. Growth was strongest in the residential segment in Scandi- navia and the Benelux countries. There was also good demand in the Do-It-Yourself segment, but growth in the commercial segment was rather lower this year. The weak US dollar and rising material prices had a negative effect on some of the division’s regions during the year. However, ASSA ABLOY was able to compensate for the higher mat- erial prices by means of higher prices for its own products. Scandinavia In Scandinavia, the residential segment made strong advances in 2004 after a weak 2003. Intensified marketing and increased discussion in the media about how best to protect the home contributed to rising sales. Development in the commercial market was less strong, but increased focus on higher security meant that sales still showed some growth. There was also growing demand from door and window manufacturers for ASSA ABLOY’s products. To shorten lead-times in delivering to customers, the Group has expanded its assembly capacity in Denmark while mov- ing component manufacture to Sweden. Finland In Finland, growth took off in the latter part of 2004 and the business also improved its margins. Abloy invested in the aftermarket, which gave stability to its operations. Abloy also increased its export share, especially in the high- security segment, thanks in past to the launch of the new Abloy PROTEC lock cylinder. 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 2004 2003 SEK M SEK M EUR M EUR M 2004 2003 10,747 9,858 1,179 1,081 284 318 31 35 11,031 10,176 1,210 1,116 3% –1% 3% –1% 1,650 1,359 181 149 15.0% 13.4% 15.0% 13.4% –358 –338 1,292 1,021 –39 142 –37 112 Operating margin (EBIT)1 11.7% 10.1% 11.7% 10.1% Capital employed Capital employed – of which goodwill 9,204 8,519 1,020 4,748 4,728 526 939 521 Return on capital employed 1 13.5% 10.6% 13.5% 10.6% Return on capital employed before goodwill amortization1 Cash flow Operating income before goodwill amortization (EBITA)1 Depreciation (excluding goodwill amortization) Net capital expenditure Change in working capital Cash flow 2 17.2% 14.2% 17.2% 14.2% 1,650 1,359 181 149 500 505 –340 –357 16 66 1,826 1,573 55 –37 2 201 55 –39 7 172 Average number of employees 12,774 12,481 12,774 12,481 1 Excluding non-recurring items. 2 Excluding restructuring payments. SALES / EBITA EUR M 400 EUR M 100 300 200 100 0 75 50 25 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 Sales, EUR M EBITA, EUR M CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED EBITA / CASH FLOW % 30 25 20 15 10 5 0 EUR M 1,200 1,000 800 600 400 200 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 Capital employed, EUR M Return on capital employed, % Return on capital employed before goodwill amortization, % EUR M 70 60 50 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 EBITA, EUR M Cash flow, EUR M 25 Division EMEA France France achieved good growth during the year. Residential new construction increased. Electromechanical solutions are beginning to take market share from the traditional mechanical lock market. Germany and Switzerland The German and Swiss markets are showing signs of new growth after several years of weakness. As part of the Leverage & Growth program, ASSA ABLOY carried out a major reorganization in Germany during the year. The number of units was reduced from seven to two. The re- organization has improved ASSA ABLOY’s positioning on the market. United Kingdom Most of the Group’s business in the United Kingdom lies in relatively simple lock products – a segment with many play- ers and price pressure. This business lost some market share during the year, and some production was moved to coun- tries with lower production costs, resulting in redundancies in Britain. The Group also reorganized the companies serv- ing the residential segment and invested resources in more efficient product development. ASSA ABLOY’s business in the high-security segment showed good development in 2004. Italy ASSA ABLOY’s companies in Italy showed weak sales and poor profitability. The profitability of export sales – tradi- tionally important – was hurt by worsening exchange rates. The Italian operations have embarked on a major reorgani- zation involving specialization of units and the movement of some production to low-cost countries. New investments have been made, and the Group acquired Corbin in Italy at the start of the year. ASSA ABLOY is working towards specific goals designed to build up its organization in Italy so as to achieve a critical mass. Benelux In Benelux, integration between companies acquired earlier is progressing well, and synergies between the companies are becoming apparent. To strengthen ASSA ABLOY’s customer offering on the market and specifically to boost its position in the OEM segment for door and window manufacturers, Nemef in the Netherlands was acquired during 2004. Spain Sales on the Spanish market rose in 2004 despite reduced exports. As part of ASSA ABLOY’s strategy to get closer to the customer, the companies developed specially tailored security solutions. ASSA ABLOY consolidated its produc- tion companies and sales companies in Spain in 2004 and also focused on initiatives in the specification segment. Eastern Europe ASSA ABLOY’s companies in eastern Europe showed strong growth during the year. The Group is investing in manufacturing units in the low-cost countries of eastern Europe such as Romania and the Czech Republic, both for production itself and for the development of new products. Ongoing investment in skills development has resulted in ASSA ABLOY now having some 70 locally employed graduate engineers in Romania. The availability of a well- qualified workforce and high levels of efficiency mean that the east European plants have good future expansion capacity. Middle East After two years of reduced demand, Mul-T-Lock has increased its market shares on the Israeli market and has launched a number of new products. DIVISION EMEA SALES BY PRODUCT GROUP Security doors, 13% Mechanical products, 69% Electromechanical products, 18% 26 Perti Lempiäinen, Abloy, Finland. Division EMEA Africa The African market is highly fragmented and ASSA ABLOY’s operations in the region are concentrated prima- rily on South Africa, where the Group has held a strong position for many years. However, low-price imports had a negative impact on the business in 2004. Ongoing initiatives The EMEA division works continually to develop its distri- bution and product offerings to customers and to make them more efficient. One prioritized area has been to focus on specific customer segments. Thus the companies work- ing in the car-lock segment were brought together during the year. FAB in the Czech Republic, which supplies locks to the Volkswagen Group, and C.E. Marshall in England, which supplies locks to the Ford Group, have formed a joint Car Lock Group. Cooperation between the companies will enable ASSA ABLOY to offer the automotive industry a more attractive product package. A similar initiative in cooperation has been undertaken by the EMEA companies that supply security solutions to airports. Through exchange of expertise between the com- panies, ASSA ABLOY can now offer security solutions to airports in all its markets worldwide. Greater cooperation with the OEM segment During the year the EMEA division has advanced its stand- ing with OEM door and window manufacturers, which are important channels for ASSA ABLOY’s products. Col- laboration with the OEM segment will affect generation- planning for the division’s products and may also influence projects spanning several customer segments and countries. Competence Centers for specification In the security industry it is becoming increasingly impor- tant to become involved in the building process at an early stage when a new housing development, factory or office complex is to be built. By specifying a total security solu- tion covering security, safety, convenience and design, ASSA ABLOY stands a good chance of going on to supply security solutions to the building. Today’s large office and factory buildings have highly complex security require- ments, and helping the architects to specify appropriate security solutions gives ASSA ABLOY an advantage later in the sales process. To train salesmen to specify new building projects, special Competence Centers have been set up in Norway and Spain. The importance of exploiting production synergies There is great potential for coordinating production in the ASSA ABLOY Group. In the long term, production will be concentrated in fewer plants, and a proportion of produc- tion will be moved to low-cost countries. Plants will manu- facture fewer different products but larger volumes of indi- vidual products. Faster delivery times and ready availability of products are also important to ASSA ABLOY’s sales. Installers therefore remain important both as partners and as customers. Leverage & Growth to be completed during 2005 The Leverage & Growth action program will come to an end in the course of 2005 as the reorganization of ASSA ABLOY’s companies in the United Kingdom, Germany, Spain and Italy is completed. KEY PRIORITIES Exploit production synergies in the division through on- going specialization. Continue to develop ASSA ABLOY’s product offerings to specific customer segments. Develop cooperation across geographical boundaries for large customers and projects. Christine Phoko, ASSA ABLOY South Africa. 27 Division Americas Growing with increased margins CHARACTERISTICS OF THE AMERICAS DIVISION A clear majority of the division’s sales comes from the non-residential segment. There is a significant differentiation between products and channels for the institutional and commercial segment and products for the residential segment. Doors and door frames are major components of solu- tions offered to the non-residential segment in the USA. The Americas division comprises companies in North, Central and South America. Americas is ASSA ABLOY’s second-largest division and accounts for 32 percent of total sales. During the year the division had an organic growth of 6 percent and an EBITA margin of 17.6 percent. The divi- sion is subdivided into product and channel focused groups in the USA and into geographical regions elsewhere. Its head office is in New Haven, Connecticut, USA. Americas division has 22 production units, 12 sales companies and about 9,800 employees. Among the major companies in the division are Corbin Russwin, Curries, Emtek, Phillips and Sargent. Report on the year The economic climate in the division’s markets was gener- ally more favorable in 2004 than in 2003, resulting in good growth in both non-residential and residential segments. The Door Group and the Residential Group reported improved sales during the year, and the Door Group has continued to develop positively despite higher material Thanasis Molokotos, Executive Vice President of ASSA ABLOY and head of Americas division. costs. The Architectural Hardware Group has also improved its margins through continuing focus on imple- menting Lean operations. The division’s EBITA margin rose by 110 basis points during the year as a consequence of continuous improvement efforts, the Leverage & Growth action program and better market conditions. Significant increases in material prices, primarily due to the global steel market situation, had some negative effect, but the division was able to offset the impact through operational efficien- cies and price increases to the market. Clear distinction between market segments The North American market differs from the European market in having a clear distinction between products intended for the non-residential segment and products intended for the residential segment. The commercial seg- ment accounts for a very large percentage of the division’s sales. Due to the segment and channel distinctions, only a few of the division’s products are suitable for both office and home applications. 28 The non-residential segment The non-residential segment consists primarily of public buildings, offices, schools and hospitals. Security and safety Standards for these environments are much more demand- ing than for typical residential applications; consequently, product functionality, quality and prices are all significantly higher. Growth in the commercial segment recovered this year after being weak for a number of years. Products sold to the non-residential segment include doors and door frames from the Door Group; door fittings, handles, locks etc. from the Architectural Hardware Group and the Electromechanical Group; and high-security prod- ucts from the High Security and Aftermarket Group. Emtek continues the positive trend In the residential segment, Emtek continued to show strong growth and rising margins. The company, based in Califor- nia, focuses on high-end residential products. Division Americas, 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 2004 2003 SEK M SEK M USD M USD M 2004 2003 8,242 8,625 1,125 1,069 28 32 4 4 8,270 8,657 1,129 1,073 6% –2% 6% –2% 1,452 1,428 198 176 17.6% 16.5% 17.6% 16.5% –314 –331 1,138 1,097 –43 155 –41 135 Operating margin (EBIT)1 13.8% 12.6% 13.8% 12.6% Capital employed Capital employed – of which goodwill 7,049 7,528 1,066 1,046 4,332 5,010 655 696 Return on capital employed 1 14.6% 12.4% 14.6% 12.4% Return on capital employed before goodwill amortization 1 18.7% 16.2% 18.7% 16.2% Actions under the Leverage & Growth program The division’s operations have been rationalized by the divestment of its two companies specializing in the deten- tion segment – Folger Adam Security and Trussbilt. Their products did not fit ASSA ABLOY’s core business, and the companies were underperforming on sales and margins. Other companies included under the Leverage & Growth action program have improved their sales and margins. Cash flow Operating income before goodwill amortization (EBITA)1 Depreciation (excluding goodwill amortization) Net capital expenditure Change in working capital Cash flow2 1,452 1,428 198 176 227 250 –195 –212 –72 61 1,412 1,527 31 –27 –10 192 31 –26 8 189 Average number of employees 9,767 10,091 9,767 10,091 1 Excluding non-recurring items. 2 Excluding restructuring payments. SALES / EBITA USD M 300 USD M 60 250 200 150 100 50 0 50 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 Sales, USD M EBITA, USD M CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED EBITA / CASH FLOW % 50 40 30 20 10 0 USD M 1,250 1,000 750 500 250 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 Capital employed, USD M Return on capital employed, % Return on capital employed before goodwill amortization, % USD M 70 60 50 40 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 EBITA, USD M Cash flow, USD M 29 Division Americas Mexico Continued efforts have been made by ASSA ABLOY’s com- panies in Mexico to improve the division’s market position. Implementation of Lean manufacturing principles, cross- learning with other companies and participation in Group procurement practices have helped to improve overall per- formance. Tesa Mexico has built a new plant in Guadalajara, which started production in September 2004. The plant has significantly increased manufacturing capacity and efficiency. Production was previously split among eight different buildings but has now been concentrated in one building laid out for one-piece-flow Lean operations. The plant supplies products to both the domestic and export markets. Among its exports are Yale-branded products for the US residential market and products and components for other Group companies in the USA, where strategically beneficial. Canada ASSA ABLOY’s Canadian operations have achieved growth during the year despite low non-residential growth in the marketplace. All but one, Fleming Door, are sales and service companies. The sales companies have been neg- atively impacted by the weak US dollar. South America ASSA ABLOY’s companies in South America have grown with increased margins during 2004. The Brazilian market, which accounts for a relatively small percentage of the divi- sion’s sales, has undergone significant improvements. La Fonte has been restructured, with a new management, new organization, cost reductions and more efficient administrative functions. Its success is also due in part to substantial collaboration with many companies across the Americas division. By working together on the develop- ment of new products, the companies offer more attractive security solutions on their own local markets. Ongoing initiatives Specification skills increasingly important The division is expanding its knowledge of the various cus- tomer categories. Different types of buildings require differ- ent solutions. The development of specification skills is an important initiative in the Americas division. Modern safety and security Standards are complex, and new build- ing regulations constantly appear. Helping architects to solve their safety and security requirements during the design and planning phases of a building project can often lead on directly to good sales. DIVISION AMERICAS SALES BY PRODUCT GROUP Security doors, 40% Mechanical products, 51% Electromechanical products, 9% 30 Joaquim Chaves, La Fonte, Brazil. Division Americas Education of ASSA ABLOY’s distributors Distributors are an essential part of the Americas division’s marketing strategy. Educational support to ASSA ABLOY’s distributors as well as end-users will help bring the impor- tance of integrated solutions to the forefront. Implementation of Lean business principles and profit centers In the USA the Door Group and the Architectural Hard- ware Group have accelerated the implementation in all major companies of new, more cost-efficient production methods (Lean operations) and a profit-center organiza- tion. These efforts focus on improved production-line effi- ciency to create a better product flow; lower administrative costs; clearer accountability; and streamlined decision- making – all of which result in greater speed to market and promote effective innovation. Each profit center focuses on one line of products or one market segment, which again produces a clearer division of responsibilities and more effective interaction with the market and the sales force. Purchasing Council team Another important objective for the Americas division is to further leverage the Group’s procurement synergies. A Pur- chasing Council team coordinates pricing negotiations with suppliers to the division. In 2004 this proved extremely important in finding an efficient way to handle increased material prices. Offering complete solutions The division is working towards offering customers more complete solutions to their safety and security problems and hence providing greater added value. Achieving this calls for precise knowledge of the true needs of both the installer and the end-user. ElectroLynx™ – a new system of pre-wiring