ASSA ABLOY
Annual Report 2005

Plain-text annual report

Annual Report 2005 Security, safety and convenience all over the world 2005 in brief • S A L E S increased to SEK 27,802 M (25,526), with 5 percent organic growth. • O P E R AT I N G I N C O M E (EBIT) amounted to SEK 4,078 M (3,683), an increase of 11 percent. • E A R N I N G S P E R S H A R E after tax and dilution amounted to SEK 6.97 (6.33), an increase of 10 percent. • O P E R AT I N G C A S H F L OW increased to SEK 3,702 M (3,439). • J O H A N M O L I N was appointed as the new President and CEO on 1 December 2005. Contents Financials in brief.............................................................1 Comments by division ...................................................56 CEO’s statement.............................................................2 Financial position ..........................................................58 Vision, Business Concept and Strategy ...........................6 Balance sheets .............................................................59 Brand Strategy................................................................9 Cash flow......................................................................60 The Market ...................................................................12 Cash flow analysis.........................................................61 ASSA ABLOY’s products ..............................................16 Changes in equity .........................................................62 Sustainable development ..............................................20 Financial risk management ............................................63 EMEA division ...............................................................24 Notes............................................................................66 Americas division ..........................................................28 Five years in summary ...................................................90 Asia Pacific division .......................................................32 Quarterly information.....................................................92 Global Technologies division..........................................36 Definitions of key data terms..........................................93 Report of the Board of Directors for 2005.......................42 Proposed disposition of earnings...................................94 Corporate governance report ........................................44 Audit report...................................................................95 Sales and earnings........................................................54 The ASSA ABLOY share................................................96 Income statements .......................................................55 Information for shareholders ..........................................99 ASSA ABLOY in brief ASSA ABLOY is the world’s leading manufacturer and sup- plier of locking solutions, meeting tough end-user demands for safety, security and user-friendliness. With over 150 companies in more than 40 countries, and a world market share of around 10 percent, ASSA ABLOY 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, Entrance Systems 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 29,500 employees and sales of SEK 27.8 billion. As the world’s leading lock Group, ASSA ABLOY offers a more complete range of products than any other com- pany on the market. SALES share of Group total, % EBIT share of Group total, % SALES share of Group total, % EBIT share of Group total, % Americas EMEA ASSA ABLOY’s Americas division comprises companies in North and South America. Americas is the Group’s second-largest division, account- ing for 30 percent of total sales. During the year the division achieved an organic growth of 5 percent and an EBIT margin of 18.3 percent. Its head office is in New Haven, Connecticut, USA. Americas division has 24 pro- duction units, 8 sales companies and 9,300 employees. The main markets are the USA, Canada and Mexico. Some of the division’s leading compa- nies are Corbin Russwin, Curries, Emtek, Medeco, Phillips and Sargent. ASSA ABLOY’s EMEA division comprises all Group companies in Europe, the Middle East and Africa. EMEA is the Group’s largest division, account- ing for 41 percent of total sales. During the year it achieved organic growth of 3 percent and an EBIT margin of 14.7 percent. Its head office is in Stock- holm, Sweden. EMEA has 46 production units, 30 sales companies and 12,400 employees. The largest markets are Scandinavia and France, and some of the division’s leading companies are Abloy, Assa, Tesa and Vachette. SALES share of Group total, % EBIT share of Group total, % Global Technologies ASSA ABLOY’s Global Technologies division is the Group’s worldwide organiza- tion for global products and services. During the year the division achieved organic growth of 10 percent and an EBIT margin of 14.1 percent. The division accounts for 21 percent of the Group’s sales and has 15 production units, 40 sales companies and 3,500 employees. Global Technologies comprises four business units: – ASSA ABLOY HID, which accounts for 24 percent of Global Technologies’ sales. The business unit’s main areas are ID cards, card readers and access control systems based on Radio-Frequency Identification (RFID). The products are sold under well-known brand names such as HID and Indala. – ASSA ABLOY Identification Technology (ITG), which accounts for 16 per- cent of Global Technologies’ sales. The business unit’s products consist of vari- ous types of identification technology based on RFID including smart cards, electronic passports, ID cards and the electronic tagging of industrial products and livestock. The products are sold under well-known brand names such as Sokymat, ACG and Omnikey. – ASSA ABLOY Entrance Systems, which accounts for 41 percent of Global Technologies’ sales. The business unit is the world’s leading supplier of elec- tronic door solutions. The products are sold under well-known brand names such as Besam, EntreMatic and Doorman. – ASSA ABLOY Hospitality, which accounts for 19 percent of Global Tech- nologies’ sales. The business unit produces hotel locks and security systems and sells chiefly to hotels and cruise ships. Its two leading companies and brands are VingCard and Elsafe. SALES share of Group total, % EBIT share of Group total, % GROUP SALES AND EBIT Asia Pacific ASSA ABLOY’s Asia Pacific division comprises the Group’s companies in Australia, New Zealand, China and elsewhere in Asia. During the year the division achieved organic growth of 2 percent and an EBIT margin of 11.1 percent. Asia Pacific accounts for 8 percent of the Group’s total sales and has 9 production units, 8 sales companies and 4,300 employees. The divi- sion’s largest markets are Australia, New Zealand and China. The largest companies in the division are ASSA ABLOY Australia, ASSA ABLOY New Zealand, Guli Security and ASSA ABLOY Wangli. * 1996–2003 have not been adjusted for IFRS but amortization of goodwill has been excluded. Financials in brief Sales, SEK M of which: Organic growth Acquired growth Foreign exchange effects, SEK M Operating income (EBIT), SEK M Operating margin (EBIT), % Income before tax, SEK M of which, Foreign exchange effects, SEK M Operating cash flow, SEK M2 Return on capital employed, % Data per share (SEK/share) Earnings after tax and dilution (EPS) Cash earnings after tax and dilution (CEPS) Shareholders´ equity after dilution Dividend Number of shares after dilution (thousands) 1 Proposed dividend. 2 Excluding restructuring payments. 2005 27,802 2004 25,526 643 4,078 14.7 3,556 73 3,702 15.9 2005 6.97 9.64 42.85 3.251 3,683 14.4 3,199 3,439 15.3 2004 6.33 8.93 34.74 2.60 378,718 378,718 Change, % 9 5 1 3 11 11 2 8 Change, % 10 8 23 25 CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED INCOME BEFORE TAX / OPERATING CASH FLOW EARNINGS PER SHARE 2 Excluding restructuring payments. 3 Data for 2001 and 2003 excludes non-recurring items. 4 1996–2003 have not been adjusted for IFRS but amortization of goodwill has been excluded. 1 CEO’s statement Great potential through continuous improvements • Sales totaled SEK 27,802 M (25,526). • Organic growth reached 5 percent after a strong second half of 2005. • EBIT reached a record level of SEK 4,078 M, an increase of 11 percent. • Earnings per share were SEK 6.97, an increase of 10 percent. • Proposed dividend is SEK 3.25. On 1 December 2005 I took on the position of President and CEO of ASSA ABLOY. During my first few months I have concentrated on visiting as many Group companies as possible. My first assessment is that the Group has great potential for the future, with experienced staff and a good position in the market. Report on the year The year 2005 was successful for ASSA ABLOY, with sales totaling SEK 27,802 M and with an EBIT that rose by 11 percent to a record figure of SEK 4,078 M. The year started relatively weak but sales improved continuously and organic growth reached 5 percent for the full year. These figures reflect good demand on the US market which impacts both Americas and Global Technologies. ASSA ABLOY has generally strengthened its position through increased customer focus both within its tradi- tional businesses and in segments of higher market growth such as electromechanical locks, automatic doors, access control and identification technology. The Leverage & Growth program initiated in 2003 was concluded at the end of the year. The program has improved the efficiency and productivity of the Group with estimated annual savings of SEK 450 M. The program has improved return on capital employed (ROCE) to 15.9 per- cent, moving the Group towards its financial target of 20 percent ROCE by 2008. ASSA ABLOY’s largest business division, EMEA, achieved an organic growth of 3 percent. The year 2005 started slowly but improved as the year passed. The cre- ation of united sales forces under the ASSA ABLOY brand name and the implementation of Lean manufacturing were initiated during the year. During 2005 R&D activity was increased with several innovative products in the pipeline. The profitability in EMEA was almost unchanged in 2005 despite the completion of the Leverage & Growth program, which indicates that more structural work remains to be done. Americas had a successful year, with good growth of 5 percent and an improved level of profitability. The sales forces were merged under the ASSA ABLOY brand name. 2 CEO’s statement Intensified work directed towards the specification market was well received, with a steep increase in the number of quotations. The consolidation of manufacturing continued, especially in Mexico where the Group faced problems at the beginning of the year due to low demand. R&D efforts were further coordinated during the year, with increased output of innovative new products. Asia Pacific did not live up to expectations, with only 2 percent growth and declining profitability. The low organic growth was mainly due to weak demand in the resi- dential market in Australia and New Zealand. Sales forces were united under the ASSA ABLOY brand name in 2005. Manufacturing was further concentrated to China, and the volumes manufactured for other Group companies increased sharply. Profitability in Asia Pacific will remain at a some- what lower level than in the other divisions because of the continuing increase of sales to other parts of the Group. Global Technologies had a very successful year, with strong growth of 10 percent and improved profitability. The rapidly growing business area of ITG has been split into two parts, one focusing on electronic access control and the other on RFID (Radio-Frequency Identification) and ID manage- ment. ASSA ABLOY Hospitality’s sales force was reorgan- ized and parts of its manufacturing relocated, leading to good