doors and frames to simplify installation of electromechanical locks and other hardware – is one such solution. Another is the LiteGuide™ system, which assists emergency evacuation of buildings by clearly illuminating the egress door opening by means of illuminated door frames and door and hardware components. KEY PRIORITIES Implement Lean operations in all units. Collaborate more closely with distribution channels and end-users to invest further in coordinated marketing initiatives that will sell products and solutions. Innovate end-user-specific integrated solutions. Educate the marketplace on the importance of high- security and life-safety solutions. Sylvia Romero, Emtek, USA. 31 Division Asia Pacific Moving towards Asia CHARACTERISTICS OF THE ASIA PACIFIC DIVISION The division’s main sales markets are Australia, New Zealand and China. There is an equal split between sales to the residential and commercial segments. The product units in China supply significant volumes to ASSA ABLOY’s other regions. The Asia Pacific division comprises companies in Australia, New Zealand, China and elsewhere in Asia. The Asia Pacific division accounts for 7 percent of ASSA ABLOY’s total sales. During the year the division achieved an organic growth of 7 percent and an EBITA margin of 15.1 percent. Its head office is located in Hong Kong. The Asia Pacific division has 5 pro- duction units, 7 sales companies and 3,600 employees. The division’s largest markets are Australia, New Zealand and China, and the leading companies in the division are Lock- wood, Interlock and Guli. Report on the year The Australian and New Zealand markets showed good sales growth during 2004. Thanks to strong local currencies in Australia and New Zealand and a fixed exchange rate for the Chinese currency against the US dollar, the division has succeeded in managing the year’s weaker dollar and higher raw-material prices well. However, the weak US dollar had a negative impact on the division’s export business. The residential and commercial segments each account for about half of the division’s sales. Growth in the residen- tial segment fell back a little from the previous high level but Geoff Norcott, Executive Vice President of ASSA ABLOY and head of Asia Pacific division. new housebuilding remains strong. The commercial seg- ment recorded continuing good growth this year. Complete solutions increase value to customers In order to retain its strong market positions in Australia and New Zealand, the division must get closer to end-users and take a more market-oriented view of its business. Innov- ative products, user modifications and knowledge of cus- tomer requirements are crucial for ASSA ABLOY to keep its present strong positions. To further improve the division’s performance, the product offering must be expanded, pri- marily by offering more support services to the aftermarket. Electromechanical products increasingly important Another important success factor will be the ability to add electromechanics to security solutions. The division’s acqui- sition of Security Merchants was one move directed at increasing the electromechanical content in its locks and other products. Security Merchants will concentrate prima- rily on helping the division’s other companies to add electro- mechanical features to their existing products, while also working to develop new electromechanical products. 32 A significant new product developed for the mature Australian and New Zealand markets is Nexion. This is a remote-control security system that allows householders to open the door of the house with a remote device. Later it will be possible to link it into the home’s alarm system. Nex- ion has just been launched on the Australian market and has been very well received by both customers and distributors. Increased sales to the OEM segment Interlock in New Zealand produces security fittings for resi- dential doors and windows. Most of Interlock’s business is with Original Equipment Manufacturers (OEMs), and this business in particular was impacted by the weak US dollar in 2004. In order to serve this market better and to reduce transport costs, production will be relocated to China and the USA in 2005. Correct specification leads to higher sales The specification market is growing, and it is essential that the Asia Pacific division increases its efforts to train capable specifiers in accordance with ASSA ABLOY’s overall strat- egy. The ability to support architects by specifying a build- ing with the relevant security standards can very often lead directly to successful sales. Lockwood in Australia has a high level of specification expertise which is being used to train more specifiers in the division. One current specifica- tion project is ASSA ABLOY’s support for the organizers of the 2008 Beijing Olympics to ensure world-class security standards for the buildings there. Division Asia Pacific, 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 2004 2003 SEK M SEK M AUD M AUD M 2004 2003 1,726 1,506 121 109 1,847 1,615 7% 5% 320 23 343 7% 288 21 309 5% 278 240 52 46 15.1% 14.9% 15.1% 14.9% –57 221 –52 188 –11 41 –10 36 Operating margin (EBIT)1 11.9% 11.8% 11.9% 11.8% Capital employed Capital employed – of which goodwill 1,620 1,513 864 839 314 168 280 155 Return on capital employed 1 12.3% 11.8% 12.3% 11.8% Return on capital employed before goodwill amortization 1 15.5% 15.1% 15.5% 15.1% Cash flow Operating income before goodwill amortization (EBITA)1 Depreciation (excluding goodwill amortization) Net capital expenditure Change in working capital Cash flow 2 278 240 62 –29 –43 268 56 –53 –28 215 52 12 –5 –8 51 46 11 –10 –5 42 Average number of employees 3,629 3,507 3,629 3,507 1 Excluding non-recurring items. 2 Excluding restructuring payments. SALES / EBITA CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED EBITA / CASH FLOW AUD M 100 AUD M 20 AUD M 400 75 50 25 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 Sales, AUD M EBITA, AUD M 15 10 5 0 300 200 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 Capital employed, AUD M Return on capital employed, % Return on capital employed before goodwill amortization, % % 40 30 20 10 0 AUD M 20 15 10 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 EBITA, AUD M Cash flow, AUD M 33 Division Asia Pacific China The Chinese market has generated strong growth for several years, but today accounts for a relatively small proportion of the Asia Pacific division’s total sales. In 2004 the pace of growth slowed in response to the efforts of China’s political leaders to temper overheating of the economy. Despite this slowing, the residential segment grew by some 15 percent and the commercial segment by some 10 percent during the year. Other Asian markets ASSA ABLOY’s companies in Asian markets other than China achieved higher earnings in 2004 than in 2003. The Asia Pacific division has mainly sales companies in these countries. These businesses are showing growth and will be developed in future years. Market shares in Asian markets outside China are still generally small. One major project during the year was the sale of a comprehensive security solution to the newly opened Hong Kong Disneyland. Concentrate on the mass-market segment The segment for high-end products is still relatively small in China, and the division does not therefore envisage making major marketing efforts in this segment at present. ASSA ABLOY will concentrate primarily on products for the mass-market segment, although some of the Group’s spe- cialized companies aim to develop the high-end segment. The Group’s largest company in China is Guli, which is now focusing primarily on producing goods for ASSA ABLOY’s other markets and supplying products to Group companies throughout the world. New plant near Shanghai Together with Global Technologies division, Asia Pacific division is building a plant in Suzhou, west of Shanghai. The plant will manufacture automatic-door products for Besam internationally while also supplying electromechanical products for the Asia Pacific division’s local markets. The plant will start deliveries early in 2005. Actions under the Leverage & Growth program The aim of the Leverage & Growth action program in the Asia Pacific division has been to consolidate production and to transfer parts of manufacturing to low-cost countries. The division contained one underperforming company that was affected by the action program and has been reorgan- ized; it is now showing higher sales and better margins. Acquisition in South Korea In February 2005 ASSA ABLOY completed the acquisition of BEST Metaline in South Korea. The company specializes in lock and door fittings and automatic doors, and also has a strong position in specifying customized hardware to architects and construction companies. The acquisition of BEST Metaline strengthens ASSA ABLOY’s position in north east Asia. DIVISION ASIA PACIFIC SALES BY PRODUCT GROUP Security doors, 26% Mechanical products, 64% Electromechanical products, 10% 34 Wiek Cuppen, Lockwood, Australia. Division Asia Pacific acquire companies with an established distribution chain and network of contacts that it can build on. In some cases the local managements and employees will own minority shareholdings in the companies. This is a departure from ASSA ABLOY’s usual strategy of having wholly owned Group companies, but part-ownership and local stakehold- ing are important parts of Chinese business and will help the companies to succeed. Recruitment vital to success Recruitment of competent people for its expansion in China is one of the greatest challenges the Asia Pacific division faces. The division is currently training people in its estab- lished Australian and New Zealand markets who will then work in China on project management and company development. Sales to Asia’s dynamic markets must increase In the longer term the balance between the different markets served by the Asia Pacific division will change. At present a clear majority of the division’s sales are to Australia and New Zealand and considerably less are to Asia. Ultimately, more than half of all sales should be to Asia. Growth in the division will come both organically and through acquisi- tions, and most of the division’s acquisitions in future years will therefore be in Asia. Ongoing initiatives Transfer of production to low-cost countries In 2005 the division will transfer parts of ASSA ABLOY’s production units from Australia and New Zealand to China. Assembly and completion of products and customer modifications will remain in Australia and New Zealand, as will manufacture of newly developed products such as Nex- ion. As production gradually moves away from the divi- sion’s largest markets, the companies in Australia and New Zealand will concentrate on sales and marketing of Group products. Active promotion of ASSA ABLOY’s brands will be crucial to success in these mature markets. Developing solutions for the end-user The companies within the Asia Pacific division sell most of their products to distributors, and ASSA ABLOY has greatly increased the development of complete security solutions to the end-user. Innovation and continuing product develop- ment are essential if ASSA ABLOY is to maintain an appeal- ing product range. Electromechanical security products are becoming ever more important. The Asia Pacific division’s product port- folio will be expanded to include more electromechanical products, and electromechanical functionality will be added to many existing products. Developing distribution on the Chinese market The Asia Pacific division’s highest priority is to develop dis- tribution on the Chinese market. The division’s strategy is to KEY PRIORITIES Innovate in product segments, electromechanical solutions and business processes. Develop and capture benefits from low-cost production units. Complete the restructuring process. Develop a cross-cultural management team to handle Asian acquisitions. Increase manufacture of low-cost products for other divisions. Stasia Dye, ASSA ABLOY Asia Pacific, New Zealand. 35 Division Global Technologies Rising demand for Identification and Automatic Doors CHARACTERISTICS OF THE GLOBAL TECHNOLOGIES DIVISION The division’s products are sold entirely to the non- residential segment. The division’s largest markets are North America and Europe. Three separate business areas: Identification Technology Group (ITG), Automatic Doors and ASSA ABLOY Hospitality. Global Technologies division is the Group’s worldwide organization dedicated to high-technology products and services. Global Technologies accounts for 19 percent of ASSA ABLOY’s total sales. During the year the division achieved an organic growth of 5 percent and an EBITA margin of 13.0 percent. Its head office is located in Provi- dence, Rhode Island, USA. Global Technologies division has 10 production units, 41 sales companies and about 2,900 employees. Global Technologies division consists of three business areas: – The Identification Technology Group (ITG), which accounts for 42 percent of the division’s sales. ITG’s prod- ucts comprise various types of identification technology for access control as well as Radio Frequency Identifica- tion (RFID) and smart cards. These are sold under well- known brand names such as HID, Indala, Sokymat and ACG. – Automatic Doors, which accounts for 40 percent of the division’s sales. This business area consists of Besam, Joseph J. Grillo, Executive Vice President of ASSA ABLOY and head of Global Technologies division. which is the world’s leading supplier of automatic door solutions. – ASSA ABLOY Hospitality, which accounts for 18 percent of the division’s sales. This business area consists of hotel locking systems and safes, and serves the hotel, cruise- ship and other lodging markets with leading brands such as VingCard and Elsafe. Report on the year Identification Technology Group (ITG) During 2004 ITG recorded rising demand and strong sales growth in all its product areas. The companies acquired in 2003, mainly in Europe, have given ITG a more balanced business than it had before, and a priority in 2004 was to integrate these earlier acquisitions. Today 40 percent of ITG’s sales are in North America, 40 percent in Europe and 20 percent in Asia, Australia and New Zealand. The mar- gins for ITG have improved during the year. The acquired companies, which specialize in Radio-Frequency Identifica- tion (RFID) and smart cards, have been well integrated into the Group. 36 Demand for ITG products from the access-control mar- ket has been good all year. Growth was especially strong in North America. Strong growth for HID HID is the world’s largest manufacturer of access-control readers and cards for the security market. The company is also a pioneer of Radio-Frequency Identification (RFID) for authenticating access. HID achieved strong growth on all markets in 2004. The company’s products, such as the multi-application iClass card, combine a variety of tech- nologies with RFID, including magnetic stripes, barcodes and modules with smart chips. Holograms or ultraviolet inks can be supplied for users requiring higher security. HID’s long experience in card technology has also given the company a strong position in the development of contactless cards, which are now used for applications such as secure access, IT signatures and digital cash. For even greater security such cards can also store users’ biometric templates based on fingerprints, iris scans etc. Product launches during 2004 During the year ITG launched its first access control prod- ucts under HID’s new VertX brand. VertX CS is a new class of access control panels specifically designed to manage access control from a remote central station. Offering full ‘plug and play’ card access-control functionality in an open-architecture platform, VertX CS is fully scalable from two-door retail installations to large corporate campuses. The future of electronic passports Several ITG companies are active in the market for elec- tronic passports. The intention is to introduce a more secure passport than today’s and to improve the authenti- Division 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 amortization 1 Cash flow Operating income before goodwill amortization (EBITA)1 Depreciation (excluding goodwill amortization) Net capital expenditure Change in working capital Cash flow2 Average number of employees 1 Excluding non-recurring items. 2 Excluding restructuring payments. 2004 2003 SEK M SEK M 4,811 4,093 100 84 4,911 4,177 5% 6% 637 542 13.0% 13.0% –249 –238 388 304 7.9% 7.3% 5,077 5,288 4,068 4,189 7.4% 5.6% 12.2% 9.9% 637 542 95 –78 –2 652 81 –64 –10 549 2,925 2,574 cating process. The ASSA ABLOY companies in this field are already offering a product range that includes both the transponders and readers for electronic passports. The first purchases of these systems are expected in 2005 with signif- icant growth in coming years. SALES / EBITA CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED EBITA / CASH FLOW SEK M 1,500 1,200 900 600 300 0 SEK M 180 SEK M 6,000 150 120 90 60 30 0 4,000 2,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 Sales, SEK M EBITA, SEK M % 30 20 10 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 Capital employed, SEK M Return on capital employed, % Return on capital employed before goodwill amortization, % SEK M 300 250 200 150 100 50 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2003 2004 EBITA, SEK M Cash flow, SEK M 37 Division Global Technologies Automatic Doors Besam constitutes the entire Automatic Doors business of the Global Technologies division. In 2004 the company achieved good growth with further improved margins. The growth of service business was particularly strong in all geographic markets. Europe is Besam’s largest market and accounts for some 70 percent of sales. Other markets are the USA, accounting for 25 percent of sales, and Asia, Australia and New Zealand, which represent 5 percent. Reorganization on the US market Besam’s business in the USA has been reorganized, with manufacturing relocated to the Yale plant at Charlotte in North Carolina. This move is now complete and in 2004 the production unit achieved major improvements in effi- ciency. As a result of this reorganization, and backed by active marketing and sales efforts, Besam succeeded during the year in reversing the negative trend on the American market. Against stiff competition, Besam has been success- ful in winning a number of important contracts. Good growth in Europe Besam has shown strong growth on a number of its European markets especially in the United Kingdom, Spain and central and eastern Europe. Market growth was driven primarily by public investments, the implementation of the Disability Dis- crimination Act in Britain, and expansion programs led by the international retail chains. Besam was successful in securing several major contracts, particularly in the retail segment. The Swedish production plant in Landskrona accounts for a major part of the output of Besam’s more complex products. The factory was reorganized in 2004 with the aim of reworking production flows so as to improve efficiency and reduce administration costs. The reorganiza- tion of manufacturing has been a success and the plant is now achieving more efficient production. Positive development in Asia Pacific Although Asian, Australian and New Zealand markets rep- resent a small fraction of Besam’s sales, they achieved satis- factory growth in 2004. To meet expected future demand and benefit from lower production costs, Besam and the Asia Pacific division are building a new production plant in Suzhou, China. This will supply both local and export mar- kets with Besam’s products mainly intended for the lower end of the market. Launch of a new brand, EntreMatic EntreMatic is a new brand in the Automatic Doors business area. Products carrying this name will build on Besam’s established technology and know-how, but will be offered through an indirect channel. EntreMatic will act as a com- plementary brand to reach smaller customers not suited to a direct sales approach. ASSA ABLOY Hospitality The weak demand that still prevails in the hotel and travel industry had a negative effect on ASSA ABLOY Hospital- ity, the division’s business area directed at the hotel and cruise-ship markets. For this reason ASSA ABLOY Hospi- tality was reorganized in 2004, and a new management team has been put in place. VingCard in Norway reorganized VingCard in Norway was reorganized during 2004 with the aims of raising efficiency and lowering production costs. Employee numbers were cut back because of plant DIVISION GLOBAL TECHNOLOGIES SALES BY PRODUCT GROUP Security doors, 1% Mechanical products, 11% Electromechanical products, 88% 38 Berrit Laursen, Besam, Sweden. overcapacity. In addition, parts of VingCard’s production will be relocated to low-cost countries. Overall, the restruc- turing of the Hospitality business area will continue in 2005 with increased emphasis being placed on the strong VingCard and Elsafe brands. Acquisition in China ASSA ABLOY Hospitality has acquired Kingsgate in China, which manufactures hotel safes. Kingsgate showed modest growth for the year with positive margins, and its acquisition will strengthen the position of the Hospitality business area on Asian markets. Ongoing initiatives Vast potential for ITG Within a timeframe of a few years, ITG has the potential to show strong growth in all segments. This will be achieved in part through organic growth but also through acquisi- tions. In its core area of electronic access control, ITG will see significant growth from sales of the next generation of products using contactless smart card technology. For HID, VertX and other products based on an open architecture represent a major growth opportunity. Elsewhere, ITG will focus on replicating its success in selling RFID technology for access control by applying the same fundamental technology to other rapidly growing market segments. These include industrial applications and national identity cards / electronic passports, where RFID may be combined with biometrics. Expanding Automatic Doors by acquisitions and product launches In the Automatic Doors business area, Besam will extend its product portfolio through selective acquisitions, either Division Global Technologies to expand geographically or to diversify the range of solu- tions offered to its commercial and retail customer base. Besam will also expand its EntreMatic business into new geographic markets in order to reach smaller customers. New products are being developed to address markets of low penetration or high growth such as eastern Europe and Asia. Besam will also continue to focus on the higher- margin service business, using key-account management to attract major retail, industrial and commercial customers. Acquisition in the UK In February 2005 ASSA ABLOY signed an agreement to acquire Doorman Services. The company supplies, installs and services manual and automatic doors and roller shut- ters throughout the UK and has a strong presence in the retail segment. The acquisition strengthens ASSA ABLOY’s Automatic Doors business area. Focus on strong brands in the Hospitality group The Hospitality group will focus on its strongest and best- known brands, VingCard and Elsafe. Ongoing restructur- ing will be directed at reducing the costs of manufacturing locking systems and safes, reducing the overhead structures of the business, and streamlining logistics and the supply chain. Development in such areas as card activation, RFID- based locks and wireless ‘on-line’ locks will continue, so that hotel chains and other customers can be offered the latest technical innovations. Other major initiatives will emphasize key-account management and increasing service revenue. KEY PRIORITIES Establish a presence in growing RFID markets by developing new products. Improve efficiency and lower production costs. Increase service and maintenance business in ASSA ABLOY Hospitality and Besam. Coordinate strategy for key-account management with the Group’s other divisions to increase sales of all Global Technologies products. David Sullivan, HID EMEA, United Kingdom. 39 Complex demands on both accessi- bility and control call for many different locking and authentication functions 40 Airports Modern airports are divided into multiple security zones with complex security needs. There are often Airports also have public areas with open access. With so many people in one place and most unfamiliar with the thousands of staff with different access authority deter- site layout, a critical consideration is safety in a security mined by their duties. An electronic card system allows alert or other emergency. Clearly signed emergency exits everyone to go just to areas where their job requires. guiding people through just a few doors allow quick, safe evacuation. 41 Report of the Board of Directors for 2004 The Annual Report of ASSA ABLOY AB (publ.), Corpo- rate Organization number 556059-3575, contains the Group’s accounts for the financial year 1 January – 31 December 2004. Work under the action program is proceeding well, with a long list of specific activities. Two underperforming units in Americas division have been divested during the year, while other underperforming units have been improved. LEVERAGE & GROWTH ACTION PROGRAM (SEK M) Important events Refined business strategy During the year ASSA ABLOY has carried out a review of the Group’s strategy to take account of the changes that have occurred on the market and within ASSA ABLOY. The strategy developed is founded on three themes. The Global Technologies Division EMEA Americas Asia Pacific Total Total cost Still to be spent at 31 Dec 2004 860 230 120 110 1,3201 513 25 33 15 586 first theme aims to strengthen organic growth in ASSA ABLOY’s core business. This includes activities in the speci- fication market for new construction; actively exploiting and developing existing distribution channels; and exploit- ing the potential of the door and window industry to better advantage. The second theme is concerned with expansion in attractive and fast-growing markets and product seg- ments, including the consumer market, the Chinese market and the electromechanical lock segment. The third theme focuses on exploiting the Group’s size to generate signifi- cant savings, especially in production and purchasing. The two-year Leverage & Growth action program A two-year action program was launched towards the end of 2003 to leverage the Group’s strength and create a basis for sustainable growth. Underperforming units should be turned round by the end of 2004, or else divested. The cost of the program amounted to SEK 1,320 M and it would involve a reduction of 1,400 in the number of people employed. The largest part of the program applies to EMEA division and is directed towards raising productivity, which is being achieved primarily by reductions in the workforce. Americas division’s part of the program, which was completed during the year, mainly concerned underperforming units. Asia Pacific division’s part of the program is concentrating on consolidation of production, while Global Technologies divi- sion is focusing on realizing synergies in the Identification business in Europe and on strengthening its competitiveness in the Hospitality business. 42 1 Of the total cost, SEK 385 M relates to write-down of assets. In 2004, payments made under the action program amoun- ted to SEK 321 M of the planned total of SEK 935 M, and 750 of the 1,400 employees affected left the Group. Negoti- ations concerning 1,150 of the 1,400 redundancies have been completed. By the second half of 2005, annual savings are expected to be running at SEK 450 M. Savings in 2004 amounted to SEK 150 M. Acquisitions in EMEA division 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 total acquisition price was EUR 66 M. Goodwill arising in con- nection with the acquisition was about EUR 40 M. The companies have annual sales of about EUR 50 M with good profitability. The companies have contributed to earnings per share from the date of acquisition. A small business concerned with secure handling of keys was acquired in Sweden during the year. Acquisitions in Asia Pacific division Security Merchants Group in Australia and New Zealand was acquired on 4 March 2004. Security Merchants is a leader in project specification and electronic and electro- mechanical security solutions, and the acquisition will help to strengthen ASSA ABLOY’s position in this area. Security Report of the Board of Directors for 2004 Merchants has annual sales of about AUD 30 M. The com- pany has contributed to earnings per share from the date of acquisition. On 13 December 2004 a contract was signed for the acquisition of BEST Metaline, one of South Korea’s leading companies in lock and door fittings. BEST Metaline will add new products to ASSA ABLOY’s security offering and will strengthen ASSA ABLOY’s market position in north east Asia. BEST Metaline’s sales in 2004 totaled around SEK 65 M and the company is expected to make a positive con- tribution to earnings per share from the date of acquisition. Acquisitions by Global Technologies division Two small businesses were acquired during the year. Panija in England works in identification, while Kingsgate in China manufactures hotel safes. On 31 January 2005 a contract was signed for the acquisition of Doorman Services, one of the UK’s leading door service companies. The acquisition will broaden ASSA ABLOY’s offering in automatic doors. Doorman Services’ sales in 2004 totaled around GBP 11 M and the company is expected to make a positive contribution to earnings per share from the date of acquisition. Divestments in Americas division On 24 August 2004 ASSA ABLOY completed the sale of the principal operating assets of Folger Adam Security Detention to Phelps-Tointon. Folger Adam was part of the acquisition of Intruder Security Group from Williams in August 2000. On 20 September 2004 the principal operat- ing assets of Trussbilt Detention were sold to a group of private investors. Trussbilt was part of the acquisition of United Door products in June 2001. Both Folger Adam Security Detention and Trussbilt Detention are active in locks for prisons. The divested businesses have annual sales of about SEK 200 M, and the transactions will have a posi- tive effect on ASSA ABLOY’s operating margin from the respective dates of sale. Cooperation agreements During the year ASSA ABLOY invested in the Swedish company Brighthandle, which develops innovative door handles. Collaboration with the American development company CoreStreet, which is involved in identification and access control, was also intensified. Incentive 2004 During the year an international incentive program, Incen- tive 2004, was launched, which offers the Group’s employ- ees the opportunity to benefit from growth in the value of the ASSA ABLOY share. This is expected to lead to greater interest in the Group’s financial performance and to strengthen employees’ sense of involvement in the Group. Almost 2,000 employees in some 15 countries took part in the program, which amounts to EUR 100 M and will run until June 2009. Financing During the year ASSA ABLOY renegotiated the conditions of the company’s back-up facility. The facility amounts to EUR 1,000 M and runs for an initial period of five years. The conditions include no financial covenants and are inde- pendent of ratings. ASSA ABLOY has also repurchased EMTN loans worth EUR 300 M, out of a total of EUR 600 M, with a redemption date of December 2006. The purpose is to improve the maturity structure and thereby reduce risk and adjust the loan portfolio to the Group’s current requirements. New dividend policy ASSA ABLOY’s Board of Directors decided in 2004 to adopt a new dividend policy under which, in the long term, 33–50 percent of earnings after standard tax of 28 percent will be distributed, but always taking into account ASSA ABLOY’s long-term financial requirements. The change to IFRS accounting from 2005 means that the income state- ment will no longer be burdened with amortization of goodwill. This permits a significant increase in the dividend paid. 43 Report of the Board of Directors for 2004 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 Industri 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 external environment through the discharge of water, air and solid waste. The subsidiaries Assa AB, Assa Industri AB, AB FAS Lås- fabrik and FIX AB are actively addressing environmental 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 ASSA ABLOY is involved in a number of disputes, but these require no further disclosure considering the size of the disputed amounts, applicable insurance cover, etc. Accounting principles From 2004 ASSA ABLOY is adopting the Swedish Finan- cial Accounting Standards Council’s Standard RR 29 ‘Employee benefits’ in the Group’s accounting. The rules are based on IAS 19. Pensions and other remuneration after retirement have previously been reported in accordance with each country’s local rules. The move to RR 29 had a negative effect of some SEK 815 M on the Group’s share- holders’ equity after deduction for deferred tax. In accor- dance with RR 29, this effect is reported as a correction to the opening shareholders’ equity on 1 January 2004. The move itself will have no effect on income or cash flow. Nor will there be any change to the ASSA ABLOY Group’s obli- gations to its employees. In other respects, accounting prin- ciples are unchanged from previous years. The effects of the change to IFRS in 2005 are described in Note 1. Outlook Organic sales growth is expected to continue at a good rate. The operating margin (EBITA) is expected to rise, mainly due to savings resulting from the restructuring program. Excluding restructuring payments, the strong cash genera- tion is expected to continue. Long term, ASSA ABLOY expects an increase in security-driven demand. Focus on end-user value and innovation as well as leverage on ASSA ABLOY’s strong positions will accelerate growth and increase profitability. 44 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 interacting 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 (cid:127) Policies and guidelines Internal control and risk management G FINAN DECENTRALIZED ORGANIZATION Ownership ASSA ABLOY’s principal shareholders are Investment AB Latour and SäkI (9.8 percent of the capital and 29.8 percent of the votes) and Melker Schörling and companies (4.0 per- cent of the capital and 11.6 percent of the votes). The num- ber of shareholders at year-end was 30,191. 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 represen- tatives 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 operations. During 2004, 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 responsi- ble for the organization and administration of the Group in accordance with the Swedish Companies Act. Working pro- cedures for the Board and instructions for the CEO have been set down in written form and are reviewed annually. The Board has a Remuneration Committee consisting of three people. There is also an Audit Committee, which consists of four people. The purpose of these committees is to assist the Board in giving deeper and more efficient con- sideration to these matters. The Audit Committee holds three meetings a year, one of which forms the annual year- end meeting, held in conjunction with the ordinary Board meeting. The Committee’s duties include review of finan- cial policy and control of the company’s financial report- ing, internal reporting and control systems, and legal risks. There is an ongoing dialog with the appointed auditor, who participates in the Audit Committee’s meetings. The Audit Committee consists of Melker Schörling (Chairman), Gustaf Douglas, Per-Olof Eriksson and Lotta Lundén. There is also a Nomination Committee with the duties – before each General Meeting – of preparing for the selection of Directors, the setting of Directors’ remunera- tion and associated issues. The Nomination Committee consists of Gustaf Douglas (Chairman), Georg Ehrnrooth and Melker Schörling, plus two representatives of the major institutional shareholders. In November 2004 Marianne Nilsson of Robur and Staffan Grefbäck of Alecta were appointed as members of the Nomination Committee prior to the 2005 Annual General Meeting. Remuneration of Board and Management Remuneration of the Board is in accordance with decisions taken at the Annual General Meeting. There are no separate 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 (3.6). The Chairman and other Directors have no pension benefits or severance pay agreements. The CEO and the employee representatives do not receive a Director’s fee. Remuneration of the CEO and the Executive Team is determined by the Remuneration Committee and approved by the Board. The Remuneration Committee consists of Georg Ehrnrooth (Chairman), Melker Schörling and Sven-Christer Nilsson. The Remuneration Committee held three meetings in 2004. Remuneration of the Executive Team consists of basic salary, variable salary, other benefits, and pensions. Vari- able salary is based primarily on improvement in operating income compared with the previous year in the recipient’s area of responsibility. Variable salary may also be based on organic growth. Such variable salary is capped at a maxi- mum of two-thirds of basic salary. The Executive Team also has the opportunity to receive variable salary based on improvement in earnings per share. The maximum pay- ment of SEK 2 M per person applies if earnings per share increase by 25 percent compared with the previous year. Half of such variable salary is paid 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. This second half is paid only if, at the end of the period, the 45 Corporate Governance person concerned has neither left his job on his own initiative nor been dismissed for breach of contract. Basic pension arrangements for the CEO and others in the Executive Team are through participation in the ITP plan or equivalent. In addition, the CEO and certain other senior exec- utives have the right to retire with a pension at the earliest on reaching the age of 60. ASSA ABLOY pays a premium on pen- sions amounting to about 60 percent of basic salary. Assuming service of at least 15 years, this means that pensions will amount to 70 percent of basic salary at the time of retiring for those between the ages of 60 and 65, and 50 percent of this salary after the age of 65 for the remainder of life. The CEO has a severance payment agreement providing 100 percent of his basic salary for 24 months. The payment is made only where the company terminates the contract. The CEO is also entitled to reimbursement for any losses resulting from relocation. Oth- ers in the Executive Team are entitled to six months’ notice and receive a severance payment of 100 percent of their basic salary for a maximum of 12 months, which is reduced by any income from employment that may arise. REMUNERATION AND OTHER BENEFITS PAID TO SENIOR OFFICE-HOLDERS Salary/ Variable Pension salary Fee Other Social costs benefits costs Total SEK M Chairman Other Board members CEO Other senior executives (5 people) Total 1 3 6 15 25 – – 5 16 21 – – 4 5 9 – – 0 0 0 0 1 5 5 11 1 4 20 41 66 Executive Team shareholdings in ASSA ABLOY Members of the Executive Team hold Series B shares, and have taken part in the convertible debenture loans 2001/06 Series 1-4 and 2004/09 Series 1-4 through purchase of shares in ASSA ABLOY Incentive 2001 Holding S.A. and ASSA ABLOY Incentive 2004 Holding S.A., as detailed in the table below. The shares were purchased at market value in line with the offers made to employees in 2001 and 2004. EXECUTIVE TEAM SHAREHOLDINGS IN ASSA ABLOY AT 31 DECEMBER Series B shares Incentive programs1 2004 2003 2004 2003 86,000 86,000 267,550 10,750 230,000 351,784 231,200 60,000 – – 161,200 60,000 Bo Dankis Göran Jansson Geoff Norcott Thanasis Molokotos 25,000 25,000 86,100 55,000 Joseph J. Grillo Åke Sund – – 164,800 32,500 135,000 175,000 153,400 60,000 1 Equivalent number of Series B shares at conversion prices EUR 10.20 – 25.30. 