improvements in both growth and profitability. ASSA ABLOY Entrance Systems continued its good performance, particularly in the USA, and added new products and services through the acquisition of Doorman in the UK. From 1 Janu- ary 2006 ASSA ABLOY Entrance Systems has become a sepa- rate division in order to maximize the great growth potential. Future development A lot of work to improve efficiency and exploit synergies within the Group remains for the years to come. One important step is to unite sales forces under the ASSA ABLOY brand name. The customer will meet one salesman offering a portfolio of products from several product brands. The Group is continuing to consolidate, relocate and outsource manufacturing, to coordinate Research & Development and to introduce shared administrative services. Product development will be increasingly directed towards creating innovative products for market segments with higher growth, which include electromechanical lock solutions, automatic doors and security-door solutions as well as electronic access and identification technologies. Customers are increasingly looking for total locking solutions that include ease of use and installation. ASSA ABLOY has therefore developed open standards to allow all our locks to integrate fully with the customer’s systems. ASSA ABLOY strives to add customer value through being close to the customer. Our efforts to lead the specifi- cation market through early involvement in the customer’s selection of security solutions are a good example of this approach. The fast-growing service organization within ASSA ABLOY Entrance Systems is another. The year showed good development and progress in many areas, which have improved ASSA ABLOY’s founda- tion for continued success. This would not have been possi- ble without the excellent professional work carried out by our employees. They have shown themselves willing and ready to change and meet the challenges of the future. They know that continuous improvements are what it takes to create success. ASSA ABLOY is the largest company in our industry. We have the right people and the necessary competencies to continue to develop and strengthen our position. ASSA ABLOY is a relatively young Group, created in 1994. The present Group has been formed through a large number of acquisitions, but has in recent years focused more on integrating, improving and renewing the various businesses and company cultures. The future creation of shareholder value will come from a combination of profitable organic growth – based on the development of innovative new products and services, extended global market presence and continued improve- ments in efficiency – and selective acquisitions. Stockholm, 9 February 2006 Johan Molin President and CEO of ASSA ABLOY 3 Security for visitors and works of art alike 4 Every year six million people visit the Louvre in Paris – which makes it one of the world’s most popular museums. respond quickly in case of fire, threat or accident so that both people and works of art can be brought to safety. But It is also the workplace for more than two thousand people, it is equally important to have well designed security solu- who include a specially trained corps of wardens. Museums tions that protect the exhibits from theft or destruction, so are often sited in historic old buildings that require specially that future generations can enjoy the heritage of history. planned security arrangements. It is vital to be able to 5 Vision, Business Concept and Strategy Locks are the heart of every security solution Since Securitas and Wärtsilä merged their lock businesses in 1994, ASSA ABLOY has grown through a combination of organic growth and acquisitions, and has improved its earnings at the same time. Today ASSA ABLOY is the world’s leading lock Group. Over the last eleven years ASSA ABLOY has increased its sales from SEK 3 billion to SEK 27.8 billion. The Group currently comprises more than 150 companies with operations in over 40 countries. Vision “ASSA ABLOY will be the most successful and innovative company on 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 objective ASSA ABLOY’s primary financial objective is that return on capital employed should exceed 20 percent. During the acquisition phase of the Group’s strategy, substantial amounts of goodwill were added, which have reduced return on capital employed. The Group’s stated goal now is to achieve its financial objective by 2008 at the latest. • Sales should, on average, grow organically at about 5 percent a year over a business cycle. • The EBIT margin should be improved to 16–17 percent. This should be achieved mainly by exploiting synergies within the Group. • The long-term positive trend in ASSA ABLOY’s operating cash flow should be maintained. • Capital employed should be maintained at the present absolute level, which means a relative improvement after considering organic growth. Measures to make produc- tion more specialized are reducing capital tied up in inventory. Given the potential to increase utilization of current production capacity, capital expenditure can be maintained at today’s level – below current depreciation. The new CEO has initiated a review of future restructuring measures. The results of this review may affect the long-term financial objective. ORGANIC GROWTH, % * In 2003, organic growth was 0 percent. 6 Vision, Business Concept and Strategy develop and strengthen collaboration with existing and new distributors by means of education, sales support and improved logistics and administration. At the same time ASSA ABLOY is working to simplify end-users’ choice of security products for different areas of application. During 2005 the coordination of marketing and sales forces under the main ASSA ABLOY brand name was initiated. 3. Develop the door and window OEM markets On many geographical markets ASSA ABLOY makes lim- ited sales to Original Equipment Manufacturers of doors and windows. The Group’s goal is to improve ASSA ABLOY’s ability to meet the specific requirements of these important customers. During 2005 ASSA ABLOY has strengthened its positions on local OEM markets by working actively with the customers on their product development. Theme 2. Expand into new markets and segments 4. Capture and develop consumer opportunities Today the consumer segment of the security market is frag- mented, and consumers are looking for many different security solutions. ASSA ABLOY’s goal is to increase the Group’s presence in the consumer segment through a vari- ety of channels and to create a new consumer category – home security. ASSA ABLOY will offer relevant products and services that make it possible for the consumer to cre- ate a safer, more secure daily life. Yale is currently being positioned as ASSA ABLOY’s worldwide consumer brand, and Yale Security Point stores are a franchise concept that ASSA ABLOY has launched during the year. Strategy For some years ASSA ABLOY has followed a strategy model based on three phases of development: 1. Global platform. Build a worldwide presence and steadily add new areas of expertise. 2. Leverage synergies and develop the Group’s strength. 3. Customer value. Increase organic growth by creating value for customers. The refined business strategy This strategy has been refined to enable ASSA ABLOY to realize the Group’s Vision, Business Concept and financial objective. The refined strategy is based on three overriding themes subdivided into seven main activities. Implementa- tion of the refined strategy has been in hand since its intro- duction in 2004. Theme 1. Grow our core business 1. Lead the specification market ASSA ABLOY’s goal is to strengthen the Group’s collabora- tion with architects and security consultants, who play an important role in choosing security solutions for new con- struction projects. Today’s large-scale office and factory buildings have highly complex security requirements, and by helping architects to specify security solutions, ASSA ABLOY contributes to more secure buildings. During 2005, work on project specifications of security solutions was intensified and the number of specifications grew satisfac- torily, especially on the US market. 2. Develop channels to market More than 90 percent of ASSA ABLOY’s sales go through fragmented local distribution. The Group’s goal is to OPERATING MARGIN (EBIT), %1 OPERATING CASH FLOW / EBIT 1 NET CAPITAL EXPENDITURE / DEPRECIATION 1 1 1996–2003 have not been adjusted for IFRS but amortiziation of goodwill has been excluded. 7 Vision, Business Concept and Strategy 5. Grow electromechanical door solutions There is a rapid pace of growth in the electromechanical door solutions segment. ASSA ABLOY’s goal is to increase the total market by reducing the installation costs for end- customers. This is being achieved by using open communica- tion standards such as Hi-O, a platform for intelligent com- munication between the various components of the door environment, which simplifies installation. In order to expand the market, these products are also sold through additional sales channels such as installers of electronic security systems. 6. Develop the Asian potential Asia offers a major potential growth market. ASSA ABLOY’s goal is to develop the Group’s presence on mar- kets in Asia, and particularly in China. At the same time the Group is trying to increase the production of simple, high- volume products in Asia. In 2005 ASSA ABLOY acquired BEST Metaline, which is one of South Korea’s leading sup- pliers of lock and door fittings and automatic doors. In China ASSA ABLOY has acquired a majority stake in Wang- li, which is focused on the manufacture and distribution of high-security doors and high-security locks. Wangli has a comprehensive distribution network in China and holds a leading position in its segment. Theme 3. Radically reduce our break-even cost 7. Capture purchasing and production synergies and adopt Lean methods The Group’s fragmented production structure, with result- ing overcapacity in many areas, is one consequence of its many acquisitions. The Group’s goal is to make the produc- tion structure as a whole more efficient, while at the same time maintaining a local presence for rapid assembly of cus- tomer-tailored products. Manufacturing, especially of sim- ple, high-volume products and components, will gradually be moved to low-cost countries or outsourced. ASSA ABLOY sees significant potential in further coordination of purchasing and increased standardization of components. In 2005 several production plants were closed or merged in New Zealand, Australia, the United Kingdom, Denmark, Italy, Spain and elsewhere. To an ever-increasing extent the Group’s production units have adopted cost-effective (‘Lean’) production methods. All activities from adminis- tration to manufacturing are now being evaluated so as to eliminate superfluous steps, smooth the product flow, lessen administrative costs, reduce inventories and use premises efficiently. Completion of the Leverage & Growth program Towards the end of 2003 a two-year action program, ‘Leverage & Growth’. was launched with the aims of tak- ing advantage of economies of scale and creating a basis for sustainable growth. Underperforming companies should be turned round by the end of 2004, or else divested. The action program was completed during 2005 at total cost of SEK 1,320 M. The Group’s employees have been reduced by a total of 1,400 people and annual savings are calculated at SEK 450 M. 8 Brand Strategy Clearer differentiation of the Group’s brands As a result of ASSA ABLOY’s many acquisitions the Group possesses a wide range of brand names that are well recog- nized by customers. To be able to manage and take advan- tage of this valuable asset and to benefit from the size of the Group, ASSA ABLOY is currently reviewing the brand strategy. ASSA ABLOY’s