46 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 Incen- tive programs. 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 divisions, the Deputy CEO (who is also CFO) and an Executive Vice Presi- dent responsible for market and business development. The composition of this group gives a geographical and strategic spread of responsibility designed to ensure short decision- making paths. Management philosophy ASSA ABLOY’s firm conviction is that people make the com- pany. 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 concern ethics and social responsibility, environmental issues, finan- cial control, the Group’s brands, and communication issues. In 2004 ASSA ABLOY adopted a Code of Conduct that applies to the whole Group. The Code, which is based on a set of internationally accepted conventions, defines the val- ues and guidelines that should govern the Group in matters such as business ethics, rights and privileges and social responsibility. 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. Corporate Governance Internal control and risk management The Board has overriding responsibility for an efficient sys- tem of internal control and risk management, while the CEO is responsible for executing internal control and risk management. Risk management includes continually iden- tifying, quantifying and assessing the business risks that the company is exposed to. In the annual budget process, the Executive Team estab- lishes business frameworks while also laying the basis for a high degree of decentralization of the Group’s operations. Internal financial reporting is based on the Group’s vari- ous 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 operations. For information about financial risks see the section ‘Financial risk management’ on page 59. takes the audit of ASSA ABLOY AB, the Group and a sub- stantial majority of its subsidiaries round the world. The audit of ASSA ABLOY AB also covers the administration by the Board of Directors and the CEO. The audit is carried out in accordance with good audit- ing practice in Sweden. The auditing of annual financial statements for legal entities outside Sweden is in accor- dance with legal requirements and other applicable regula- tions in the countries concerned and with good auditing practice as defined by the International Federation of Accountants (IFAC) for the issue of audit reports for the legal entities. For remuneration of auditors, see Note 4. The Group’s accounting and valuation principles com- ply with Sweden’s Annual Accounts Act and the standards and pronouncements of the Swedish Financial Accounting Standards Council, in accordance with the listing contract of the Stockholm Stock Exchange. Decentralized organization Financial reporting 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 short decision-making paths. Examples of central functions are Operations, Shared Technologies and Supply Management – areas where there are obvious economies of scale. The Group’s 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. External audit The Annual General Meeting has appointed Pricewater- houseCoopers as auditors for the period up to the 2006 Annual General Meeting. PricewaterhouseCoopers under- 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. The Swedish Code of Corporate Governance The Swedish Code of Corporate Governance was published on 16 December 2004. The Code, which is based on self-regu- lation using the ‘comply or explain’ principle, deals mainly with the organization and methods of working of a company’s annual general meeting, board of directors and management, and the interaction between the three. The subjects covered include rules for the appointment of the board and auditor, the board’s responsibility for internal control, processes for setting the remuneration of the company management, and informa- tion about corporate governance. ASSA ABLOY intends to adopt the Code from 1 July 2005, when the Code is expected to become part of the rules of the Stockholm Stock Exchange. ORGANIZATIONAL STRUCTURE Executive team EMEA Americas Asia Pacific Global Technologies Benchmarking units 47 Sales and earnings • Organic growth for comparable units was 5 percent (0). • Operating margin before amortization of goodwill and excluding non-recurring items (EBITA) was 14.7 percent (13.9). • Earnings per share excluding non-recurring items amounted to SEK 4.05 (3.31). Sales The Group’s sales rose in 2004 to SEK 25,526 M (24,080). Exchange-rate effects affected sales negatively by SEK 982 M compared with 2003. In local currencies, sales increased by 10 percent. Of this, organic growth by comparable units accounted for 5 percent (0), while acquired units made a positive contribution of 5 percent. CHANGES IN SALES % Acquired growth Organic growth Currency effects Total 2004 2003 5 5 –4 6 5 0 –10 –5 Depreciation of tangible fixed assets amounted to SEK 860 M (861), which represents 3 percent (4) of sales. Operating income Operating income (EBIT) amounted to SEK 2,770 M (1,073). The operating margin was 10.9 percent (4.5). Depreciation and amortization for the year totaled SEK 1,872 M (1,856), of which SEK 978 M (959) represented goodwill. Operating income before depreciation and amortization (EBITDA), adjusted for non-recurring items, amounted to SEK 4,642 M (4,249). The corresponding margin was 18.2 percent (17.6). Consolidated operating income before goodwill amorti- zation (EBITA) amounted to SEK 3,748 M (3,352) and was affected negatively by exchange-rate effects totaling SEK 146 M. The operating margin before goodwill amortization was 14.7 percent (13.9). Income before tax Mechanical locks, lock systems and accessories accounted for 53 percent (57) of sales. Sales of electromechanical and electronic locks rose to 27 percent (24). Sales of security doors and fittings also increased to 20 percent (19). SALES BY PRODUCT GROUP % Mechanical locks, lock systems and accessories Electromechanical and electronic locks Security doors and fittings 2004 2003 53 27 20 57 24 19 Income before tax and non-recurring items totaled SEK 2,294 M (1,903). This represents an increase of 21 percent compared with the previous year, with negative currency effects of SEK 78 M. Financial items amounted to SEK –484 M (–497). The improvement is due to reduced net debt. Profit margin – defined as income before tax and non- recurring items in relation to sales – amounted to 9.0 per- cent (7.9). The Parent Company’s income before tax amounted to SEK 3,876 M (-439). Cost structure Tax Total remuneration costs including social costs and pension costs amounted to SEK 8,526 M (8,351), which represents 33 percent (35) of sales. The average number of employees was 29,160 (28,708). The Group’s tax charge totaled SEK 792 M (556), which corresponds to an effective tax rate of 34.5 percent (35.5) after adjusting for non-recurring items and tax pertaining to them. The average number of employees in the Parent Com- pany was 52 (43). Earnings per share The Group’s material costs totaled SEK 7,213 M (6,527), which represents 28 percent (27) of sales. Other purchasing costs totaled SEK 5,146 M (4,951), which represents 20 percent (21) of sales. Earnings per share excluding non-recurring items amounted to SEK 4.05 (3.31). Earnings per share excluding goodwill and non-recurring items amounted to SEK 6.66 (5.89). 48 Income statements GROUP PARENT COMPANY 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 Note 2 4 5 7 3, 6 Income from shares and shareholdings in subsidiaries 8 Interest income and similar income items Interest expenses and similar expense items Shares of earnings in associated companies Income before tax Tax Minority interests Net income Earnings per share after tax and before conversion, SEK after tax and before conversion, SEK after tax and full conversion, SEK after tax and full conversion, SEK 9 9 10 16 after tax and full conversion but excluding goodwill, SEK 1 Average EUR/SEK rate: 9.12. 2 Excluding non-recurring items after tax. EUR M1 2004 SEK M 2004 SEK M 2003 2,799 25,526 24,080 –1,661 –15,148 –14,613 1,138 10,378 9,467 –468 –206 –55 19 –17 –107 – 304 – 20 –73 1 252 –87 –1 164 –4,272 –1,883 –3,957 –1,679 –500 181 –157 –978 –447 180 –212 –959 – –1,320 2,770 1,073 – 186 –670 8 2,294 –792 –7 1,495 4.09 4.05 6.66 – 224 –721 7 583 –556 –18 9 0.06 3.302 0.07 3.312 5.892 EUR M1 2004 SEK M 2004 SEK M 2003 – – – – –36 – 63 – – – 27 444 55 –101 – 425 –1 – – – – – –331 – 580 – – – 249 4,044 506 –923 – – – – – –234 – 202 – – – –32 33 481 –921 – 3,876 –439 –7 – – – 424 3,869 –439 49 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, Auto- matic Doors and Hospitality, which all serve a global mar- ket. The column headed ‘Other’ in the table includes com- mon Group functions. EMEA Sales totaled EUR 1,210 M (1,116), with organic growth. of 3 percent. Operating income before goodwill amortiza- tion and excluding non-recurring items amounted to EUR 181 M (149), with an operating margin (EBITA) of 15.0 percent (13.4). Return on capital employed before goodwill amortization amounted to 17.2 percent (14.2). Operating cash flow before interest paid amounted to EUR 201 M (172). EMEA made excellent progress this year, which was mainly due to the two largest market areas, Scandinavia and France, and in part to improved market conditions. Eastern Europe and Israel showed strong organic growth during the year, while Italy and the United King- dom lost sales volumes, which had a negative impact on results. The structural changes in the division affected results positively. The acquisition of Nemef strengthened the division’s position in the Benelux area. Americas Sales totaled USD 1,129 M (1,073), with organic growth of 6 percent. Operating income before goodwill amortization and excluding non-recurring items amounted to USD 198 M (176), with an operating margin (EBITA) of 17.6 percent (16.5). Return on capital employed before goodwill amorti- zation amounted to 18.7 percent (16.2). Operating cash flow before interest paid amounted to USD 192 M (189). Good progress in Americas was due in part to improved demand in the USA, specifically in the important commer- cial segment. Profitability was also improved by the struc- tural measures undertaken and by the divestment of the Detention Group. The Architectural Hardware Group, which represents about 40 percent of Americas’ sales, continued to improve its profitability despite relatively stable volumes. The Door Group showed strong growth, due in part to a rise in new construction and in part to price rises resulting from the increased cost of steel. The Residen- tial Group showed strong growth and profitability. South America and Mexico also developed well. Asia Pacific Sales totaled AUD 343 M (309), with organic growth of 7 percent. Operating income before goodwill amortization and excluding non-recurring items amounted to AUD 52 M (46), with an operating margin (EBITA) of 15.1 percent (14.9). Return on capital employed before goodwill amorti- zation amounted to 15.5 percent (15.1). Operating cash flow before interest paid amounted to AUD 51 M (42). Australia showed weak positive growth of both vol- umes and margins during the year, while sales volumes in New Zealand grew strongly. The division’s exports were hit by changes in exchange rates. Development in China and South East Asia was strong. The acquisition of Security Merchants strengthens the division’s position, chiefly in Australia and New Zealand. Global Technologies Sales totaled SEK 4,911 M (4,177), with organic growth of 5 percent. Operating income before goodwill amortization and excluding non-recurring items amounted to SEK 637 M (542), with an operating margin (EBITA) of 13.0 percent (13.0). Return on capital employed before goodwill amorti- zation amounted to 12.2 percent (9.9). Operating cash flow before interest paid amounted to SEK 652 M (549). Global Technologies is making good progress, with good development of sales and margins after allowing for the dilution effects of acquisitions. The Identification busi- ness area developed positively, especially in North America, with strong growth and improved margins. The acquired units in Europe developed well. Automatic Doors achieved gradually increasing sales growth during the year in terms of both new sales and service. Europe and Asia are showing strong advances while North America improved after restructuring meas- ures were implemented. The market for Hospitality fell back this year. Profitability continued to be weak as parts of the business were restructured and a number of manage- ment changes were made. 50 EMEA1 EUR M Americas2 USD M Asia Pacific3 AUD M Global Technologies4 SEK M Other SEK M Total SEK M 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 Sales, external Sales, internal Sales Organic growth EBITA 5 EBITA / Sales 1,179 1,081 1,125 1,069 31 35 4 4 1,210 1,116 1,129 1,073 3% 181 –1% 149 6% 198 –2% 176 320 23 343 7% 52 288 21 309 5% 46 4,811 4,093 100 84 4,911 4,177 5% 637 6% 542 15.0% 13.4% 17.6% 16.5% 15.1% 14.9% 13.0% 13.0% Goodwill amortization Non-recurring items Operating income (EBIT) –39 – 142 –37 –94 18 –43 – 155 –41 –29 106 –11 – 41 –10 –23 13 Operating margin (EBIT) 5 11.7% 10.1% 13.8% 12.6% 11.9% 11.8% Capital employed – of which, goodwill 1,020 526 939 521 1,066 1,046 655 696 314 168 280 155 Return on capital employed 5 13.5% 10.6% 14.6% 12.4% 12.3% 11.8% –249 – 388 7.9% 5,077 4,068 7.4% –238 –110 194 7.3% 5,288 4,189 5.6% –533 –533 –544 –544 25,526 24,080 25,526 24,080 5% 0% –269 –217 3,748 3,352 14.7% 13.9% –978 –959 – –1,320 2,770 10.9% 1,073 9.9% –269 –217 –268 136 22,683 22,984 14,012 14,766 11.8% 9.6% Return on capital employed before goodwill amortization 5 Assets Liabilities EBITA 5 Depreciation (excluding goodwill) Investments – acquisitions Investments – disposals Change in working capital Cash flow 6 Items not affecting cash flow Interest paid and received Operating cash flow 6 17.2% 14.2% 18.7% 16.2% 15.5% 15.1% 12.2% 9.9% 16.0% 13.3% 1,398 1,295 1,225 1,252 376 345 378 181 55 –49 12 2 201 356 149 55 –50 11 7 172 160 198 31 –36 9 –10 192 206 176 31 –42 16 8 189 62 52 12 65 46 11 –13 –11 8 –8 51 1 –5 42 6,186 1,109 6,446 1,158 475 758 29,322 29,827 12,977 12,928 18,874 19,149 637 95 –104 26 –2 652 542 81 –87 23 –10 549 –269 –217 3,748 3,352 10 –24 16 53 5 –9 1 79 –16 –489 62 –520 894 –894 244 –48 897 –952 258 168 3,944 3,723 –16 –489 62 –520 3,439 3,265 Acquisitions of shares in companies Disposals of shares in companies –78 – –14 – – 8 –78 – –18 – –13 – –62 – –267 – Average number of employees 12,774 12,481 9,767 10,091 3,629 3,507 2,925 2,574 –13 – 65 –37 – 55 –917 –1,133 62 – 29,160 28,708 SEK M EMEA1 Americas2 Asia Pacific3 Global Technologies4 Other Total Sales, external Sales, internal Sales Organic growth EBITA 5 EBITA / Sales 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 10,747 9,858 8,242 8,625 1,726 1,506 4,811 4,093 25,526 24,080 284 318 28 32 121 109 100 84 11,031 10,176 8,270 8,657 1,847 1,615 4,911 4,177 –533 –533 –544 –544 3% –1% 6% –2% 1,650 1,359 1,452 1,428 7% 278 5% 240 5% 637 6% 542 15.0% 13.4% 17.6% 16.5% 15.1% 14.9% 13.0% 13.0% Return on capital employed before goodwill amortization 5 17.2% 14.2% 18.7% 16.2% 15.5% 15.1% 12.2% 9.9% 16.0% 13.3% 6,186 1,109 6,446 1,158 475 758 29,322 29,827 12,977 12,928 18,874 19,149 Goodwill amortization Non-recurring items Operating income (EBIT) –358 – 1,292 –338 –860 161 –314 – 1,138 –331 –230 867 –57 – 221 –52 –120 68 Operating margin (EBIT) 5 11.7% 10.1% 13.8% 12.6% 11.9% 11.8% Capital employed – of which, goodwill 9,204 4,748 8,519 4,728 7,049 4,332 7,528 5,010 1,620 1,513 864 839 Return on capital employed 5 13.5% 10.6% 14.6% 12.4% 12.3% 11.8% –249 – 388 7.9% 5,077 4,068 7.4% –238 –110 194 7.3% 5,288 4,189 5.6% Assets Liabilities EBITA 5 Depreciation (excluding goodwill) Investments – acquisitions Investments – disposals Change in working capital 12,616 11,748 3,410 3,230 8,105 1,058 9,010 1,482 1,650 1,359 1,452 1,428 500 –436 96 16 505 –458 101 66 227 –263 68 –72 250 –341 129 61 Cash flow 6 1,826 1,573 1,412 1,527 1,940 1,865 320 278 62 –67 38 –43 268 351 240 56 –57 4 –28 215 Items not affecting cash flow Interest paid and received Operating cash flow 6 637 95 –104 26 –2 652 542 81 –87 23 –10 549 Acquisitions of shares in companies –707 –127 Disposals of shares in companies – – – 62 –632 –135 – – –70 – –62 – –267 – Average number of employees 12,774 12,481 9,767 10,091 3,629 3,507 2,925 2,574 25,526 24,080 5% 0% –269 –217 3,748 3,352 14.7% 13.9% –978 –959 – –1,320 2,770 10.9% 1,073 9.9% –269 –217 –268 136 22,683 22,984 14,012 14,766 11.8% 9.6% –269 –217 3,748 3,352 10 –24 16 53 5 –9 1 79 –16 –489 62 –520 –13 – 65 –37 – 55 894 –894 244 –48 897 –952 258 168 3,944 3,723 –16 –489 62 –520 3,439 3,265 –917 –1,133 62 – 29,160 28,708 1 Europe, Middle East and Africa. 2 North and South America. 3 Asia, Australia and New Zealand. 4 Automatic Doors, Hospitality and Identification. 5 2003 excluding non-recurring items. 6 Excluding restructuring payments. 51 Financial position • Capital employed amounts to SEK 22,683 M (22,984). • Net debt was reduced to SEK 12,208 M (12,290). • Net debt / equity ratio was 1.17 (1.15). debt was reduced by the strong operational cash flow but increased to a comparable extent by company acquisitions and the changed accounting principles applying to employee benefits and the dividend paid. SEK M Capital employed – of which, goodwill Net debt Minority interests Shareholders’ equity Capital employed 2004 2003 22,683 14,012 12,208 27 22,984 14,766 12,290 16 10,448 10,678 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 22,683 M (22,984). The return on capital employed, excluding goodwill amortization and non-recurring items, was 16.0 percent (13.3). Intangible assets amounted to SEK 14,154 M (14,933). The change is explained mainly by amortization. During the year goodwill of SEK 671 M arose from acquisitions. A valuation model based on discounted future cash flow is used for regular impairment testing of goodwill. No write- down took place this year. Tangible fixed assets amounted to SEK 5,163 M (5,329). Investments in tangible fixed assets, less sales of tangible fixed assets, totaled SEK 650 M (694). Deprecia- tion according to plan amounted to SEK 860 M (861). Deferred tax receivables amounted to SEK 793 M (507). The increase is due principally to the increased pen- sion liability arising in connection with the move to RR 29. Accounts receivable totaled SEK 4,146 M (4,131) and inventories totaled SEK 3,135 M (3,030). The average collec- tion period for accounts receivable was 55 days (56). Mater- ial throughput time averaged 105 days (108), the improve- ment 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 12,208 M (12.290), of which pension liabilities accounted for SEK 1,677 M (723). Net 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 global Commercial Paper program for a maximum of USD 1,000 M (1,000), a Nordic MTN program for EUR 300 M (300) and a Swedish Commercial Paper program for SEK 5,000 M (5,000). At year-end the EMTN program was being utilized for SEK 2,706 M, the global Commercial Paper program for SEK 4,128 M, the Nordic MTN program for SEK 902 M and the Swedish Commercial Paper program for SEK 549 M. During the year the Group’s financing options were increased by an Incentive Program of EUR 100 M, equiva- lent to SEK 902 M. There is also a Multi-Currency Revolv- ing Credit (MCRF) agreement for a maximum of EUR 1,000 M (820), 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 5.7 (4.7). 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 1,017 M (880). Cash and cash equivalents are invested in banks with high credit ratings. Shareholders’ equity Shareholders’ equity in the Group totaled SEK 10,448 M (10,678) at year-end. The return on capital employed amounted to 13.2 percent (9.9). The equity ratio was 35.6 percent (35.9). The net debt / equity ratio, defined as net debt divided by shareholders’ equity, was 1.17 (1.15). 52 Balance sheets Note EUR M1 2004 SEK M 2004 SEK M 2003 EUR M1 2004 SEK M 2004 SEK M 2003 GROUP PARENT COMPANY 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 and work in progress Accounts receivable Other receivables Prepaid expenses and accrued income 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 from 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: 9.02. 11 12 13 14 10 15 26 26 28 23 16 17 10 18 19 21 20 22 28 24 1,569 14,154 14,933 572 5,163 5,329 – – 18 88 – – 166 793 – – 210 507 1 1 7 8 3 8 2,826 25,497 23,187 246 2,216 2,248 7 – 67 – 41 – 2,247 20,276 20,979 3,081 27,795 25,487 348 460 49 29 – 25 92 3,135 4,146 3,030 4,131 438 266 – 230 831 392 207 – 375 713 1,003 3,250 9,046 8,848 29,322 29,827 – – 5 6 – – 45 53 – – 19 28 566 5,105 7,514 0 0 2 2 19 633 577 5,207 8,213 3,658 33,002 33,700 5 43 46 Inga Inga Inga 41 1,009 –56 164 366 9,106 –519 1,495 366 9,118 1,185 9 41 987 225 424 366 8,905 2,014 3,869 366 8,905 2,911 –439 1,158 10,448 10,678 1,677 15,154 11,743 3 27 16 186 23 75 284 468 – 200 8 676 620 34 169 – 232 75 1,677 209 679 723 283 935 2,565 1,941 4,225 7,987 – 1,804 68 – 907 100 6,097 8,994 5,594 304 1,521 – 2,089 677 3,821 250 1,489 – 1,862 776 8,198 1,129 10,185 – – – – – 344 246 200 – 790 58 1 2 – – – – – – – – – – 3,104 2,216 1,804 – 5,875 2,248 907 – 7,124 9,030 507 12 22 – – 19 1,122 10,108 12,852 7 1 64 11 44 12 1,191 10,724 12,927 3,250 29,322 29,827 3,658 33,002 33,700 91 817 696 819 7,393 7,213 53 Cash flow • Operating cash flow amounted to SEK 3,439 M (3,265). • Net capital expenditure amounted to SEK 650 M (694). Relationship between cash flow from operating activities and operating cash flow SEK M Cash flow from operating activities Net capital expenditure 2004 2003 Tax paid Operating cash flow 3,748 3,352 2004 3,339 –650 750 3,439 2003 3,180 –694 779 3,265 Company acquisitions Total outlay on company acquisitions amounted to SEK 804 M (1,254). Acquired net debt totaled SEK -30 M (169). Acquisitions made during the year were financed by internally generated cash flow. Change in net debt Net debt was reduced primarily by the strong cash flow, while the change to RR 29 regarding the reporting of pen- sions has increased reported net debt by SEK 1,164 M. Company acquisitions were financed out of operating cash flow. SEK M Net debt at 1 January Operating cash flow Restructuring payments Tax paid Acquisitions Dividend Change to RR 29 Translation differences 2004 2003 12,290 13,989 –3,439 –3,265 321 750 929 457 1,164 –264 – 779 1,355 457 – –1,025 Net debt at 31 December 2 12,208 12,290 2 Note 28. 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 894 –650 –48 –489 –16 3,439 1.50 897 –694 168 –520 62 3,265 1.72 The Group’s operating cash flow amounted to SEK 3,439 M (3,265), equivalent to 150 percent (172) of income before tax. The Parent Company’s cash flow amounted to SEK –648 M (452). Net capital expenditure Direct net capital expenditure on tangible fixed assets totaled SEK 650 M (694), equivalent to 76 percent (81) 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 Accounts payable Other working capital Change in working capital 2004 –79 –135 95 71 –48 2003 274 –120 –33 47 168 Efforts to reduce the Group’s average material throughput times in its inventories are continuing. Rising material prices and a planned increase in stocks of steel in particular have increased the capital tied up in inventories, which burdened cash flow by SEK –79 M (274). The average throughput time is now 105 days (108). The increased capi- tal tied up in accounts receivable is due chiefly to stronger sales. 54 Cash flow analysis Note EUR M1 2004 SEK M 2004 SEK M 2003 EUR M1 2004 SEK M 2004 SEK M 2003 GROUP PARENT COMPANY 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 Reduction of shareholders’ equity in subsidiaries Sales of shares in subsidiaries Investments in associated companies Other investments 5 27 27 27 27 27 27 27 304 205 – –2 507 –54 – –82 371 –5 366 –72 –99 – 7 – –1 2,770 1,872 – –16 1,073 1,856 1,320 62 4,626 4,311 –489 –520 – –750 3,387 –48 3,339 –650 –904 – 62 – –13 – –779 3,012 168 3,180 –694 –1,096 – – 8 –45 27 0 – – 28 –21 364 – 371 10 381 249 –32 3 – – 252 –187 3,322 – 3 – – –29 –367 296 – 3,387 –100 91 3,478 294 194 –8 –912 – – – – –1 –7 –1,584 –14,456 915 548 – –1 8,348 4,996 – –5 Cash flow from investing activities –165 –1,505 –1,827 –123 –1,124 –920 FINANCING ACTIVITIES Dividends paid Net cash effect of changes in borrowings Cash flow from financing activities CASH FLOW CASH AND CASH EQUIVALENTS 2 Cash and cash equivalents at 1 January Cash flow Effect of translation differences –50 –140 –190 –457 –1,277 –1,734 –457 –1,315 –1,772 –50 –279 –329 –457 –2,545 –3,002 –457 1,635 1,178 100 –419 –71 –648 452 11 97 11 5 880 100 37 Cash and cash equivalents at 31 December 26 113 1,017 1 Average EUR/SEK rate: 9.12. 2 EUR/SEK rate on 31 Dec: 9.02. 1,408 –419 –109 880 71 –71 – 0 652 –648 – 4 200 452 – 652 55 Changes in shareholders’ equity GROUP SEK M Closing balance 31 December 2002 Translation differences for the year Share capital 366 Restricted reserves 10,343 Transfers between unrestricted and restricted reserves –1,225 Net income Dividend Closing balance 31 December 2003 366 9,118 Change to RR 29 Translation differences for the year Transfers between unrestricted and restricted reserves Transaction costs connected with convertible bond issue Net income Dividend –12 Closing balance 31 December 2004 366 9,106 The accumulated translation difference since 1 January 1999 amounts to SEK –2,433 M (–1,998). Unrestricted reserves 1,672 –1,255 1,225 9 –457 1,194 –815 –435 12 –18 1,495 –457 976 PARENT COMPANY SEK M Closing balance 31 December 2002 Net income Dividend Share capital 366 Premium reserve Reserve fund Unappropriated earnings 8,260 645 Total 12,381 –1,255 0 9 –457 10,678 –815 –435 0 –18 1,495 –457 10,448 Total 12,639 –439 –457 11,743 3,869 –457 15,154 3,368 –439 –457 2,472 3,869 –457 5,883 Closing balance 31 December 2003 366 8,260 645 Net income Dividend Closing balance 31 December 2004 366 8,260 645 56 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 (hereinafter referred to as ‘the Group Policy’) is reviewed annually by the Board of Directors. It constitutes a framework of guidelines and reg- ulations for the management of financial risks and financial activities. ASSA ABLOY’S financial activities are coordi- nated centrally within the subsidiary ASSA ABLOY Trea- sury S.A. 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 currency flows. Currency risk Currency risk affects 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 currency’ below shows the use of currency forward contracts in association with funding, for the major currencies. The forward contracts are used to neutralize the exposure arising between net debt and internal needs. Net debt by currency (in millions) Exposure of Group earnings A general strengthening of the Swedish krona in 2005 by one percent has a negative impact of about SEK 240 M on Group sales and SEK 18 M on Group earnings. Transaction exposure Currency risk in the form of transaction exposure, or the relative values of exports and imports of goods, is limited in the Group. Through 2004, subsidiaries within the ASSA ABLOY Group hedged their transaction exposure by means of internal currency forward contracts with the internal bank. The Group Policy has been to hedge externally approxi- mately 70 percent of currency flows from imports and exports forecast to arise within the next twelve months. From 2005, instead of hedging individual flows, the Group will hedge a basket of flows with the aims of facilitat- ing contract management and reducing administrative costs. Forecast transaction flows by major currency for 2005 are as follows (imports + and exports -): Currency exposure Currency USD EUR CHF GBP SEK M 498 289 –288 226 Interest rate risk 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 dura- tion in the Group is generally short, averaging less than a year. At year-end, the average interest rate duration, excluding pensions, was about 9 months. Currency exposure Forward External contracts borrowing Effective interest rate by currency Currency USD EUR SEK GBP Other 618 283 1,862 102 683 –66 –317 1 313 102 –683 Total internal bank (SEK) 10,486 Overdrafts and external loans (SEK) Cash and cash equivalents (SEK) Provisions for pensions (SEK) Accrued financial items (SEK) Net debt (SEK) Currency USD EUR SEK GBP Average for the Group 684 600 549 0 0 10,486 1,054 –1,017 1,677 8 12,208 Interest rate 2.5% 4.7% 4.9% 4.6% 3.9% 57 Financial risk management 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 parts of the EMTN loan to floating rates. Sensitivity analysis An increase of one percentage point in market rates would have a negative impact of SEK 57 M on interest expense for the year 2005. Liquidity risk 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 Group Policy is to have available facilities that include a reserve (facilities con- firmed but not used) equivalent to 10 percent of the Group’s annual total sales. Maturity structure The column ‘End of facility’ in the table ‘External funding / net debt’ shows that duration until repayment of debts con- tracted by the internal bank is not concentrated in the short term. When there are many transactions with different maturities, the duration is computed by weighted average. At year-end, the average duration, excluding pensions, was 14 months. This is down from 2003 (22 months) as, just prior to year-end, EUR 300 M of the outstanding EMTN of EUR 600 M was repurchased with the objective of refi- nancing with medium-duration USD debt so as to achieve an average duration at least at the level of 2003. Ratings Agency Standard & Poor’s Moody’s Short term Long term Outlook A2 P2 A – n/a Stable Stable Ratings from both institutions remain unchanged from the previous year. Credit risk Financial risk management exposes ASSA ABLOY to certain counterparty risks. Such exposure may arise, for example, from the placement of surplus cash, from trade receivables, and from the use of debt securities and deriva- tive instruments. The Group 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 controlled primarily External funding / net debt (in millions) Amount End of SEK facility Utilized SEK Currency Principal Market value, SEK Average interest rate duration Interest rate swap 1.9 years 13 days 21 days Fixed quarterly Fixed quarterly Fixed quarterly Fixed six-monthly Fixed annually Yes No No Yes No No Yes No EUR USD SEK EUR EUR EUR USD EUR 300 624 549 100 100 100 60 55 13,532 Dec 06 6,615 5,000 n/a n/a 2,706 Jun 06 2,706 4,128 549 902 9,022 Dec 09 902 Jun 09 902 Nov 06 Feb 06 Feb 05 n/a 397 498 1,086 40,659 0 902 902 397 498 556 11,540 –1,017 1,677 8 12,208 2,830 4,128 549 902 902 902 396 498 556 11,663 –1,017 1,677 8 12,331 Credit facilities Confirmed programs: EMTN Program Global CP Program Swedish CP Program Nordic MTN Program Committed: Multi-Currency RF Incentive Program Incentive Program Bank loan Bank loan Overdrafts etc. Total credit facilities Cash and cash equivalents Provisions for pensions Accrued financial items Net debt 58 through the cash pool network put in place by the internal bank. Approximately 80 percent of commercial sales were settled through cash pools in 2004. The Group may never- theless deposit surplus funds on a short-term basis with banks in order to match debt maturities. Derivative instruments are allocated to banks according to risk factors set in the Group Policy to limit counterparty risk. The internal bank enters into derivative contracts ex- clusively with banks participating in the syndicated credit system or with banks rated AAA and AA. An ISDA (full netting of transactions in case of default by one counter- party) is agreed in the case of interest derivatives. Trade receivables are spread over a large number of individual customers, thus minimizing credit risk. Commodity risk The Group is exposed to price risk related to purchases of certain commodities (primarily metals) used as raw materi- als in its business. To date, the Group has engaged in very limited hedging of materials traded on world markets through commodity forward contracts. Financial instruments and accounting treatment Financial derivative instruments such as currency and interest-rate forwards are used to the extent necessary. The use of derivative instruments is solely to reduce ex- posure to financial risks. Financial derivative instruments are not used with speculative intent. Financial risk management Currency-derivative hedging of funding All contracts used to hedge funding activity will mature within 12 months. Interest spreads are amortized into inter- est expense and income over the life of the contracts. The remaining spot portions of the contracts are revalued at year- end spot market rates and charged to the income statement. Currency-derivative hedging of 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 at year-end spot market rates and charged to the income statement. 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. Outstanding derivative instruments at 31 December 2004 (SEK M) Instrument Positive market value Negative market value Foreign exchange forwards – funding Foreign exchange forwards – transaction Currency basket option Interest rate swaps Total 63 7 – 8 78 –19 –26 – –88 –133 Nominal value 7,032 452 504 4,823 12,811 59 Notes NOTE 1 Accounting and valuation principles The Group’s accounting and valuation principles comply with Sweden’s Annual Accounts Act and the standards of the Swedish Financial Accounting Standards Council. The new standard of the Financial Accounting Standards Council, RR 29 ‘Employee benefits’, was adopted from 1 January 2004. Pensions and other remuneration after retirement were previously reported according to each country’s local rules. In the consolidated financial state- ments, reporting is now in accordance with RR 29. The introduction of RR 29 has meant a reduction of SEK 815 M in the Group’s shareholders’ equity, but has not required any adjustment of figures for previously reported periods. Apart from the adoption of RR 29, accounting 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 income from companies acquired during the year 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 the date of disposal. The consolidated financial statements are prepared in accordance 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 are companies in which the Parent Company has shareholdings which, directly or indirectly, represent at least 20 percent of all participations and/or is considered to have a significant influence. 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 sur- plus value, and is charged against share in earnings of asso- ciated companies. Participation in tax on associated com- panies’ income is included in the Group’s tax expense. In the consolidated balance sheet, shareholdings in associated 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 deduc- tion 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 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 at year-end. Exchange rate differences on hedging operations are eliminated from the income state- ment and, like differences that arise when foreign net assets are translated, are carried directly to shareholders’ equity in the balance sheet. Interest differentials on forward con- tracts are annualized and reported in the income statement. 