brand message Unlock Your Life was launched in 2002. The aim is to link the word ‘security’ to ‘freedom’ and not to ‘fear’. As far as possible the normal negative perceptions of security should be avoided. Its opportunities should be stressed instead. This philosophy pervades the Group’s whole brand strategy and brand platform. Fewer brands To prevent duplication and high parallel development costs, the number of brands will be reviewed and reduced. ASSA ABLOY will be the Group’s only main brand for security solutions, and represents the Group’s accumulated knowledge, professionalism and sense of service. It is thus not tied to any particular products. The main brand will be backed by a number of strong brands that the Group chooses to invest in. These are currently being selected in close collaboration with the Group’s regional units. The strong brands will sometimes work as components of a product solution under the Group brand ASSA ABLOY, but will also continue to operate as independent brands where they can meet the needs of cus- tomers. The project to select the Group’s strong brands will judge them on how general or specialized they are. The review will also take account of how local or global each brand is. The number of general brands should be restricted to a smaller total. Joint sales forces In order to compete effectively on a global market, ASSA ABLOY’s sales forces are increasingly working across com- pany boundaries. The joint sales organizations work under the Group brand ASSA ABLOY, but at the same time act as representatives of the local product brands that the cus- tomer already knows. The salesmen thus handle not just a single brand but several product brands in meeting cus- tomers’ security needs. Yale the consumer brand Yale is ASSA ABLOY’s worldwide consumer brand. On some markets the brand will operate in conjunction with strong local brands, while in other areas Yale will shine more strongly on its own. The Yale Security Point stores are one such example. This is a franchise concept currently being tested in South Africa, Germany and Great Britain. 9 Security and safety for millions of commuters 10 Every day millions of people all over the world use public transport systems to travel to and from work, visit railway station in the world. City transport systems are not just travel routes but are the workplaces of thousands their friends and take part in leisure activities. In New York of people. The authorities running the systems are respons- City and its surroundings, eight million people a day use the ible for the lives and security of everyone who uses them. subway, buses and suburban trains. Three million people a If an accident occurs, people must be able to get out easily day pass through Shinjoku Station in Tokyo, the busiest and quickly. 11 The Market The security market – a growing industry in course of change Today ASSA ABLOY is the world’s leading lock company. As the Group has grown, its product portfolio has been augmented with products that are relevant not just to the lock market but to the security market in general. The requirements of different customers vary greatly. Thus airports, private homes and hospitals have very different security requirements. Development of the security market is driven primarily by the general trend towards higher security. As crime, vio- lence and terrorism increase and look like continuing to increase, the overall threat picture has changed. People’s growing insecurity moves security considerations high up the agenda, driving the development of more advanced security solutions and the upgrading of existing security solutions. The total security market consists mainly of security services and electronic and mechanical security products. ASSA ABLOY estimates the total security market at more than 200 billion Euro, and the Group is currently active in about 15 percent of this total market. Electronic and mechanical security products ASSA ABLOY’s range of electronic security products includes electronic cylinders, automatic doors and products for access control. Annual growth of the market for elec- tronic security products is expected to be around 10 per- cent. Besides locks, the main mechanical security products also include handles, door closers, evacuation products and door and window fittings. Demand for mechanical security products is driven primarily by new construction and the replacement of old locks in existing windows and doors. This section of the market is expected to grow, in the long term, at the same rate as each market’s GDP, averaged over a business cycle. For ASSA ABLOY the market for mechani- cal security products stays relatively stable. This is partly 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 means that in these sectors ASSA ABLOY’s market share is 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 targets are based on the expected growth of these markets. 12 The Market because its sensitivity to economic fluctuations is buffered by a substantial aftermarket, and partly because ASSA ABLOY’s operations are spread over a large number of countries with different business cycles. Consolidation between companies in the mechanical security segment is common and this trend is expected to continue. Distribution channels A characteristic of today’s security market is that manu- facturers of security products, such as ASSA ABLOY, are usually separated from end-users behind various forms of distribution. A high proportion of ASSA ABLOY’s products are sold in small volumes to a large number of end-cus- tomers with different needs. In consequence, the distribu- tion of mechanical and electronic security products is in general local and fragmented. The role of the distributor can vary between the differ- ent customer segments. In the commercial segment, distrib- utors on some markets act as consultants, engineers and project managers to produce good security solutions. They have good knowledge of the customer’s needs and ensure that the products meet local regulations. Locksmiths, buying from ASSA ABLOY either direct or through wholesalers, are among the most important dis- tributors of mechanical security products. Many manufac- turers of doors and windows integrate lock cases and other security items into their products before delivery to their customers. Wholesalers of building materials and locks play important roles in supplying the solutions specified by manufacturers for different construction projects. Retailers – building materials supermarkets and ironmongers – serve the consumer market. In the case of electronic security products, products flow from manufacturer to end-user mainly via security contrac- tors and specialized distributors. But the products are also sold through integrators 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 the increasingly standardized technology, which makes it easier to integrate the different components of security solutions with one another. This means that, to remain competitive, manufacturers will be compelled to focus on specific product segments. Distribution is changing too. Door and window manu- facturers, DIY chains and other players are gaining strength by consolidation. Some locksmiths are placing growing emphasis on electronics, while a growing number of IT integrators are starting to offer physical security solutions as well. 13 The Market Another marked trend is that manufacturers in low-cost countries 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 significantly 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 customers increasingly choose either a high-secu- rity solution or a low-priced option. Differences between markets Americans spend more than twice as much on panic devices as Europeans. Conversely, northern Europeans spend three to four times as much as Americans on high-security locks for their homes. Automatic doors are also significantly more common in Europe than the USA. And use of electro- mechanical products is far more widespread in the com- mercial segment than the residential. If the demand for security and safety solutions were to be the same in Europe and the USA, the total market would be roughly doubled. In the long term there is no reason why the present differ- ences between segments should endure. One of ASSA ABLOY’s challenges is to develop the market so as to reduce the great differences between markets and segments that are found today. The world lock market is still relatively fragmented. But in individual countries the market is relatively consoli- dated, since in the industrialized regions of the world it is very common that family-owned companies still hold lead- ing positions on their own home markets. They are well- established and have strong ties with local distribution networks. However, in the less developed countries, estab- lished lock standards and brands are less common. Competitors In the USA Ingersoll-Rand is the largest competitor in the commercial segment and is also strong in the residential segment. Other major players on the American market include Stanley Works and, in the residential segment, Black & Decker. In EMEA the main competitors are the Swiss company Kaba, which focuses on high-security solutions, and Dorma in Germany. Imports from low-cost countries provide much of the competition in Australia and New Zealand. In China the lock market remains 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. The main competitors in Global Technologies division’s segment of global products and solutions are Gemplus, Dorma, Stanley Works and Onity. USA and Canada In general the residential segment in the USA currently 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. In the USA and Canada it is important to plan security solutions, via specialist specifiers, at an early stage of the building’s planning or design. These specifiers ensure that the security solutions meet all laws and regulations while also offering the highest possible degree of user-friendliness and convenience. Collaboration with architects is often crucial here in creating the best security solutions. GLOBAL-LEVEL COMPETITORS ASSA ABLOY’S TOTAL SALES BY REGION, % There are five main players in terms of competition at a global level. 14 The Market Rest of Asia In other parts of Asia, ASSA ABLOY is represented by sales offices. The Group has gained a strong position on the South Korean market through its acquisition of BEST Metaline, one of the country’s leading suppliers of lock and door fit- tings and automatic doors. In India ASSA ABLOY has a sales office to provide support to its Indian distributors. Global products and solutions ASSA ABLOY HID Because the technological differences between markets in different countries are small, cards and card readers for both smart cards and traditional contact-based methods of access control form a worldwide product segment. Demand for products of this type continues to increase and growth was strong in 2005. HID is ASSA ABLOY’s largest com- pany in the segment. HID’s iClass cards hold a significant share of the world market for electronic access control. The market is still fairly fragmented. ASSA ABLOY Identification Technology (ITG) The fastest-growing segments of the RFID (Radio-Frequency Identification) market are identification products for elec- tronic passports, banks and payment systems for public transport. The RFID market remains fairly fragmented. ASSA ABLOY Entrance Systems There are local differences in requirements for automatic door solutions. Nonetheless, the requirements of the largest customer segments – airports, hospitals, hotels, restaurants and stores – are so similar everywhere that the product segment is best marketed globally. The market for ASSA ABLOY Entrance Systems is growing and consolidation is continuing. ASSA ABLOY Hospitality The primary target group for ASSA ABLOY Hospitality comprises large international hotel chains. The market has shown some recovery after the decline of the last few years. Price pressure in the aviation industry indicates that travel should grow in the future. South America Much of South America is a fragmented market with few established security standards. However, the region has a major need for security solutions and is a future growth market. Europe EMEA is characterized by striking differences between dif- ferent national markets. In many European countries EU standardization of security products is now complete and has become a driver for increased sales. It has raised previ- ously low national requirements and thereby also raised the quality of products. However, standardization only covers the level of security provided, not shape or dimensions. In these respects the national differences remain. The countries of northern and southern Europe show great differences. Customers in the north generally demand higher quality in residential security products than those in the south. Most of the countries of eastern Europe currently have a lower standard of locks than many other parts of Europe. Foreign products – e.g. Swedish or German – are generally perceived as superior. However development in eastern Europe is proceeding rapidly and leading to rising standards. Middle East The largest markets in the Middle East are Saudi Arabia, Iran, Israel and the United Arab Emirates. Many of the markets in the region have thriving economies. ASSA ABLOY has its strongest foothold in the region in Israel, where Mul-T-Lock is market leader. Africa Apart from South Africa, most African countries have poor security standards for both the residential and commercial segments. ASSA ABLOY is the market leader in South Africa, which is the largest market in Africa. Australia and New Zealand The lock markets in Australia and New Zealand are rela- tively consolidated, and ASSA ABLOY’s companies are the clear market leaders in both countries. The commercial and residential segments each account for about half of Asia Pacific division’s sales there. China The residential segment has weakened somewhat, but gen- eral growth of the security market remains strong. China currently has relatively poorly developed security standards and produces an abundance of low-quality products that are mostly exported. ASSA ABLOY has established its own manufacturing plants and now faces a challenge in educat- ing and developing the distribution chain towards products offering higher security. 15 ASSA ABLOY’s products Growth through product development ASSA ABLOY has the largest installed base of locks and lock systems throughout the world. These products are tail- ored to the different needs and lock standards of world users. ASSA ABLOY’s pace of innovation is reflected in the many patents that Group companies own. Mechanical products still account for the majority of patents, but electromechanical products are the fastest-growing area. A continuous flow of innovative new products is the single most important source of organic growth, and focused product development is a critical success factor. Complete security solutions vital to sales ASSA ABLOY works all the time to develop its products in ways that will satisfy the end-user’s requirements for secu- rity, safety, convenience and design. To meet these customer requirements more comprehensively, the Group focuses on developing total security solutions for different customer segments. Such solutions incorporate mechanical and electromechanical products that also make installation and after-sales service simpler. These complete security solu- tions are becoming ever more crucial to the Group’s sales and earnings. Shared Technologies The use of electromechanics in doors is growing rapidly, which strengthens the need to integrate security solutions with access control systems. ASSA ABLOY has therefore created an organization named Shared Technologies to take responsibility for the standardization of electronics throughout the Group. The goal of standardization is to achieve lower development costs and shorter development times for new products. One area concerned is electronic lock cylinders, which includes the Group’s CLIQ product range. Another is Hi-O (Highly Intelligent Operation), a platform for intelligent communication among the various components in the door environment. The importance of design In all product groups, design has become an ever more important factor in winning sales. Customers appreciate the added value of being given greater choice regarding shape, color and finish. ASSA ABLOY is working actively to integrate design as an important part of product devel- opment, and on several markets has taken initiatives to work with industrial designers and interior decorators in 16 The Group has launched Hi-O (Highly Intelligent Operation) a new range of electromechanical doors and door frames with a pre-installed cable harness and contacts ready to connect up the lock unit. The new products are thus far simpler to install and can easily be upgraded to more advanced locks later. developing designed products. Such products tend to appeal more strongly to architects and specifiers, and demand for them is rising steadily. ASSA ABLOY’S SALES BY PRODUCT GROUP ASSA ABLOY’s products Mechanical products Mechanical products still account for more than half of ASSA ABLOY’s world sales. Mechanical locks provide the two basic functions of any security device: identifica- tion (the key) and mechanical strength (the lock). There continues to be a large market for these products, which combine good functionality in meeting many security needs with a moderate cost. Examples of traditional mechanical products include door locks, padlocks, handles and door closers. Increased security needs There is a clear trend towards higher levels of security in mechanical products. In many developing countries, for example in Asia, rising standards of living mean that more people feel a greater need for security. Simple, low-quality locks are therefore being replaced by modern high-security locks. But a growing demand for sound security solutions applies to industrialized countries too. A large installed lock base ASSA ABLOY has a large base of installed locks, which creates great opportunities for product upgrades and represents a solid foundation for the important after- market. An essential part of the Group’s strategy is to offer products that comply with existing dimensional standards, but that are better at satisfying higher secu- rity demands and easier to install. can continue to utilize and improve existing components. In comparison with the company’s previous series of lock cases, Evolution provides a better range of products with 60 percent fewer components. Modular platforms Many of ASSA ABLOY’s mechanical products employ iden- tical building blocks, which provide great opportunities to gain benefit from economies of scale. By making product development more efficient and basing products on modu- lar platforms, Group companies can utilize common com- ponents without loss of product variation. Economies of scale in purchase of materials are another advantage of using modular platforms. In addition, improvements and updates are rapidly applied to the whole product range, and products can be adapted quickly when customers’ demands and requirements change. Evolution The Evolution series of lock cases is one example of modu- larization applied to both product development and pro- duction. The modular series of lock cases makes it simple to provide new functions in the products while the company 17 Electromechanical locks Electromechanical locks are another of ASSA ABLOY’s fast-growing product segments. ELVA ELVA is an electronic front-door lock intended for the residential market. It has the basic design of a traditional lock but has many new and convenient functions.Thus the door can be locked either with a key or by remote control.The coding technology (using one-time codes) and security between the remote control unit and the lock are the same as that used by banks to communicate over the Inter- net.A lost remote control unit can easily be barred from use. ASSA ABLOY’s products Electromechanical products As a rule electromechanical products provide higher secu- rity than traditional mechanical products because of their greater convenience. Locking and unlocking become simpler while the security of the locked door increases. ASSA ABLOY offers a large range of electromechanical products ranging from elec- tric strikes and remotely actuated door locks to auto- matic doors and advanced card-based solutions. By exploiting developments in microprocessor and commu- nications technology, future electromechanical products will offer additional con- trol and monitoring func- tions. There are also great opportunities of incorporating electromechanics in ASSA ABLOY’s more traditional mechanical products, and many Group companies are developing electromechanics for this purpose. The Group’s sales of electromechanical products are now growing at a faster rate than those of mechanical products. Simpler installation and operation The trend is towards products that are simpler to install and simpler to integrate with the other systems used to automate buildings. This is driving the development of more intelligent products with built-in communications. Electromechanical products can now handle a long list of security requirements and are especially suitable for the more demanding security environments found in schools, hospitals, airports, warehouses and museums. Automatic doors ASSA ABLOY has a world-leading position in auto- matic doors. There is strong demand for convenience and easier entrance and exit. As customer requirements increase, many store chains and hospitals, for example, are investing in tailored entrance systems that also include service. ASSA ABLOY’s broad product range gives the Group a unique abilty to integrate automatic door operation with locking and access control so as to meet customers’ demands for simple, convenient secu- rity solutions. 18 Security solutions for hotels Modular platforms are used for electromechanical products too. One example of a modular product is the Signature hotel-room lock from VingCard. The applica- tion of modular concepts to production allows the cus- tomer to combine different components, with different functionality and design, in creating security solutions. The new product simplifies communication between the electromechanical components and makes after- market services easier. ASSA ABLOY’s products Identification and access control One of ASSA ABLOY’s fastest-growing product areas is identification and access control based principally on RFID (Radio-Frequency Identification) technology. One advantage of RFID is that security monitoring and access control take place without physical con- tact. The need for more secure solutions is further driving the development of ‘smart’ cards on which personal information about the user can be stored. Service aspects, such as administration of access cards, are growing in importance in identification and access control. Where there are extra-high demands for security, RFID and personal information can be combined with biometry – for example, fingerprints or iris scans. These products can provide extremely high levels of security. Other techniques that can be applied to raise security include holograms and ultraviolet inks. ASSA ABLOY is also working with the American company CoreStreet to develop a new system for secure identifi- cation in electromechanical locks. ASSA ABLOY is well positioned to claim a share of the growing market for identification and access control. Security doors ASSA ABLOY sells security doors mainly on the American market. In the USA there are stringent requirements for emergency evacuation and fire safety, which leads to a powerful demand for security doors and espe- cially steel doors. 