60 Notes Exchange rates The rates for currencies used in the Group were as follows (weighted average for the year, and rate at year-end): Average rate Year-end rate customer’s premises, revenue is recognized when installa- tion is completed. All sales are reported less VAT, discounts, returns and freight. Intra-Group sales are eliminated from the consolidated income statement. Argentina Australia Bermuda Brazil Canada Switzerland Chile China Czech Republic Denmark Estonia Euroland United Kingdom Hong Kong Hungary Indonesia Israel 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 JPY KES LTL MUR MXN MYR NGN NOK NZD PLN ROL RUR SGD SIT SKK THB USD UYU ZAR ZWD 2.49 5.39 7.34 2.51 5.65 5.90 2.22 5.15 6.68 2.49 5.50 5.85 0.012 0.012 Intra-Group sales Transfer pricing between companies in the Group is carried out at arm’s length and thus at market prices. Internal prof- its arising from intra-Group sales have been eliminated in their entirety. 0.88 0.29 1.23 0.58 9.12 13.38 0.94 0.036 0.80 0.30 1.21 0.58 9.02 12.74 0.85 0.037 Government grants Grants from governments, public authorities etc are reported when there is reasonable assurance that the com- pany will comply with the conditions attaching to the grant and that the grant will be received. Grants related to assets are handled by reducing the carrying amount of the asset by the amount of the grant. 0.00082 0.00071 1.64 0.068 0.093 2.64 0.27 0.65 1.93 0.055 1.09 4.85 2.02 1.53 0.064 0.08 2.61 0.23 0.59 1.74 0.050 1.09 4.75 2.21 0.00022 0.00023 0.25 4.34 0.038 0.23 0.18 7.33 0.26 1.15 0.24 4.05 0.038 0.23 0.17 6.62 0.25 1.17 0.0026 0.0012 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 use- ful 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 companies 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. Borrowing costs Borrowing costs are recognized as expenses in the period in which they are incurred. 61 Reporting by segment The Group’s business operations are divided organization- ally among four divisions: EMEA, Americas, Asia Pacific and Global Technologies. The divisions form the Group’s segments. There are no secondary segments. Revenue recognition Revenue from sales of the Group’s products is recognized when significant risks and rewards associated with owner- ship are transferred to the purchaser in accordance with applicable conditions of sale, which is normally the time of delivery. If the product requires installation on the Notes Tax on income The income statement includes 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 carried forward 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 sub- sidiaries are not reported in ASSA ABLOY’s consolidated accounts since the Parent Company can always control the time at which the temporary differences are canceled and it is not considered likely that such cancellation will occur in the foreseeable future. In the Parent Company, because of the relationship between accounting and taxation, 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 cost less accumulated depreciation. Expenditure on improvements that raise an asset’s performance above its original level increases the carrying amount of the asset. Expenditure on repairs and maintenance is shown as a cost. Tangible and intangible fixed assets are depreciated systematically over the asset’s expected useful life. If the carrying value of an asset exceeds its estimated recoverable amount, the asset is imme- diately written down to the recoverable amount. A valuation model based on discounted future cash flow is used for regu- lar impairment testing 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 budgeted 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 financial year or prior financial years which, on the closing date, were likely to be incurred, but which were uncertain as to amount or date of payment. Pensions Both defined-contribution and defined-benefit pension plans exist in the Group. Comprehensive defined-benefit plans are found chiefly in the USA and the UK. In the USA post-retirement medical benefits are also available, which are reported in the same way as defined-benefit pension plans. Assessments related to defined-benefit pension plans are made by independent actuaries and are based on vari- ous actuarial assumptions concerning discount rate, future inflation, salary increases etc. Obligations are valued on the closing day at the current value of expected future pay- ments. For funded plans, obligations are reduced by the fair value of the plan assets. Funded plans with a positive value in the form of net assets are reported as financial fixed assets. In principle, pension costs for defined-benefit plans are spread over the employee’s service period. Actuarial profits and losses lying outside the so-called ten-percent corridor are spread over the expected average remaining service period. The Group’s payments related to defined- contribution pension plans are reported as a cost in the period to which they refer, based on the services performed by the employee. The part of the interest component in the pension cost that relates to the deficit in pension plans is reported as a financial expense. 62 Notes Transition to IFRS in 2005 Summary ASSA ABLOY will report its Group accounting according to International Financial Reporting Standards (IFRS) from 2005. The transition has effect from 1 January 2004 and comparative figures for 2004 will be adjusted in accor- dance with IFRS. In accordance with IFRS 1, ASSA ABLOY has chosen not to make adjustments for acquisi- tions made before 1 January 2004. The information given here provides a preliminary overview of the impact of the new accounting rules on the Group’s accounting. In summary, these are the expected effects of the change: • Amortization of goodwill will cease, and amortization of goodwill charged as a cost during 2004 will be canceled. • Deferred tax receivables will be considered in relation to tax-deductible goodwill from 1 January 2004. • Intangible rights pertaining to 2004 acquisitions will be differentiated from goodwill and written off over their estimated useful life. • Some provisions for acquisition-related restructuring that do not meet the requirements of IFRS will be charged as costs. • Financial instruments will be reported in the balance sheet at their fair value. Expected effect on the Group’s income statement for 2004 SEK billion Sales Operating income Net income 2004 Adjustment Under IFRS 25.5 2.8 1.5 – + 0.9 + 0.8 25.5 3.7 2.3 Expected effect on the Group’s balance sheet for 2004 SEK billion Capital employed Net debt Shareholders’ equity 2004 Adjustment Under IFRS 22.7 12.2 10.5 + 0.8 + 0.1 + 0.7 23.5 12.3 11.2 General comments on the change to IFRS In recent years Swedish accounting, through the standards of the Swedish Financial Accounting Standards council, has moved steadily towards IFRS. Nonetheless, a number of differences remain, mainly concerning dates of adoption and transition rules, but also related to the changes in IFRS made through the Improvement Project of the International Accounting Standard Board (IASB). From ASSA ABLOY’s perspective, the Swedish accounting rules are in line in all important respects with the changes introduced in the European Union on 1 January 2005. The change to IFRS for ASSA ABLOY ASSA ABLOY is adopting IFRS from the financial year that began on 1 January 2005. The Interim Report for the first quarter of 2005, to be published in April 2005, will be the first prepared according to IFRS. The opening balance for 2004 and quarterly informa- tion for 2004 will be adjusted in line with IFRS. Earlier financial years will not be adjusted, which is in accordance with the changeover rules in IFRS 1. In 2003 a project group headed by the Chief Financial Officer was established to evaluate the effects of the transi- tion to IFRS and to make practical preparations for, and carry through, the change in 2005. Continual contact was maintained between the project group and the Company’s auditors, and the progress of the project was reported back regularly to the Executive Team, the Audit Committee and the Board of Directors. The most important effects relate to accounting for acquisitions, including accounting for good- will, and accounting for and valuation of financial instru- ments. Acquisitions and mergers IFRS 3, ‘Business Combinations’, deals with company acqui- sitions and mergers. ASSA ABLOY does not intend to adjust any acquisitions made before the date of transition (1 Janu- ary 2004). Adjustments relating to allocation of the purchase price are being made for acquisitions made after this date. Adjustments will also be made for restructuring reserves that do not meet the requirements of IFRS. Under IFRS 3, all amortization of goodwill ceases, and the amortization of goodwill set against income in 2004 will be canceled in line with IFRS when 2004 comparatives are restated. To the extent that amortization of goodwill is tax-deductible, deferred tax receivables will be accounted for and expensed when the tax deduction is utilized. Amortization of goodwill will be replaced by an impair- ment test that will be carried out every quarter for all Cash- Generating Units (CGUs). Goodwill and acquisition-related intangible assets will be tested for impairment at the same level as monthly performance is reviewed within the Group. Accounting for acquisitions will be changed under IFRS 3, mainly as regards purchase price allocation. To a greater extent than before, the purchase price will be allocated to identifiable intangible assets, which will be amortized over their estimated useful life. The adoption of IFRS 3 will affect accounting for acquisitions but not the Group’s acquisition strategy. Financial instruments IAS 39, ‘Financial Instruments’, will be adopted from 1 January 2005 without adjustment of comparison figures. The accumulated effects of revaluation of financial instru- ments in accordance with IAS 39 will be reported as an adjustment of shareholders’ equity. The reporting of these effects, which represents a change in accounting principles, will be made as a reduction of unrestricted reserves, after a 63 Notes deduction for tax. Reporting of financial instruments under IAS 39 will give rise to increased volatility in both the income statement and the balance sheet. ASSA ABLOY believes that these fluctuations should be limited. ASSA ABLOY has used financial instruments chiefly to hedge transaction exposure and in Treasury operations. From 2005 this type of hedging operation will use different methods, which are expected to limit fluctuation effects resulting from the adoption of IAS 39. Effects on key figures The adoption of IFRS will have a positive effect on ASSA ABLOY’s key figures. For example, Return on capital employed, Return on shareholders’ equity, Earnings per share and Net debt / Equity ratio will all be improved, mainly because goodwill will no longer be amortized. Note 2 Sales by country 1 2004 8,414 2,260 1,675 1,380 1,180 1,056 1,036 961 739 728 649 576 503 454 394 356 319 286 273 263 244 238 222 179 129 122 118 103 92 48 529 2003 8,686 2,108 1,585 1,261 1,089 914 650 852 709 691 731 545 455 390 358 311 234 244 255 240 260 195 197 139 128 110 124 69 79 42 429 25,526 24,080 SEK M USA France United Kingdom Germany Sweden Australia Netherlands Spain Finland Canada Mexico Norway Denmark Italy Asia (excluding China) Belgium New Zealand China Middle East Czech Republic Switzerland South America South Africa Austria Central America (excluding Mexico) Portugal Russia Poland Baltic countries Romania Other countries Total 1 Sales to customers in each country. 64 Note 3 Salaries, wages, other remuneration and social costs Salaries, wages and other remuneration (of which, performance-related salary paid to managing directors) 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 Other countries Total Social costs (of which, pensions) SEK M Total Total Absence for illness % Total absence for illness: – long-term – men – women – aged 29 or younger – aged 30–49 – aged 50 or older 1 During the period 1 July – 31 December 2003. Group 2004 2003 475 (9) 403 (3) 285 (1) 278 (1) 242 (1) 243 (1) 116 (0) 123 (0) 491 (1) 480 (1) 471 (2) 467 (2) 69 (0) 57 (0) 583 (2) 576 (2) 220 (1) 120 (0) 58 (0) 215 (0) 47 (0) 93 (0) 227 (0) 212 (1) 125 (–) 115 (–) 1,866 (11) 2,143 (13) 67 (0) 23 (–) 58 (0) 74 (1) 17 (–) 62 (1) 129 (–) 107 (0) 61 (–) 58 (–) 168 (0) 215 (1) 270 (–) 267 (1) 207 (0) 149 (0) 42 (–) 108 (2) 41 (0) 79 (2) 6,576 (30) 6,426 (30) Parent company 62 (5) 4 (–) 66 (5) 46 (0) – 46 (0) Group 2004 2003 1,950 (433)1,925 (384) Parent company 36 (17) 25 (12) Parent company 2004 20031 1.1 – 0.2 2.1 0.6 1.5 0.5 1.0 – 0.2 1.7 0.4 1.3 0.3 Note 4 Auditors’ fees Note 9 Financial items Notes Group Parent company Group Parent company 2004 2003 2004 2003 SEK M 2004 2003 2004 2003 Note 5 Depreciation and amortization Group Parent company Exchange-rate differences 2004 2003 2004 2003 Total SEK M Audit PricewaterhouseCoopers Other Assignments other than audit PricewaterhouseCoopers Other Total SEK M Goodwill Intangible rights Machinery Equipment Buildings Land and land improvements SEK M Leasing fees paid during the year SEK M Nominal value of agreed future leasing fees Due for payment in 2005 Due for payment in 2006 Due for payment in 2007 Due for payment in 2008 Due for payment in 2009 Due for payment in 2010 or later Total 22 4 12 7 45 24 4 7 3 38 2 – 2 4 8 2 – 3 1 6 978 34 493 245 121 1 959 35 491 255 115 1 – 1 – 2 – – 3 – 1 – 2 – – 3 Dividends Interest income and similar income items Interest income from Group companies Exchange-rate differences Total Interest expenses and similar expense items Interest expenses from Group companies 0 0 164 – 22 186 176 – 48 224 – 0 506 – 506 – 3 478 – 481 –670 –721 –518 –363 – – – – –670 –721 –385 –20 –923 –531 –27 –921 Net financial items –484 –497 –417 –440 Note 10 Tax SEK M Current tax paid Tax attributable to prior years Deferred tax Totalt Group Parent company 2004 –707 –77 –8 2003 –572 –92 109 –792 –556 2004 2003 – –7 – –7 – – – – Explanation for the difference between nominal Swedish tax rate and effective tax rate according to the income statement: Group Parent company 2004 144 2004 9 Group Parent company 2004 2004 Percent Swedish rate of tax on income Non-recurring items Effect of foreign tax rates Non-deductible goodwill amortization Other non-deductible expenses Other Effective tax rate according to the income statement 121 92 65 41 40 34 393 9 9 9 9 9 9 54 Deferred tax liabilities and deferred tax receivables are made up as follows: Total 1,872 1,856 Note 6 Operational leasing agreements Note 7 Non-recurring items SEK M Provision for restructuring Write-downs of fixed assets and inventories Total Group 2004 2003 – – – 935 385 1,320 Note 8 Income from participations in Group companies Deferred tax liabilities Fixed assets Inventories Short-term receivables and liabilities Deferred tax receivables Fixed assets Inventories Short-term receivables and liabilities Parent company Provisions Tax-deductible losses SEK M Dividends Write-downs of shares in subsidiaries Income from disposal of shares in subsidiaries Total 2004 2,845 –177 1,376 4,044 2003 733 –700 – 33 Write-downs of shares in subsidiaries includes SEK 177 M (700) arising from dividends received from subsidiaries. The Group has additional tax losses carried forward of some SEK 500 M which have not been accounted for as deferred tax receivables because it is not probable that the tax losses can be realized. 65 Group 2004 28.0 – –2.0 7.0 4.5 –3.0 2003 28.0 59.9 –3.5 7.4 5.4 –1.8 34.5 95.4 Group 2004 2003 121 69 19 209 78 85 20 462 148 793 188 75 20 283 95 82 5 179 146 507 Notes Note 11 Intangible fixed assets Note 12 Tangible fixed assets Goodwill SEK M Buildings Group 2004 2003 SEK M Opening acquisition value 18,085 18,943 Opening acquisition value Purchases/acquisitions Sales/disposals Translation differences 671 –26 1,030 Purchases/acquisitions – Sales/disposals –606 –1,888 Reclassifications Closing accumulated acquisition value 18,124 18,085 Translation differences Opening amortization –3,320 –2,730 Closing accumulated acquisition value Group 2004 2003 2,874 3,012 86 –77 68 –105 2,846 117 –51 27 –231 2,874 Opening depreciation –1,025 –861 Sales/disposals Write-downs Amortization for the year Translation differences 10 – –978 176 – –5 –959 374 Sales/disposals Reclassifications Write-downs Closing accumulated amortization –4,112 –3,320 Depreciation for the year Closing net book value 14,012 14,766 Translation differences 68 –12 – –121 69 21 –13 –155 –115 98 Intangible rights SEK M 2004 2003 2004 2003 The taxable value of the Group’s Swedish buildings was SEK 87 M. Group Parent company Closing net book value 1,825 1,849 Closing accumulated depreciation –1,021 –1,025 Opening acquisition value Purchases/acquisitions Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value 410 40 –40 – –16 407 62 –22 –1 –36 394 410 Opening amortization –243 –235 Sales/disposals Reclassifications Amortization for the year Translation differences Closing accumulated amortization 14 – –34 11 2 4 –35 21 –252 –243 Closing net book value 142 167 4 5 – – – 9 –1 – – –1 – –2 7 1 3 – – – 4 0 – – –1 – –1 3 Amortization of intangible rights has mostly been reported as administration costs in the income statement. Land and land improvements SEK M Opening acquisition value Purchases/acquisitions Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value Opening depreciation Reclassifications Write-downs Depreciation for the year Translation differences Closing accumulated depreciation Closing net book value Group 2004 645 20 –21 –19 –14 611 –16 1 –1 –1 1 –16 595 2003 681 23 –4 –13 –42 645 –8 2 –10 –1 1 –16 629 The taxable value of the Group’s Swedish land was SEK 12 M. 66 Notes Equipment Group Group Parent company 2004 2003 SEK M 2004 2003 2004 2003 4,877 5,321 Opening acquisition value 1,326 1,467 Note 12 cont. Machinery SEK M Opening acquisition value Purchases/acquisitions Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value 409 –200 –35 –237 4,814 474 –249 17 –686 4,877 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 Opening depreciation –2,870 –2,904 Sales/disposals Reclassifications Write-downs Depreciation for the year Translation differences 193 35 – –493 209 206 9 –177 –491 487 Closing accumulated depreciation –2,926 –2,870 Closing net book value 1,888 2,007 222 –138 26 –69 212 –189 33 –197 1,367 1,326 –755 136 –2 – –245 55 –787 164 –5 –15 –255 143 17 3 –2 – – 18 –9 1 – – –2 – 14 5 –2 – – 17 –9 2 – – –2 – –9 8 Closing net book value 556 571 8 –811 –755 –10 Construction in progress SEK M Construction in progress Group 2004 299 2003 273 Note 13 Shares in subsidiaries Parent company ASSA ABLOY EMEA AB Timelox AB AA Besam AB Sokymat AB ASSA ABLOY Kredit AB Organization number, Registered Office 556061-8455 Stockholm 556214-7735 Landskrona 556204-8511 