19 Sustainable development The environment and ethics – a global responsibility Since the Group was created, ASSA ABLOY has based its operations on the four Cornerstones of Vision, Realism, Ethics and Courage. These form the foundation of the Group’s present endeavors towards sustainable develop- ment. ASSA ABLOY is working systematically to meet its ethical and social responsibilities towards its employees, its shareholders and external bodies. Risk management ASSA ABLOY’s work on sustainable development is marked by an awareness of risks, but also by efforts to exploit opportunities and create advantages through systematic handling of such issues. The Group’s own analysis reveals three main areas of risk: – Environmental impact in production. – Lack of business ethics on many different markets. – Operations in, and suppliers from, low-cost countries. ASSA ABLOY is working steadily to reduce risks in various business processes, including production (with focus on the environment), purchasing and acquisitions. It is also addressing ethical and social issues. Responsibility in the Group ASSA ABLOY’s Board of Directors has the ultimate respon- sibility for policy in this area, while the CEO is responsible for producing, implementing and monitoring a detailed framework of rules for sustainable development. There is an executive at Head Office with primary responsibility for sustainable development and at least one person with simi- lar 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 Environ- mental Director for environmental issues. Code of Conduct To facilitate risk management and the regulation of envi- ronmental, ethical and social issues, a code of conduct enti- tled simply ‘Our Code of Conduct’ was introduced in 2004. This is based on a combination of ASSA ABLOY’s primary policies and international conventions such as the United Nations Declaration of Human Rights and the core con- ventions of the International Labor Organization. The Code was adopted throughout the organization during 2005 and is one means of bridging the cultural differences in values that can arise. ASSA ABLOY has laid down a universal standard of behavior that all employees should acquaint themselves with. Vision • The world leader in safe and secure lock solutions • Leading in size and thought Realism • Develop the core business • Know your business Ethics • High ethical standards • Trust and respect other people Courage • Lead and embrace change • Innovate 20 Sustainable development Environmental impact in production ASSA ABLOY has carried out thorough surveys of all its factories in terms of the external environment, health and safety. An environmental program was subsequently devel- oped, which covers: – Implementation of environmental management systems meeting ISO 14001 or similar standards in all factories with significant environmental impact by 2006 at latest. – Review of the use of organic solvents and possible alter- natives to them. – Review of the use of hexavalent chromium and substitu- tion of alternatives. Implementation of the EU’s directive on Restriction of Hazardous Substances (RoHS), which forbids the use of hexavalent chromium for passivating certain electronic and electromechanical products. – Internal audits, including more thorough local risk analyses. – Health and safety programs. – Introduction and reporting of key parameters, for exam- ple energy consumption, use of solvents, and accident statistics. These parameters were internally reported for the first time in 2005 and will form the basis for setting quantifiable improvement targets. Ethical and social business issues In 2005 ASSA ABLOY began a survey of how its local com- panies manage their ethical and social risks. The aim of the survey is to raise awareness in the organization and to ensure that the Code of Conduct is observed. The results will lay the ground for action plans and indicators for control and monitoring. Evaluation of suppliers Since 2004 local activities have been underway to include issues from the Code of Conduct in the Group’s system for monitoring its suppliers. A concept of how to evaluate and inspect suppliers now exists. As part of the comprehensive quality control operation for monitoring suppliers, pilot inspections took place in 2005. In addition to actions on suppliers, guidelines for the Group’s investments and acqui- sitions have been prepared. CODE OF CONDUCT The Group’s Code of Conduct covers the following subjects: • Business ethics – Fair competition and antitrust legislation – Bribery – Records and reports – Government investigations – Conflict of interest • Workers’ rights, human rights, consumer interests and community 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 Ongoing initiatives In 2006 the environmental program is being expanded with greater control and more reporting from the divisions. A program of internal audit is also being introduced to ensure that the Code of Conduct is being observed and that ASSA ABLOY’s basic needs in sustainable development are being achieved. An action plan for continuous monitoring of the Code of Conduct will be implemented in the Group. The program for controlling suppliers will be extended in 2006. This means that major suppliers operating in low- cost countries will be inspected by auditors working in the purchasing organization and specially trained for the purpose. The growing interchange of experience between ASSA ABLOY’s companies will strengthen the Group and improve the coordination of its work on sustainable development. 21 Boom time for the Chinese construction industry 22 Construction is currently in a phase of expansion. Forecasts indicate that, by 2007, total construction in buildings are springing up, even if they are far less high than the 101 floors of the world’s tallest building, Taipei 101. progress in China will have increased by over 10 percent. Working closely with architects is crucial to ensuring Other large Asian cities such as Hong Kong and Singapore that the right security systems are installed – and such are growing and new houses, office blocks and commercial specification work often leads directly to sales success. 23 EMEA division –11 –10 –9 –8 –7 –6 –5 – 4 –3 –2 –1 0 +1 +2 + 3 +4 +5 +6 +7 +8 + 9 +10 +11 +12 Increased focus on production synergies CHARACTERISTICS OF THE EMEA DIVISION • The division’s markets are strongly diversified, with signifi- cant local differences. • EMEA comprises many and varied companies with good knowledge of their local markets. • In EMEA’s largest markets there is no clear distinction between products for the residential and the commercial segments. The EMEA division comprises companies in Europe, the Middle East and Africa. EMEA is the Group’s largest divi- sion and accounts for 41 percent of total sales. During the year the division achieved an organic growth of 3 percent and an EBIT margin of 14.7 percent. The EMEA division has 12,400 employees, 46 production units and 30 sales companies. The division is organized into eleven geographi- cal market regions. EMEA’s management is based in Stock- holm, Sweden. The division’s largest markets are Scandi- navia and France, and the leading companies are Abloy, Assa, Tesa and Vachette. Local differences 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. Consequently there may be substantial differences between the products in demand on each local market. ASSA ABLOY’s strength is that its companies have a large installed base of locks in every local market, which leads to good aftermarket sales. ASSA ABLOY has excellent relationships with distributors and good knowledge of local lock standards. The after- market accounts for a significant fraction of EMEA’s sales. Local brands play an important part in winning such business. In EMEA’s largest markets there is generally no clear distinction between products for the residential segment and products for the commercial segment. Many products currently sell to customers 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 exam- ple, the American market. Many Group companies have a broad product range to cater for different local demands and dimensional stan- dards and different door materials such as wood, alu- minum, steel and glass. With modification, some of these products can be used in many of EMEA’s market regions with the aim of creating more secure, more functional lock- ing solutions. However, this requires increased efforts in certain markets to inform and educate dealers, customers and other interested parties about the advantages of better security solutions. Report on the year Demand for ASSA ABLOY’s products was generally stable during 2005. The year started weakly with relatively low demand in the first half of the year, but sales improved in the second half of 2005. EMEA saw strongest growth in its markets in Scandinavia, eastern Europe, the Middle East and Africa. 24 The prices of raw materials, including important metals EMEA division, Key figures EMEA division 2005 2004 SEK M SEK M 2005 2004 EUR M EUR M 11,369 10,747 1,225 1,179 280 284 30 31 11,649 11,031 1,255 1,210 3% 3% 3% 184 3% 174 Income statement Sales, external Sales, internal Sales Organic growth Operating income (EBIT) 1,707 1,586 Operating margin (EBIT) 14.7% 14.4% 14.7% 14.4% Capital employed Capital employed – of which goodwill 10,151 9,433 1,077 1,046 4,709 4,462 499 495 Return on capital employed 16.6% 16.3% 16.6% 16.3% Cash flow Operating income (EBIT) Depreciation Net capital expenditure Change in working capital Cash flow 1 1,707 1,586 499 529 –335 –340 30 51 1,901 1,826 184 54 –36 3 205 174 58 –37 6 201 Average number of employees 12,405 12,774 12,405 12,774 1 Excluding restructuring payments. such as brass and zinc, continued to rise. However, Group companies were largely able to compensate for these cost increases by means of greater cooperation in purchasing and by raising their own prices. During 2005 EMEA began to unify the Group compa- nies’ marketing and sales forces under the main ASSA ABLOY brand name. The Leverage & Growth action program, whose activi- ties came to an end during the year, has improved ASSA ABLOY’s production structure. ‘Lean manufacturing’ methods are used more and more widely in the division’s factories. Ongoing reductions of the cost base will play a major role in ASSA ABLOY, and experience gained from the Leverage & Growth program will be important in seeing these continuing measures through. The importance of the electromechanical product seg- ment continues to grow throughout ASSA ABLOY, and in EMEA the segment recorded good growth during the year. One example of this progress was the success of CLIQ, which achieved particularly good sales in Germany. The German market is characterized by a relatively high pro- portion of large office complexes with security solutions based on masterkey systems. One advantage of CLIQ is simpler key management, which makes it easy to exclude a key from the system. Another is the ability to handle systems with more than 2000 cylinders. The year saw continued strong competition from low- SALES / EBIT 2 CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED 2 EBIT / CASH FLOW 2 1 Excluding restructuring payments. 2 2003 has not been adjusted for IFRS but amortization of goodwill has been excluded. 25 EMEA division cost countries offering simpler products aimed primarily at the residential market. ASSA ABLOY’s competitive advan- tages in this segment are its wide product range, well- known brands, short delivery times and well-developed local distribution network. Group companies are meeting the growing competition by reducing costs and focusing on product-based customer segmentation. Market regions Scandinavia continued to make good progress, with a strong demand for ASSA ABLOY’s products that was strengthened by good growth in new construction. There was also rising demand from door and window manufac- turers and ASSA ABLOY succeeded in winning several major contracts. The domestic market in Finland remained stable and there were encouraging increases in export sales. In France the demand for ASSA ABLOY products re- mained stable. The Group has initiated the amalgamation of the region’s sales organizations. Sales development in Germany and Switzerland was stable. The region has also continued with reorganization and the integration of the Group’s German companies into fewer but larger units. In the United Kingdom, sales developed well during the year, especially in the Do-It-Yourself market. There was good demand for ASSA ABLOY’s products in the Benelux countries. The Group’s acquisition of Nemef has strengthened its position among Original Equipment Manufacturers of doors and windows. In Belgium ASSA ABLOY’s operations have been concentrated in a single company. The Italian market remained weak in 2005. ASSA ABLOY’s focus in Italy is to improve domestic sales. Restructuring of the Group’s Italian companies is continu- ing, with the transfer of some production to low-cost countries. Spain experienced good demand on the domestic mar- ket in 2005. Consolidation of ASSA ABLOY’s production and sales companies has continued. The Group’s companies in eastern Europe showed strong growth during the year. The Group has continued to invest in production plants in Romania and the Czech Republic. Good access to a qualified workforce and high efficiency mean that the plants in eastern Europe have good capacity for future expansion. ASSA ABLOY has also achieved very good growth in the Middle East. The Group company Mul-T-Lock has con- tinued to increase its market share in Israel and has intro- duced a number of new products. Group companies in Africa also exhibited good growth in 2005. ASSA ABLOY acquired Security World in South Africa, a franchise chain of security stores which has been renamed Yale Security Point. Ongoing initiatives Unified sales forces One of EMEA’s continuing initiatives is that the market regions should create unified sales forces under the main ASSA ABLOY brand. The sales forces will offer a broader product range with strong local brands backed by products from other parts of the Group. Cost-efficient production ASSA ABLOY is focusing on exploiting production syner- gies between Group companies. Production should be con- centrated in fewer factories and part of the production moved to low-cost countries. The remaining factories will manufacture a smaller number of different products but larger volumes of each individual product. The division is currently engaged in building up a ‘Lean team’ with the aim of making both production and admin- istration more efficient. The project began in 2005 and will have high priority in the next few years. Changing the production structure has been given renewed impetus by the growing competition from new players emanating for example from China. However, ASSA ABLOY’s products are hard to copy because of the great variation within the product families. In the future standardized components will increasingly be produced in low-cost countries and then assembled and tailored to customers’ needs in the various local markets for rapid delivery to customers. EMEA DIVISION SALES BY PRODUCT GROUP KEY PRIORITIES Exploit production synergies and achieve cost-efficient production through continuing specialization. Unify the sales organizations under the main ASSA ABLOY brand name. Continue to develop the specification of major projects. Increase product development activities. 26 EMEA division Specification gaining importance in major projects 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. Today’s large office and factory build- ings have highly complex security requirements, and helping the architects to specify appropriate security solutions gives ASSA ABLOY an advantage later in the sales process. EMEA is continuing to strengthen the resources devoted to specification, in the form of both skills and systems. Improved product range EMEA will increase its efforts to coordinate product devel- opment activities. ASSA ABLOY is working actively to make greater use of electromechanics in developing new products with improved functionality for specific applica- tion areas. A number of new products will be launched during 2006. Safe emergency exits for stadium Bern’s new football stadium, Stade de Suisse Wankdorf Bern, was opened in July 2005. The stadium, which seats 40,000, has a roof made from solar panels and is part of a complex that includes a shopping mall, restau- rants, offices and a school. It will be one of the official European Championship stadiums during Euro 2008. It is important to be able to evacuate a stadium safely and quickly when it is packed with spectators. This calls for locking systems that work perfectly even in a panic situation. Two of ASSA ABLOY’s Group companies installed all the emergency exit fittings, including push-bar controls. The doors are fitted with electronic solutions and hardware that is designed to resist abuse. All push-bar hardware is surface-mounted, in other words it did not require fitting inside the doors. This reduced the installation costs and was an impor- tant factor in the client’s choice of products from ASSA ABLOY. Another factor was the wide selection of push- bar controls and the fact that ASSA ABLOY was able to offer complete security-door solutions that included analysis, design and strategy. Following the project in Bern one of ASSA ABLOY’s Group companies has been selected to help plan future sports stadiums in Switzerland. 27 Americas division –11 –10 –9 –8 –7 –6 –5 – 4 –3 –2 –1 0 +1 +2 + 3 +4 +5 +6 +7 +8 + 9 +10 +11 +12 Achieving continuous improvements CHARACTERISTICS OF THE AMERICAS DIVISION • The division participates in both the residential and non- residential (institutional, commercial and industrial) seg- ments. The non-residential segment accounts for the greater part of the division’s sales. • Products for US and Canadian non-residential and residential markets are clearly differentiated from prod- ucts for other markets, as are the distribution channels that serve them. Additionally, doors and door frames are major components of solutions offered to non-residential customers. The Americas division comprises companies in North and South America. Americas is ASSA ABLOY’s second-largest division and accounts for 30 percent of total sales. During the year the division had an organic growth of 5 percent and an EBIT margin of 18.3 percent. Its head office is in New Haven, Connecticut, USA. In the USA the division is sub- divided into product groups and sales organizations, while geographical organizations serve Canada, Mexico and South America. Americas division has 9,300 employees in 24 pro- duction units and 8 sales companies. The major companies in the division include Corbin Russwin, Curries, Emtek, Medeco, Phillips and Sargent. Report on the year After allowing for raw material inflation which character- ized the construction industry during 2005, the overall non- residential construction markets in the USA and Canada remained steady at similar levels to 2004. During the year there were significant increases in the prices of steel and other raw materials, which in turn led to unavoidable increased prices for ASSA ABLOY Group company products. Sales of residential products continued to grow despite slower growth rates in the US housing market. The Mexican market showed weak development during the year whereas the Canadian and South American markets remained steady. Some major activities in 2005 were to consolidate sales forces and to develop specification resources for work in the US market. Clear distinction between market segments The North American market differs from the European mar- ket in having a clear distinction between products intended for the non-residential segment and products intended for the residential segment. As a result, very few of the division’s products are suitable for both markets. The distribution channels serving the two segments are also differentiated. Another unique characteristic of ASSA ABLOY in the USA and Canada is the manufacturing of non-residential wood and metal doors and related door frames to comple- ment its locking-related hardware and fittings. The non-residential segment The non-residential segment, comprising institutional, com- mercial and industrial end-users, accounts for a very large per- centage of the division’s sales in the USA and Canada. Typical applications are in public buildings, hospitals, school and col- lege campuses, airports, transport terminals, sports and shop- ping centers, manufacturing plants and commercial offices. These projects are inherently complex compared to a typical residential building and often include such functional require- 28 Americas division Americas division, Key figures Income statement Sales, external Sales, internal Sales Organic growth 2005 2004 SEK M SEK M 2005 2004 USD M USD M 8,775 8,242 1,177 1,125 31 28 5 4 8,806 8,270 1,182 1,129 5% 6% 5% 217 6% 199 Operating income (EBIT) 1,615 1,456 Operating margin (EBIT) 18.3% 17.6% 18.3% 17.6% Capital employed Capital employed – of which goodwill 8,726 7,303 1,098 1,104 5,276 4,324 664 654 Return on capital employed 19.6% 18.2% 19.6% 18.2% Cash flow Operating income (EBIT) Depreciation Net capital expenditure Change in working capital Cash flow 1 1,615 1,456 230 227 –114 –195 24 –76 1,755 1,412 217 31 –15 3 236 199 31 –27 –11 192 Average number of employees 9,251 9,767 9,251 9,767 1 Excluding restructuring payments. ments as the integration of door security and safety egress. Security and safety standards for these more complex envi- ronments are much more demanding and often require more lock functionality than typical residential applications. Due to the changing nature of intricate building, fire and life- safety codes, needs for increasing levels of product function- ality, complexity and durability are all significantly higher, and it is increasingly essential that door opening solutions be considered as a whole. Consequently the costs and price lev- els of these products are commensurately higher. A total solution from ASSA ABLOY is likely to include a coordinated combination of doors and frames from the Door Group; locks, door controls, exit devices, and access-control products from the Architectural Hardware and Electro- mechanical Groups; and high-security key system solutions from the High Security and Aftermarket Group. Significant non-residential projects this past year included the Overture Center in Madison, Wisconsin designed by Cesar Pelli and Associates and the Baptist Medical Center in Jacksonville, Florida. The residential segment In 2005 the division’s Residential Group continued to achieve strong growth, with sales mostly to the retrofit after- market. It is notable that the US residential market is less interested in high-security cylinders and key control than the market in Europe. Mexico ASSA ABLOY’s companies in Mexico experienced a signifi- cant change in order patterns during 2005 mainly due to a major change in laws affecting the taxation of sales and SALES / EBIT 2 CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED 2 EBIT / CASH FLOW 2 1 Excluding restructuring paymets. 2 2003 has not been adjusted for IFRS but goodwill amortization has been excluded. 