Landskrona 556514-7997 Ronneby 556047-9148 Stockholm ASSA ABLOY Identification Technology Group AB 556645-4087 Stockholm ASSA ABLOY Svensk Fastighets AB Metget Intressenter AB AA Asia Holding AB 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. Nemef BV ASSA ABLOY France SAS Interlock Holding AG ASSA ABLOY Ltd Mul-T-Lock Ltd ASSA ABLOY Holdings (SA) Ltd AA US International Holdings, Inc. 556645-0275 Stockholm 556608-9222 Ronneby 556602-4500 Stockholm 1094741-7 Joensuu 979207476 Moss CVR 10050316 Herlev HR B 66227 Berlin 23028070 Dordrecht 31021889 Hoevelaken 08017187 Amersfoort 18066659 Amsterdam 08023138 Apeldoorn 412140907 R.C.S. Versailles CH-020.3.913.588-8 Zürich 2096505 Willenhall 520036583 Yavne 1948/030356/06 Johannesburg 040916454 Delaware Number of shares % of share capital Book value, SEK M 70 15,000 1,000 30,491 400 1,000 1,000 1,000 1,000 800,000 150,000 60,500 2 3,515 25 25 180 4,000 12,499,999 10,736 1,330,000 13,787,856 100,220 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98 100 90 100 100 14 40 1,000 53 12,221 50 0 0 0 631 538 376 1,394 70 29 1 2 1,236 1,582 84 943 901 184 0 67 Notes Note 13 cont. Parent company ASSA ABLOY Inc ABLOY Holdings Ltd Organization number, Registered Office 39347-83 Salem, Oregon 1148165260 St Laurent ASSA ABLOY Australia Pacific Pty Ltd ACN 095354582 Oakleigh, Victoria ASSA ABLOY South Asia Pte Ltd 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 Int. Management Services Ltd Codas Electrónica S.A. ASSA ABLOY Asia Pacific Ltd Total 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 199804395K Singapore YSM9612049Y4 Mexico D.F. GIP980312169 Mexico 33274584 Amsterdam 556192-3201 Stockholm 556180-7156 Göteborg EC21330 Bermuda 8805 Buenos Aires 53451 Hong Kong Organization number, Registered Office A20065744 Astigarraga 934372816 Bergen 00008028 Bogota 8727 Pavia Number of shares % of share capital Book value, SEK M 100 1 48,190,000 3,400,000 231,299,904 27,036,635 400 2,500 1,000 100,100 240 1,000,000 100 100 100 100 100 100 100 100 100 100 2 100 2,259 13 242 43 225 862 0 1 5 423 0 72 25,497 Number of shares % of share capital Book value, SEK M 4,802 305 182,682 – – 40 50 29 25 – 17 14 2 2 1 36 Group Parent company Note 16 Number of shares SEK M 2004 2003 2004 2003 Shares in associated companies Other shares and participations Long-term receivables Total 36 22 108 166 37 40 133 210 – 6 61 67 – 2 39 41 Note 15 Inventories SEK M Materials and stock items Work in progress Finished goods Paid in advance Total Group 2004 2003 874 968 825 967 1,266 1,210 27 28 3,135 3,030 SEK 123 M of the inventory value on 31 December 2004 was reported at net realisable value. Number of shares on 31 December 2004 Number of votes on 31 December 2004 Series A shares Series B shares Total 19,175,323 346,742,711 365,918,034 191,753,230 346,742,711 538,495,941 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, to the nearest thousand, was 365,918 thousand (365,918). The average number of shares after full conver- sion of outstanding convertible bonds, similarly rounded, was 375,103 thou- sand (370,935). The proposed dividend is SEK 2.60 per share – a maximum total amount of SEK 951 M. Note 17 Provision for pensions ASSA ABLOY has defined-benefit plans in a number of countries, those in the USA and the UK being the most significant ones. In principle, the plans cover substantially all employees and provide benefits based on an employee’s service and remuneration at or near retirement. In the USA there are also obligations related to post-retirement medical benefits. Figures below include both defined-benefit pension plans and post-retirement med- ical benefits. Due to ASSA ABLOY’s application of RR 29 from 1 January 2004, comparative figures are not available. RR 29 accords in all material respects with IAS 19, ‘Employee benefits’. 68 Notes Note 17 cont. The amounts recognized in the income statement are as follows: Pension cost (SEK M) Current service costs Interest cost Expected return on plan assets Net actuarial losses (gains) recognized Past service costs Losses (gains) on curtailments/settlements Total pension cost of which recorded as: Operating income Financial items 2004 119 208 –154 – –5 –7 161 116 45 Cost of defined-contribution plans was SEK 272 M. The actual return on plan assets regarding defined-benefit plans was SEK 148 M in 2004. Actuarial gains/losses, resulting from changes in the actuarial assumptions for defined-benefit plans, are recognized to the extent that their accumulated amount exceeds the 10 percent corridor, i.e. 10 percent of the higher of the obligation’s present value or the fair value of plan assets. The surplus/deficit outside the 10 percent corridor is recognized as income/expense over the expected average remaining service period. Amortization of actuarial gains/losses that arose in 2004 will start in 2005. The amounts recognized in the balance sheet are as follows: Key actuarial assumptions (weighted average) 1 Discount rate Expected return on plan assets Future salary increases Future pension increases Future medical-benefit increases Expected inflation 1 Jan 2004 31 Dec 2004 5.6% 7.1% 1.9% 1.2% 9.0% 2.4% 5.2% 6.9% 2.1% 1.5% 8.0% 2.5% 1 The actuarial assumptions have been used in calculating the defined-benefit pension obligations. Pensions with Alecta Commitments for old-age pensions and family pensions for salaried employ- ees in Sweden are guaranteed in part through insurance with Alecta. Accord- ing to statement URA 42 from the Swedish Financial Accounting Standards Council’s Emerging Issues Taskforce, this is a defined-benefit plan that cov- ers many employers. For the 2004 financial year the company has not had access to information making it possible to report this plan as a defined- benefit plan. Pension plans in accordance with ITP that are guaranteed through insurance with Alecta are therefore reported as defined-contribution plans. The year’s contributions that are contracted to Alecta amount to SEK 9 M. Alecta’s surplus may be distributed to the policy-holders and/or the per- sons insured. At the end of 2004 Alecta’s surplus expressed as collective consolidation level amounted to 128.0 percent (119.9). Collective consolida- tion level consists of the market value of Alecta’s assets as a percentage of its insurance commitments calculated according to Alecta’s actuarial calculation assumptions, which do not comply with RR 29. Pension obligations (SEK M) Provisions for defined-benefit plans Provisions for defined-contribution plans Provisions for pensions, total Assets regarding defined-contribution plans Pension obligations, net 2004 1,609 68 1,677 –22 1,655 Note 18 Other provisions SEK M Restructuring Other Total Group 2004 2003 586 93 679 935 – 935 There are no defined-benefit plans with surpluses within the Group. Partly funded or unfunded pension plans are reported as provision for pensions. Out of pension obligations for defined-benefit plans, SEK 382 M relates to post-retirement medical benefits. Specification of pension obligations (SEK M) Present value of funded defined-benefit obligations Fair value of plan assets Funded status Present value of unfunded defined-benefit obligations Unrecognized actuarial gains (losses), net Unrecognized past service cost Provision for pensions, net 2004 3,294 –2,243 1,051 666 –111 3 1,609 Specification of movements in provision for pensions (SEK M) 2004 Net provision on 31 December 2003 Adoption of RR 29, 1 January 2004 Net provision on 1 January 2004 Pension cost, defined-benefit plans Contributions Effect from acquisitions/disposals, net Curtailments Currency translation differences Provision for pensions, net 723 1,164 1,887 161 –384 –1 –47 –7 1,609 Note 19 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 2004 2003 46 – 46 44 1 45 Note 20 Corporate credit line Overdrafts granted to the Group totaled SEK 1,024 M (903), of which SEK 204 M (264) was utilized. Note 21 Convertible debenture bonds SEK M Incentive 2001 Incentive 2004 Total Group 2004 2003 902 902 1,804 907 – 907 69 Notes Note 21 cont. Note 23 Assets pledged SEK M Relating to long-term liabilities to credit institutions: Real-estate mortgages Chattel mortgages Total Note 24 Contingent liabilities Group 2004 2003 43 0 43 46 0 46 SEK M Guarantees Guarantees on behalf of subsidiaries Other Total Group Parent company 2004 119 692 6 817 2003 120 567 9 696 2004 118 2003 109 7,275 7,104 – – 7,393 7,213 INCENTIVE 2001 has a variable interest rate equivalent to 0.9*EURIBOR + 54 basis points. Convertible debenture loans within INCENTIVE 2001 can be converted from October 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 1.4 percent of share capital and 0.9 percent of the total number of votes. INCENTIVE 2004 has a variable interest rate equivalent to 0.9*EURIBOR + 47 basis points. Convertible debenture loans within INCENTIVE 2004 can be converted from March 2009. Full conversion at a conversion rate of EUR 10.20 for Bond 1, of EUR 12.20 for Bond 2, of EUR 14.30 for Bond 3 and of EUR 16.30 for Bond 4 will add 7,782,155 shares. The dilution effects with full conversion will amount to 2.1 percent of share capital and 1.4 percent of the total number of votes. Full conversion of both programs will add a total of 12,799,587 shares and result in dilution effects amounting to 3.4 percent of share capital and 2.3 percent of the total number of votes. Each program has a total value of EUR 100 M. Note 22 Accrued expenses and prepaid income Group Parent company SEK M 2004 2003 2004 2003 Personnel-related expenses Customer-related expenses Interest expenses Prepaid income Other Total 964 295 58 54 718 2,089 747 175 87 43 810 1,862 29 – – 28 7 64 13 – – 24 7 44 Note 25 Average number of employees by country and by gender Women Men Total Group USA Mexico France China United Kingdom Sweden Germany Finland Australia Romania Spain Czech Republic South Africa Norway Netherlands South America Italy New Zealand Switzerland Israel Canada Denmark Belgium Other countries Total 70 2004 1,880 1,992 918 1,082 2003 1,919 2,113 926 1,035 2004 4,389 1,235 1,444 1,084 2003 4,505 1,282 1,491 1,008 780 552 472 424 396 385 297 475 360 202 106 141 242 165 198 104 64 126 69 192 813 492 471 420 392 351 310 460 324 219 100 156 253 145 122 67 60 118 64 175 927 836 788 680 630 553 636 376 389 461 551 508 278 328 250 265 292 152 132 354 946 790 790 687 589 470 667 362 345 468 320 546 285 362 184 273 256 154 117 306 2004 6,269 3,227 2,362 2,166 1,707 1,388 1,260 1,104 1,026 938 933 851 749 663 657 649 520 493 448 369 356 278 201 546 2003 6,424 3,395 2,417 2,043 1,759 1,282 1,261 1,107 981 821 977 822 669 687 420 702 538 507 306 340 316 272 181 481 11,622 11,505 17,538 17,203 29,160 28,708 Note 25 cont. Parent company Sweden Other countries Total Gender split in Company management Group Board of Directors 1 Executive Team Total 1 excluding Employee Representatives. Notes Women Men Total 2004 2003 2004 2003 2004 2003 20 4 24 23 – 23 23 5 28 20 – 20 43 9 52 43 – 43 Women Men Total 2004 2003 2004 2003 2004 2003 1 – 1 2 – 2 8 6 14 7 7 14 9 6 15 9 7 16 Group 2004 2003 Note 26 Cash and cash equivalents Note 27 cont. SEK M 2004 2003 2004 2003 SEK M Group Parent company Cash and bank balances Short-term investments 831 186 Cash and cash equivalents 1,017 713 167 880 2 2 4 633 19 652 Short-term investments shown in the consolidated balance sheet at year-end were SEK 230 M (375), of which SEK 44 M (208) 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 2 M (19). 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 –671 –1,106 –63 –135 –101 –8 91 52 61 –30 –156 –116 –196 –172 96 137 90 169 Note 27 Cash flow Group Purchase price –804 –1,254 SEK M 2004 2003 Less, acquired cash and cash equivalents ADJUSTMENTS FOR NON-CASH ITEMS Profit on sales of equipment 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 (–/+) Accounts payable increase/decrease (+/–) Other working capital increase/decrease (–/+) Change in working capital NET CAPITAL EXPENDITURE Purchases of tangible fixed assets Sales of tangible fixed assets Net capital expenditure –18 2 –16 –663 174 –489 –79 –135 95 71 –48 –894 244 –650 – 62 62 –697 177 –520 274 –120 –33 47 168 –952 258 –694 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 Note 28 Net debt SEK M Cash and bank balances Short-term interest-bearing investments Long-term interest-bearing receivables Long-term interest-bearing liabilities Short-term interest-bearing liabilities Pension provisions Total 43 – –143 –904 – – –4 –9 –13 23 198 –63 –1,096 8 8 –31 –14 –45 Group 2004 –831 –230 –31 6,029 5,594 1,677 2003 –713 –375 –60 8,894 3,821 723 12,208 12,290 71 Proposed disposition of earnings As shown in the consolidated balance sheet, the Group’s unrestricted equity amounts to SEK 976 M (1,194). 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 3,869 M Unappropriated earnings brought forward: SEK 2,014 M Total: SEK 5,883 M The Board of Directors and the President and CEO propose that a dividend of SEK 2.60 per share, a maximum total of SEK 951 M, be distributed to shareholders and that the remainder, SEK 4,932 M, be carried forward to the new financial year. Stockholm, 16 February 2005 Georg Ehrnrooth Chairman Melker Schörling Vice Chairman Carl-Henric Svanberg Vice Chairman Bo Dankis President and CEO Carl Douglas Gustaf Douglas Per-Olof Eriksson Lotta Lundén Sven-Christer Nilsson Seppo Liimatainen Employee representative Mats Persson Employee representative Our audit report was issued on 16 February 2005 PricewaterhouseCoopers AB Anders Lundin Authorized Public Accountant 72 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 for the year 2004. The Board of Directors and the President are responsible for accounting and administration and for ensuring that the annual accounts and consolidated accounts com- ply with the Annual Accounts Act. 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, judging the significant estimates made by the Board of Directors and the President in draw- ing up the annual accounts and the consolidated accounts, and 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 exam- ined 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 Presi- dent has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Asso- ciation. 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 give thereby 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. The Directors’ Report is consistent with the rest of the annual accounts and the consolidated accounts. 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, 16 February 2005 PricewaterhouseCoopers AB Anders Lundin Authorized Public Accountant 73 Comments on ‘Five years in summary’ 2000 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 & 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 pro- gram are to realize Group synergies and strengthen sus- tained organic growth. 2004 Some recovery in demand on major markets contributed to a notable improvement in organic growth. Acquisitions contributed to business performance in the EMEA and Global Technologies divisions. Negative exchange-rate effects continued to decrease reported sales and earnings. The operating margin rose in response to better sales vol- umes and savings from the ongoing action program, while higher costs for important metals were neutralized by higher selling prices and changes in the purchasing struc- ture. Operating cash flow was strong as usual. During the year ASSA ABLOY refined the Group’s strategy with the aims of strengthening organic growth in ASSA ABLOY’s core business and in certain attractive and fast-growing markets and product segments, and of better exploiting the Group’s size to generate significant savings, especially in production and purchasing. 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 acquisi- tion 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 tech- nology, 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 Inter- lock in New Zealand – which added strength in both geo- graphical 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 investments 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 precise 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 automatic doors, was acquired during the year. 74 Five years in summary (Amounts in SEK M unless stated otherwise) 2000 1 2001 2002 2003 2004 Sales and income Sales Organic growth, % Acquired growth, % Operating income before depreciation and amortization (EBITDA) Depreciation and amortization Operating income before goodwill amortization (EBITA) Operating income (EBIT) Income before tax (EBT) Net income Cash flow Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Cash flow Operating cash flow Capital employed and financing Capital employed – of which, goodwill Net debt Minority interests Shareholders’ equity Data per share, SEK 14,394 22,510 25,397 24,080 25,526 5 32 2,705 985 2,107 1,720 1,402 915 1,799 –5,189 4,609 1,219 1,756 19,779 12,078 8,560 560 3 44 4,020 1,721 3,159 2,133 1,476 949 2,631 –7,112 4,259 –222 2,338 27,861 16,371 15,534 481 2 15 4,545 1,907 3,595 2,638 2,015 1,270 3,847 –4,268 568 146 3,525 26,701 16,213 13,989 331 0 5 4,249 1,856 3,352 1,073 583 9 3,180 –1,827 –1,772 –419 3,265 22,984 14,766 12,290 16 5 5 4,642 1,872 3,748 2,770 2,294 1,495 3,339 –1,505 –1,734 100 3,439 22,683 14,012 12,208 27 10,659 11,846 12,381 10,678 10,448 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 2004, as proposed by the Board) 2.76 2.73 3.88 5.81 30.58 0.90 2.99 2 2.98 2 5.39 2 8.07 2 35.80 1.00 Price of Series B share at year-end 184.50 151.00 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 amortization, % Return on shareholders’ equity, % Equity ratio, % Net debt / Equity ratio, times Interest coverage ratio, times Interest on convertible debenture loan after tax, SEK M 18.8 14.6 12.0 9.7 13.7 16.7 13.3 43.1 0.80 5.5 8.5 17.9 14.0 10.2 2 7.3 2 9.7 2 13.3 2 8.9 2 35.6 1.31 3.5 9.0 3.53 3.53 6.13 9.08 35.85 1.25 99.50 17.9 14.2 10.4 7.9 9.9 13.4 9.9 38.2 1.13 3.9 27.2 3.30 2 3.31 2 5.89 2 8.61 2 31.23 1.25 85.50 17.6 13.9 9.9 2 7.9 2 9.6 2 13.3 2 9.9 2 35.9 1.15 4.7 17.8 4.09 4.05 6.66 9.06 32.66 2.60 113.50 18.2 14.7 10.9 9.0 11.8 16.0 13.2 35.6 1.17 5.7 24.0 Number of shares, thousands 352,453 353,751 365,918 365,918 365,918 Number of shares after full conversion, thousands 356,712 361,730 370,935 370,935 378,717 Average number of employees 16,881 24,211 28,754 28,708 29,160 1 Key data for 1999 and 2000 have been adjusted for changes in accounting principles. 2 Excluding non-recurring items. 