29 Americas division inventory that impacted several distribution channels. In addition, competition in the residential market continued to be strong. The outcome was that sales declined during the first months of 2005 and began recovering slowly later in the year following the implementation of new commercial strate- gies for these changing markets. The Mexican production facilities continued the ongoing implementation of Lean methods in the factories and in busi- ness processes as well as realigning the manufacturing foot- print. production profit centers to product development through to marketing and sales, are continuously streamlining business processes so that the companies can put together better inte- grated solutions to meet complicated functional life-safety and security needs. Much of the effort in 2005 was concentrated on consol- idating the sales forces in both the USA and Canada and on integrating and realigning sales and marketing activities to focus on the selling of complete solutions to meet end- users’ needs. Canada ASSA ABLOY’s Canadian operations are directed exclusively at the non-residential market and consist mainly of sales companies. Despite the impact of higher material prices and a construction market that has remained steady for the past two years, the Group companies showed steady development in 2005 and continued streamlining and coordination of all sales and marketing activities in order to offer comprehen- sive solutions to the market. South America The division’s operations in South America are centered on manufacture of door locks and hardware in Brazil and Chile. In 2005 there was good domestic and export sales develop- ment based on targeted marketing efforts and increased spec- ification activity. Ongoing implementation of Lean produc- tion methods, resulting in improved customer satisfaction and substantial collaboration with many other companies across the Americas division, also fueled South American sales growth. Ongoing initiatives Offering complete solutions The division continues to work intensively to offer its non- residential customers complete solutions for their safety and security challenges and thereby provide greater value-added. To achieve this, the Americas division requires precise know- ledge of the true needs of both the installer and the end-user. Collaborative efforts through the entire organization, from Working closer with the market Working more closely with the market has been a theme of activities in 2005. From developing the specification process to understanding the complex individual needs of end-users and specific types of building, the division has been able to better support the market and its important distributor partners. Distributor partners are deeply involved with the Americas division in defining the right products and solutions for given applications and recommending them to the end-user. The distributor often acts as the local consultant, engineer, project manager and installer, with the ultimate objective of making sure that the end-user receives the right product, and that it is installed correctly. The distributor partners are an integral part of the Ameri- cas division’s plans, and continued efforts are being devoted to ways of giving them additional support and transferring even more knowledge to their contractor and end-user cus- tomers. Lean processes In 2005 the move to Lean operations, as already employed in the USA Door Group and Architectural Hardware Group, was extended to most companies across the division and to a wider range of functions. The first implementations of Lean methods were focused on cost-efficient production opera- tions, a profit-center organization and identifying purchasing synergies within the division. These had the effects of stream- lining product flows, controlling material costs at a time of rising prices, simplifying decision-making, increasing speed AMERICAS DIVISION SALES BY PRODUCT GROUP KEY PRIORITIES Implement further Lean thinking in all units and business functions. Collaborate more closely with distribution channels and end-users to identify coordinated marketing initiatives that will sell products and solutions to meet the end-users’ needs. Innovate more targeted end-user-specific integrated solutions. Further educate the marketplace on the importance of high- security and life-safety solutions. Continue incorporating emerging new technologies into traditional mechanical door and hardware products. 30 Americas division to market, and improving interaction with the market and the sales force. The Lean philosophy continues to be a major thrust in all the ASSA ABLOY Americas organizations and has now been extended to functions such as product and solutions design as well as many office processes. Raising technology levels The trend towards higher technology continued through 2005 with the addition of electromechanical actuators and electronic intelligence to many traditional lock products. Electromechanical products are a rapidly growing segment and form crucial components of most integrated institutional and commercial security systems. The SARGENT v.N1 Access Control lock and the Bio- Fob proximity credential are two recent examples of tech- nology integration into traditional hardware. The v.N1 Access Control lock is an integrated device which incorporates an HID proximity reader and key pad into the trim of the electromechanical lock, thus eliminating the need for separate components around the door. The integrated lockset provides Wiegand-technology output to communicate to existing access control systems. The BioFob is a hand-held biometric credential which contains unique access information and fingerprint identifi- cation information for a specific user. The biometric tech- nology verifies that the person using it is indeed the person authorized to do so. After the fingerprint is verified, the BioFob activates the 125kHz HID or Indala signal for pres- entation to the reader, and thus functions as a standard cre- dential for allowing access to the door opening. Because the biometric device is part of a hand-held credential, it allows existing access control systems to be easily upgraded to a higher level of security while allaying the user’s personal- privacy concerns typically associated with biometric databases. Security and design interwoven at arts center The Overture Center is a private initiative to promote arts and culture in Madison, Wisconsin, USA. The arts center is currently undergoing modernization under the direction of internationally renowned architect Cesar Pelli. His past work includes the Petronas Towers in Kuala Lumpur and the International Finance Center in China. ASSA ABLOY has been involved in the moderniza- tion project from the outset and has worked closely with the architect to create a secure and practical build- ing. The Overture Center has almost 1,300 doorways. All doors and security solutions were supplied by ASSA ABLOY. The design and acoustics dictated the form of the building, which placed strict demands on ASSA ABLOY’s products. All hardware is built into the doors, and to ensure that doors to the halls and stages are as quiet as possible they are opened electronically by push- buttons, a feature that is appreciated by the client. Secu- rity was considered right from the start. To prevent unauthorized access backstage or to staff areas, ASSA ABLOY has installed electromechanical locks that require pass cards or the like. Modernization of the Overture Center will be com- pleted in 2006. The Center will occupy an entire block in Madison and will include several stages, rehearsal premises, a gallery and a lecture hall. The largest venue, Overture Hall, seats 2,250 people. The Overture Center has its roots in the Capitol Theatre, which opened its doors in 1928. 31 Asia Pacific division –11 –10 –9 –8 –7 –6 –5 – 4 –3 –2 –1 0 +1 +2 + 3 +4 +5 +6 +7 +8 + 9 +10 +11 +12 Increased presence in Asia CHARACTERISTICS OF THE ASIA PACIFIC DIVISION • The division’s main sales markets are Australia, New Zealand and China. • Sales to the residential and commercial segments are approximately equal. • Asian markets now account for about 20 percent of sales and 30 percent of production – some of which goes to ASSA ABLOY’s other regions. The Asia Pacific division comprises companies in Australia, New Zealand, China and elsewhere in Asia and accounts for 8 percent of ASSA ABLOY’s total sales. During the year the division achieved an organic growth of 2 percent and an EBIT margin of 11.1 percent. Its head office is located in Hong Kong. The division has 4,300 employees in 9 produc- tion units and 8 sales companies. Its largest markets are Aus- tralia, New Zealand and China, and the leading companies in the division are ASSA ABLOY Australia, ASSA ABLOY New Zealand, and Guli Security and ASSA ABLOY Wangli in China. Report on the year As in the previous year, the residential and non-residential segments each accounted for about half of the division’s sales in 2005. The Australian and New Zealand commer- cial market continued to show good growth. The residen- tial market in Australia was somewhat weaker due to poor residential and retail activity. The division was also affected by the weak US dollar, which reduced the profitability of the division’s export business. Asian sales grew significantly in 2005, primarily due to acquisitions. The trend of moving production from New Zealand and Australia to Asia continued. Non-residential segment The division has established strong positions on the institutional and commercial construction market in both Australia and New Zealand. In 2005 efforts have been focused on the specification of projects, increasing know- ledge of customer requirements, and modification of prod- ucts to tailor complete solutions for end-users. The esthetic design of products has become more and more important to sales success during 2005. The division has made increased use of interior designers and architects who have, for example, worked in the automotive industry (Ford) or worked with distinguished architects such as Sir Norman Foster. A significant number of new products for the non-resi- dential segment were introduced during 2005, including some that combine traditional door hardware with high- technology products from Global Technologies division. These products are intended for up-market offices and sim- ilar commercial buildings, where they provide an attractive appearance without a visible card-reader. There has also been growing collaboration between Asia Pacific division’s specification team and ASSA ABLOY Entrance Systems, which produces automatic doors. This has led to increased sales of Group products in major pro- jects. Security Merchants, which was acquired in 2004 prima- rily for its electronic expertise, has been working closely with the division’s other companies to upgrade their prod- uct offerings. By adding electromechanical products to their portfolios this has enabled Group companies to offer a wider range of products to specifiers. 32 Asia Pacific division Residential segment The residential segment in Australia has been weak during 2005, with decreasing demand partly mitigated by new- product launches. Electromechanical keyless locksets have been successfully launched in Australia and are now also being sold in New Zealand and selected Asian markets. As an alternative to using keys, householders operate exterior door locks with a battery-powered remote device similar to those employed by modern cars. A designed range of locksets with a choice of levers and knobs and a range of finishes to match modern decor was launched in 2005 and has been equally successful on the market. ASSA ABLOY New Zealand produces security fittings for residential doors and windows, most of which are sold to Original Equipment Manufacturers. Although total sales rose during 2005, the company’s export business was impacted by the weak US dollar. During the year several of the production lines were moved to China. The relocation of production will continue in 2006. Asia Pacific division, Key figures Income statement Sales, external Sales, internal Sales Organic growth Operating income (EBIT) 2005 2004 SEK M SEK M 2005 2004 AUD M AUD M 2,019 1,726 190 121 2,209 1,847 2% 245 7% 278 356 33 389 2% 43 320 23 343 7% 52 Operating margin (EBIT) 11.1% 15.1% 11.1% 15.1% Capital employed Capital employed – of which goodwill 1,985 1,671 995 818 340 171 324 159 Return on capital employed 12.9% 16.8% 12.9% 16.8% Cash flow Operating income (EBIT) Depreciation Net capital expenditure Change in working capital Cash flow 1 245 66 –40 –12 259 278 62 –29 –43 268 43 12 –7 –2 46 52 12 –5 –8 51 Average number of employees 4,352 3,629 4,352 3,626 1 Excluding restructuring payments. SALES / EBIT 2 CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED 2 EBIT / CASH FLOW 2 1 Excluding restructuring payments. 