75 Quarterly information THE GROUP IN SUMMARY SEK M Sales Organic growth1 Gross income Gross income / sales Q1 2003 Q2 2003 Q3 2003 Q4 2003 Full year 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Full year 2004 6,124 5,930 5,930 6,096 24,080 6,283 6,533 6,447 6,263 25,526 0% –2% 0% 2% 0% 3% 7% 6% 4% 5% 2,390 2,299 2,333 2,445 9,467 2,509 2,688 2,633 2,568 10,378 39.0% 38.8% 39.3% 40.1% 39.3% 39.9% 40.8% 40.8% 41.0% 40.7% Operating income before depreciation (EBITDA) 1,078 993 1,044 1,135 4,249 1,120 1,168 1,196 1,158 4,642 Gross margin (EBITDA) 17.6% 16.7% 17.6% 18.6% 17.6% 17.8% 17.9% 18.6% 18.5% 18.2% Depreciation –232 –223 –219 –223 –897 –230 –232 –220 –212 –894 Operating income before goodwill amortization (EBITA) 846 770 824 912 3,352 890 936 976 946 3,748 Operating margin before goodwill amortization (EBITA) 13.8% 13.0% 13.9% 15.0% 13.9% 14.2% 14.3% 15.1% 15.1% 14.7% Goodwill amortization Non-recurring items Operating income (EBIT) Operating margin (EBIT) –244 –237 –238 –240 –959 –243 –247 –245 –243 –978 – 602 – 533 – –1,320 –1,320 586 –648 1,073 – 647 – 689 – 731 – – 703 2,770 9.8% 9.0% 9.9% 11.0%3 9.9%3 10.3% 10.6% 11.3% 11.2% 10.9% Financial items –135 –129 –120 –113 –497 –118 –121 –127 –118 –484 Income before tax (EBT) Profit margin (EBT) Tax Minority interests Net income OPERATING CASH FLOW Operating income before goodwill amortization (EBITA) Depreciation (excluding goodwill amortization) Net operating capital expenditure Change in working capital Paid and received interest Non-cash items Operating cash flow Q1 2003 846 232 –157 –298 –88 29 564 468 407 467 –758 583 530 571 605 588 2,294 7.6% 6.9% 7.9% 9.2%3 7.9%3 8.4% 8.7% 9.4% 9.4% 9.0% –165 –143 –165 –4 299 –7 257 –4 299 Q2 2003 770 223 Q3 2003 824 219 –83 –4 –845 Q4 2003 912 223 –556 –18 9 Full year 2003 3,352 897 –184 –163 –190 –694 –83 291 258 168 –169 –107 –156 –520 21 –11 22 62 –183 –197 –208 –204 –792 –2 345 –2 372 –2 395 –1 –7 383 1,495 Q1 2004 890 230 –123 –362 –45 25 Q2 2004 936 232 –166 –187 –144 –19 Q3 2004 976 220 Q4 2004 946 212 Full year 2004 3,748 894 –146 –215 –650 135 –67 –36 366 –48 –233 –489 14 –16 578 1,054 1,069 3,265 6152 6522 1,0822 1,0902 3,4392 Operating cash flow / Income before tax 1.21 1.42 2.26 1.903 1.723 1.16 1.14 1.79 1.85 1.50 CHANGE IN NET DEBT Net debt at start of period Operating cash flow Restructuring payments Tax paid Acquisitions Dividend Change to RR 29 Translation differences Net debt at end of period Net debt / Equity ratio Q1 2003 Q2 2003 Q3 2003 Q4 2003 Full year 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Full year 2004 13,989 13,702 13,405 12,829 13,989 12,290 14,425 14,514 13,331 12,290 –564 –578 –1,054 –1,069 –3,265 –615 –652 –1,082 –1,090 –3,439 – 333 106 – – – 97 39 457 – – 151 675 – – – 198 535 – – – 779 1,355 457 – 35 164 830 – 1,108 45 322 23 457 – 112 103 –27 – – 129 161 103 – 56 321 750 929 457 1,164 –162 –312 –348 –203 –1,025 613 –106 –289 –482 –264 13,702 13,405 12,829 12,290 12,290 14,425 14,514 13,331 12,208 12,208 1.10 1.12 1.09 1.15 1.15 1.37 1.40 1.26 1.17 1.17 1 Organic growth relates to comparable units after adjusting for acquisitions and changes in exchange rates. 2 Excluding restructuring payments. 3 Excluding non-recurring items. 76 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 Earnings per share after tax and full conversion excluding goodwill Cash earnings per share after tax and full conversion Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 26,452 25,683 24,743 22,984 24,966 24,934 23,949 22,683 15,755 15,137 14,910 14,766 15,432 15,210 14,699 14,012 13,702 13,405 12,829 12,290 14,425 14,514 13,331 12,208 315 295 143 16 17 20 20 27 12,435 11,983 11,772 10,678 10,523 10,400 10,598 10,448 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 2003 0.961 0.971 Full year 2003 3.301 3.311 1.611 2.291 5.891 8.611 Q1 2004 0.94 0.94 1.60 2.18 Q2 2004 1.02 1.01 1.67 2.28 Q3 2004 1.08 1.07 1.71 2.29 Q4 2004 1.05 1.03 1.68 2.31 Full year 2004 4.09 4.05 6.66 9.06 Shareholders’ equity per share after full conversion 36.01 34.77 34.14 31.23 31.23 30.87 32.91 33.19 32.66 32.66 NUMBER OF SHARES Mar 2003 Jun 2003 Sep 2003 Dec 2003 Mar 2004 Jun 2004 Sep 2004 Dec 2004 Number of shares before conversion, thousands2 365,918 365,918 365,918 365,918 365,918 365,918 365,918 365,918 Number of shares after full conversion, thousands2 370,935 370,935 370,935 370,935 370,935 371,449 373,889 375,103 1 Excluding non-recurring items. 2 Accumulated weighted average. Definitions Organic growth: Change in sales for comparable units after adjust- ments for acquisitions and exchange-rate effects. Net debt: Interest-bearing liabilities less interest-bearing investments. Gross margin (EBITDA): Operating income before depreciation and amortization as a percentage of sales. Capital employed: Total assets less interest-bearing assets and non- interest-bearing liabilities including deferred tax liability. Operating margin before goodwill amortization (EBITA): Operating income before goodwill amortization as a percentage of sales. Equity ratio: Shareholders‘ equity including minority interests as a percentage of total assets. 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 dispos- als of tangible fixed assets. Depreciation: Depreciation/amortization of intangible and tangible fixed 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 amortization: Income before tax plus net interest and goodwill amortization as a percentage of average capital employed. 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 divided by weighted average 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 divided by 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, divided by weighted average number of shares after full conversion. Shareholders’ equity per share after full conversion: Shareholders‘ equity plus convertible debenture loans divided by numbers of shares after full con- version. 77 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. Share price movement The price of the ASSA ABLOY share rose by 33 percent in 2004. During the same period, the Stockholm Exchange All-Share index (SAX) rose by 18 percent. The share’s closing price at year-end was SEK 113.50, corresponding to a market capitalization of SEK 41,532 M. Trading During the year a total of 594 million shares (713) were traded, which is an average of 2.3 million shares (2.9) per trading day and represents about 165 percent (203) of the issued shares. Ownership structure The number of shareholders at year-end was 30,191 (26,214). Investors outside Sweden account for 36 percent (49) of the capital. Dividend and dividend policy The Board of Directors and President propose that SEK 2.60 per share (1.25) – a maximum total amount of SEK 951 M – be paid as a dividend to shareholders for the 2004 financial year, corresponding to a direct return of 2.3 per- cent (1.5) on the Series B share. The aim is that, in the long term, the dividend should correspond to 33-50 percent of ASSA ABLOY's earnings after standard tax of 28 percent, but always taking into account ASSA ABLOY's long-term financial requirements. SHARE PRICE MOVEMENT AND TRADING 1994–2004 DIVIDEND PER SHARE 1995-2004 SEK 200 180 160 140 120 100 80 60 40 20 5 95 96 97 98 99 00 01 02 03 04 B share Afv General Index Shares traded, 1,000s (incl. off-floor trading) SEK 3.0 2.5 2.0 1.5 1.0 0.5 0.0 100,000 80,000 60,000 40,000 20,000 (c) SIX 95 96 97 98 99 00 01 02 03 04 Dividend per share, SEK Data per share SEK/share 1 Earnings after tax and full conversion Dividend Direct yield, % 5 Dividend, % 6 Share price at end of period Highest share price Lowest share price Shareholders’ equity 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0.56 0.22 1.6 36.7 13.24 15.16 5.23 4.37 0.93 0.30 1.0 31.6 29.28 28.97 12.38 5.40 1.23 0.43 0.8 31.6 51.24 52.95 28.69 8.64 1.76 0.60 0.8 33.5 75.65 92.73 48.07 9.93 2.00 3 0.74 0.6 32.6 2.73 0.90 0.5 30.9 2.98 2 1.00 0.7 30.5 3.53 1.25 1.3 32.2 3.31 2 1.25 1.5 33.9 4.05 2.604 2.3 41.1 119.50 184.50 151.00 99.50 85.50 113.50 140.00 206.70 186.00 159.50 110.00 113.50 73.21 110.50 94.50 16.95 3 30.58 3 35.80 76.50 35.85 67.00 31.23 84.00 32.66 Number of shares (1,000s) 7 221,684 265,396 295,448 295,448 324,200 356,712 361,730 370,935 370,935 378,718 1 Adjustment made for new issues. 2 Excluding non-recurring items. 3 Key data adjusted following change in accounting principle. 4 Proposed dividend. 78 5 Dividend as percentage of share price at end of period. 6 Dividend as percentage of adjusted earnings in line with dividend policy. 7 After full conversion. The ASSA ABLOY share A shares C shares B shares Share capital, SEK1 20,000 2,000,000 1,746,005 1,428,550 50,417,555 2,095,206 1,714,260 60,501,066 2,000,000 2,000,000 53,592,110 64,310,532 64,310,532 70,732,118 71,075,983 71,369,974 285,479,896 314,002,299 314,408,642 320,036,195 332,688,203 352,453,235 353,751,412 363,751,412 365,918,034 378,717,621 60,501,066 66,541,706 66,885,571 67,179,562 268,718,248 295,564,487 295,970,830 301,598,383 313,512,880 333,277,912 334,576,089 344,576,089 346,742,711 359,542,298 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 A shares 6,746,425 7,118,818 5,310,080 B shares Capital, % Voting rights, % 20,000,000 2,000,000 9,296,636 19,485,973 17,270,350 11,114,000 10,680,600 9,891,738 9,567,179 8,402,200 229,034,035 7.3 2.5 4.0 5.3 4.7 3.0 2.9 2.7 2.6 2.3 62.6 100.0 16.2 13.6 11.6 3.6 3.2 2.1 2.0 1.8 1.8 1.6 42.5 100.0 19,175,323 346,742,711 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 1 SEK 1 per share – number of shares at end of period. ASSA ABLOY’s 10 largest shareholders Based on the share register at 31 December 2004. Owner Investment AB Latour SäkI Melker Schörling and companies Robur unit trusts Wärtsilä Corporation SEB AMF pension Nordea unit trusts The third National Swedish Pension fund Alecta Other shareholders Total number Source: SIS Ägarservice AB and VPC AB. Ownership structure at 31 December 2004 Shareholding 1–1,000 1,001–5,000 5,001–20,000 20,001–50,000 50,001–500,000 500,000– Total Source: SIS Ägarservice AB. No. of shareholders Percent 24,563 4,105 907 237 267 112 81.4 13.6 3.0 0.8 0.9 0.4 No. of shares 7,508,540 9,462,600 9,256,964 7,634,909 41,679,781 290,375,240 30,191 100.0 365,918,034 Capital, % Voting rights, % 2.1 2.6 2.5 2.1 11.4 79.4 100.0 1.4 1.8 1.7 1.4 7.7 86.0 100.0 79 The ASSA ABLOY share Convertible debentures for personnel The ASSA ABLOY Group has issued several convertible debentures 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. In 2001 a convertible debenture, Incentive 2001, 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. On full conversion, at a conversion price for Series 1 of EUR 15.80, Series 2 of EUR 19.00, Series 3 of EUR 22.10 and Series 4 of EUR 25.30, an additional 5,017,432 shares would be created. The convertible bonds can be converted in October/ November 2006. In 2004 a further convertible debenture, Incentive 2004, was issued. Like Incentive 2001, this is 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 conver- sion price. On full conversion, at a conversion price for Series 1 of EUR 10.20, Series 2 of EUR 12.20, Series 3 of EUR 14.30 and Series 4 of EUR 16.30, an additional 7,782,155 shares would be created. The convertible bonds can be converted from March 2009. Over 4,000 employees in more than 15 countries are participating in the two current Incentive programs, Incentive 2001 and Incentive 2004. Financial analysts who follow ASSA ABLOY Company ABG Sundal Collier Alfred Berg ABN AMRO CAI Cheuvreux Carnegie Cazenove CSFB Dresdner Kleinwort Wasserstein Enskilda Securities Goldman Sachs Hagströmer & Qviberg Handelsbanken JP Morgan Kaupthing Bank Sverige AB Lehman Brothers Merrill Lynch Morgan Stanley Swedbank UBS Name Anders Jegers Henrik Fröjd Sasu Ristimäki Anders Idborg Ilan Chaitowitz Patrick Marshall Colin Grant Julian Beer James Moore Patric Lindqvist Henrik Saläng Nick Paton Peder Frölén Brian Hall Raymond Greaves Daniel Cunliffe Anders Bruzelius Anders Fagerlund Öhman J:or Fondkommission AB Johan Gahm Telephone number E-mail +44 207 9055 631 +46 8 572 358 33 +44 207 621 5173 +46 8 676 86 88 +44 207 155 8207 +44 207 888 0289 +44 207 475 9161 +46 8 522 296 52 +44 207 774 1515 +46 8 696 20 84 +46 8 701 12 51 +44 207 325 5044 +46 8 791 47 86 +44 207 102 4726 +44 207 996 4783 +44 207 425 2057 +46 8 585 912 88 +46 8 453 73 30 +46 8 402 52 68 anders.jegers@abgsc.com henrik.frojd@alfredberg.se sristimaki@caicheuvreux.com andidb@carnegie.se ilan.chaitowitz@cazenove.com patrick.marshall@csfb.com colin.grant@drkw.com julian.beer@enskilda.se james.moore@gs.com patric.lindqvist@hagqvi.com hesa06@handelsbanken.se nicholas.j.paton@jpmorgan.com peder.frolen@kaupthing.se brhall@lehman.com raymond_greaves@ml.com daniel.cunliffe@morganstanley.com anders.bruzelius@swedbank.com anders.fagerlund@ubs.com johan.gahm@ohman.se 80 Information for shareholders Annual General Meeting The Annual General Meeting of ASSA ABLOY will be held in the Great Hall of the Royal Academy of Music, Nybrokajen 11, Stockholm at 15.30 on Wednesday 27 April 2005. Shareholders wishing to attend the Annual General Meeting should: – be registered in the share register kept by VPC AB no later than Friday 15 April 2005; – notify ASSA ABLOY AB of their intention to attend by 16.00 on Thursday 21 April 2005. Registration in the share register 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 Friday 15 April 2005 at the latest. Notification of intention to attend Shareholders must notify ASSA ABLOY of their intention to attend the Annual General Meeting no later than 16.00 on Thursday 21 April via: – Website – E-mail – Post www.assaabloy.com bolagsstamma@assaabloy.com ASSA ABLOY AB, ‘Bolagsstämma’, Box 70340, SE-107 23 Stockholm, Sweden – Telephone +46 8 506 485 00 +46 8 506 485 85 – Fax 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. Nomination Committee 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 2005 Annual General Meeting are Gustaf Douglas (Chairman), Georg Ehrnrooth and Melker Schörling, plus two representatives of the major institutional shareholders, Marianne Nilsson of Robur and Staffan Grefbäck of Alecta. Entitlement to dividend Monday 2 May 2005 has been set as the qualification day for dividends. If the Annual General Meeting decides to fol- low the recommendation of the Board of Directors, divi- dends are expected to be distributed through VPC AB on Friday 6 May 2005. Reports can be ordered from www.assaabloy.com ASSA ABLOY AB: – Website – Telephone +46 8 506 485 00 +46 8 506 485 85 – Fax ASSA ABLOY AB – Post Box 70340 SE-107 23 Stockholm Sweden Future financial reports Interim reports: First quarter: 27 April 2005 Second quarter: 17 August 2005 Third quarter: 8 November 2005 Fourth quarter and Year-end Report: February 2006 2005 Annual Report: March 2006 81 Board of Directors Georg Ehrnrooth Melker Schörling Carl-Henric Svanberg Bo Dankis Carl Douglas Gustaf Douglas Georg Ehrnrooth Chairman Born 1940 Master of Science (Engineering) Vice Chairman: Rautaruukki Oyj Board member: Nokia Abp, Sampo Abp, 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, and Karlshamns AB Board member: Hennes & Mauritz AB Member of the ASSA ABLOY Board since 1994 Holdings privately and through company: 5,310,080 Series A shares and 9,296,836 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 March 2003 Holdings: 86,000 Series B shares, Incentive 2001 convertibles corresponding to 10,750 Series B shares and Incentive 2004 convertibles corresponding to 256,800 Series B shares Carl Douglas Born 1965 B.A. Board member: Boxholms Skogar AB, Swegon AB, Securitas AB and SäkI AB Member of the ASSA ABLOY Board since 2004 Holdings: 0 Gustaf Douglas Born 1938 Bachelor of Economics Principal owner of Investment AB Latour and SäkI Board Chairman: Investment AB Latour, Boxholms Skogar AB and Säkl AB Vice Chairman: 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 shares and 21,462,421 Series B shares Through SäkI AB: 7,118,818 Series A shares and 954,200 Series B shares 82 Per-Olof Eriksson Lotta Lundén Sven-Christer Nilsson Seppo Liimatainen Mats Persson Joakim Järrebring Per-Edvin Nyström Per-Olof Eriksson Born 1938 Master of Engineering, Doctor of Technology h.c. Board Chairman: Callans Trä AB,Odlander, Fredriksson & Co. and Consolis Oy Board member: Senea AB, SSAB Svenskt Stål AB, AB Volvo, Investmentbolaget Öresund and Elkem ASA. Member of the Royal Swedish Acad- emy of Engineering Sciences Member of the ASSA ABLOY Board since 1995 Holdings: 10,000 Series B shares Lotta Lundén Born 1957 Bachelor of Economics Board member: J C, Bergendahlsgruppen, Exportrådet and Glitter. Partner in Koncept- verkstan 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 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, Incentive 2001 convertibles corresponding to 125 Series B shares and Incentive 2004 convertibles corresponding to 7,800 Series B shares Auditor PricewaterhouseCoopers AB Auditor in charge Anders Lundin Born 1956 Authorized Public Accountant 83 Executive Team Bo Dankis Born 1954 Master of Science President and Chief Executive Officer Head of EMEA division Employed since 1997 Holdings: 86,000 Series B shares, Incentive 2001 convertibles corresponding to 10,750 Series B shares and Incentive 2004 convertibles corresponding to 256,800 Series B shares Joseph J. Grillo Born 1957 Bachelor of Finance and Economics Executive Vice President of ASSA ABLOY Head of Global Technologies division Employed since 2001 Holdings: Incentive 2001 convertibles corresponding to 32,500 Series B shares and Incentive 2004 convertibles corresponding to 132,300 Series B shares Göran Jansson Born 1958 Graduate Diploma in Business Administration Deputy CEO and Chief Financial Officer Employed since 1997 Holdings: 230,000 Series B shares, Incentive 2001 convertibles corresponding to 60,000 Series B shares and Incentive 2004 convertibles corresponding to 171,000 Series B shares Thanasis Molokotos Born 1958 Master of Science Executive Vice President of ASSA ABLOY Head of Americas division Employed since 1996 Holdings: 25,000 Series B shares, Incentive 2001 convertibles corresponding to 55,000 Series B shares and Incentive 2004 convertibles corresponding to 31,100 Series B shares Geoff Norcott Born 1947 Bachelor of Engineering Hons. (Industrial), 1st class Executive Vice President of ASSA ABLOY Head of Asia Pacific division Employed since August 2000 Holdings: Incentive 2001 convertibles corresponding to 60,000 Series B shares and Incentive 2004 convertibles corresponding to 101,200 Series B shares Åke Sund Born 1957 Graduate Diploma in Marketing Executive Vice President of ASSA ABLOY Head of Market and Business Development Employed since the Group was formed Holdings: 135,000 Series B shares, Incentive 2001 convertibles corresponding to 60,000 Series B shares and Incentive 2004 convertibles corresponding to 93,400 Series B shares ASSA ABLOY’s Executive Team: Geoff Norcott, Thanasis Molokotos, Åke Sund, Joseph J. Grillo, Göran Jansson and Bo Dankis. 84 Production: n3prenör English editing: Marcom International Photographs: Ulf Huett, gettyimages and others Printing: Ljungbergs tryckeri AB, Klippan 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 innovation, cost-efficiency and creating added value for our customers. 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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