2 2003 has not been adjusted for IFRS but amortization of goodwill has been excluded. 33 Asia Pacific division China During 2005 the division increased its footprint on the Chi- nese market by acquiring the majority of Wangli, a leading manufacturer of high-security doors and high-security locks. The combination of the Wangli acquisition and good growth by the established companies Guli and ASSA ABLOY China has resulted in 2005 sales almost double those of 2004. Guli continues to focus primarily on manu- facturing products for ASSA ABLOY companies through- out the world. Although the residential segment has slowed as a result of various government initiatives, the growth rate in China remains strong. The sales organization in China has been restructured with the creation of a separate organization to focus on sales to the residential segment. Together with Global Technologies division, Asia Pacific division has opened a manufacturing plant to the west of Shanghai. The plant will manufacture products for several of the Group’s divisions. Other Asian markets The South Korean company BEST Metaline, acquired in February 2005, has been integrated into the division during the year and this has developed sales opportunities in Korea for other Group companies. The company manufactures locks, door fittings and automatic doors, and has a strong position in specifying hardware to architects and construc- tion companies. Efforts to introduce BEST Metaline prod- ucts on other markets are ongoing. In its other Asian markets the division’s companies are focused mainly on sales of Group products. These markets continued to develop well with the exception of Malaysia, whose economy is in a weak state. Ongoing initiatives Moving production to low-cost countries In 2005 two production units in New Zealand were closed down and their production was moved to Asia. The Aus- tralian plant for residential products is currently being restructured and the bulk of this operation will be trans- ferred to Guli in China. As production moves away from the division’s mature markets in Australia and New Zealand, the companies there will concentrate on product development, the promo- tion of brands and services offering local customization, and sales and marketing of products from throughout the ASSA ABLOY Group. Developing specification skills and total solutions Innovation and continuing product development are essen- tial if the Asia Pacific division is to maintain an appealing product range and continue to increase its sales. Another important part of the sales strategy is to continue to develop specification skills, both in the division’s own sales force and among the distributors through whom most of the products are sold. ASSA ABLOY Australia has a long tradition of specification expertise, which is being used to train people in other divisions. The specification market is growing, and the ability to support architects by proposing total security solutions and specifying a building with the relevant security standards can very often lead directly to successful sales. In Asian markets in particular, specification sales are an important route to improving local security standards and thereby specifying higher-value products. The division’s growing presence in China has already given it increased influence in establishing higher standards there. ASIA PACIFIC DIVISION SALES BY PRODUCT GROUP KEY PRIORITIES Innovate – in both products and business methodology. Capture benefits from low-cost production units by relocating manufacture of mature products and increasing production of low-cost products. Increase sales in Asia relative to Australia / New Zealand. 34 Asia Pacific division Adding electromechanical technology The importance of electromechanical security products continues to grow and there is an ongoing program to add more electromechanical products to the division’s product portfolio, and to add electromechanical functionality to many traditional products. The opening of the new produc- tion plant west of Shanghai has expanded the range of electromechanical products. Developing sales in China The key consideration in acquiring Wangli was to develop distribution on the Chinese market. In addition to its manu- facturing facilities, Wangli has an established distribution network that can be built on further. To develop sales in China, the division’s existing Guli company is being divided into a manufacturing operation, serving the Group as a whole, and a sales organization sell- ing products on the home market. The Asia Pacific division will continue with its present acquisition strategy in China. Another vital challenge in developing its expansion there is the recruitment of com- petent personnel. The division is continuing to expand its graduate training program for future managers. Tilting the balance towards Asia During the year the balance between the Australian and New Zealand markets and the Asian markets has continued to change. A substantial part of the division’s production has moved to Asia, and the growth focus continues to be more on the developing markets of Asia. Sales growth in the division will come both organically and through acqui- sitions, with most future acquisitions taking place in Asia. Ultimately, more than half of all sales are expected to arise in Asia. Unique security solutions keep Disneyland safe ing factors when Disney chose to work with ASSA ABLOY. The company’s well-documented ability to work with a single client but several subcontractors counted for a great deal. During the course of the pro- ject ASSA ABLOY worked with architects, main con- tractors, subcontractors and installers. An additional factor was past experience in coordinating the complex stages from production to installation. Disneyland in Hong Kong is the biggest project so far for ASSA ABLOY Hong Kong. It involved collabora- tion between ASSA ABLOY’s Asia Pacific, Global Tech- nologies and Americas divisions. In September 2005 the world’s fifth Disneyland was opened on Lantou Island, Hong Kong. 5.6 million people are expected to visit the park in its first year, and in 2008 the figure is predicted to rise to 10 million visitors a year. The park has four main attractions: Main Street USA, Adventureland, Fantasyland and Tomorrowland, as well as two big hotel complexes with 1,000 rooms in total. Added to this are a host of restau- rants and shops. ASSA ABLOY has supplied most of the security products for the amusement park. The large number of visitors each day places extreme demands on security, and in many cases required the development of dedicated solutions for Dis- ney. Every door at Disney- land has unique products that are tailored to the colour, design and function of the individual door. The equipment installed by ASSA ABLOY included mechani- cal and electromechanical locks, door closers and emergency exit fittings. Reliability and specialist knowledge were the decid- 35 Global Technologies division –11 –10 –9 –8 –7 –6 –5 – 4 –3 –2 –1 0 +1 +2 + 3 +4 +5 +6 +7 +8 + 9 +10 +11 +12 Innovation drives growth CHARACTERISTICS OF THE GLOBAL TECHNOLOGIES DIVISION • The division’s products are sold primarily to the non- residential segment. • The largest markets are North America and Europe. • There are four specialized business units: ASSA ABLOY HID, ASSA ABLOY Identification Technology (ITG), ASSA ABLOY Entrance Systems* and ASSA ABLOY Hospitality. Global Technologies is the Group’s worldwide organization dedicated to global products and services. Global Technolo- gies accounts for 21 percent of ASSA ABLOY’s total sales. During the year the division achieved an organic growth of 10 percent and an EBIT margin of 14.1 percent. Its head office is located in Providence, Rhode Island, USA. Global Technologies has 3,500 employees, 15 production units and 40 sales companies. Global Technologies’ four business units • ASSA ABLOY HID, which accounted for 24 percent of the division’s sales, primarily supplies ID cards, card read- ers and control panels for authenticating identity. These use various types of identification technology including Radio-Frequency Identification (RFID), magnetic stripes and biometry. The business unit both manufactures and customizes personal ID cards. Its products are sold under well-known brand names such as HID and Indala. • ASSA ABLOY Identification Technology (ITG), which accounted for 16 percent of the division’s sales, produces ID management products based on RFID, such as elec- tronic passports and identity cards and electronic tags for inventory management of industrial products and for marking livestock. The leading brand names in the busi- ness unit are Sokymat, ACG and Omnikey. • ASSA ABLOY Entrance Systems, which accounted for 41 percent of the division’s sales, is the world’s leading sup- plier of complete automatic door solutions, sold under well-known brand names such as Besam, EntreMatic and Doorman. These are supported by a full range of after- market services. • ASSA ABLOY Hospitality, which accounted for 19 per- cent of the division’s sales, produces door locking systems and hotel-room safes and serves the hotel and cruise-ship markets under leading global brand names such as Ving- Card and Elsafe. Report on the year ASSA ABLOY HID This newly formed business unit continued to show strong growth on all major geographical markets. Sales were largely driven by new products resulting from major invest- ments in Research & Development. The business unit’s largest company is HID, which is also the world’s largest manufacturer of cards and card- readers for authenticating identity for the security market. HID pioneered the use of RFID for authentication. In 2005, HID’s iCLASS line of contactless smart cards and readers continued to expand and now represents the world’s second- largest range of readers and cards for authenticating iden- tity. The cards can be used for logical access and to make *On 1 January 2006 ASSA ABLOY Entrance Systems became a separate division in order to take best advantage of the business opportunities to be found in existing operations and through future acquisitions. 36 payments as well as for physical access control. For even greater security, iCLASS cards can store digital versions of users’ biometric information. During the year, ASSA ABLOY HID acquired the Cana- dian company Synercard, which produces software for pro- viding, issuing and managing advanced digital, ‘smart’ and photo ID cards. The acquisition will assist the rapid growth and penetration of card personalization services, which end-users and issuers of ID and security cards increasingly request. ASSA ABLOY Identification Technology (ITG) The business unit achieved strong growth in all major prod- uct areas and geographical markets in 2005. Integration of acquired companies specializing in RFID and smart cards resulted in further improvement in margins, despite contin- ued investment in new and existing markets. The fastest- growing market segments are those concerned with RFID, electronic passports and related identification products for international travel, public-transport ticketing and bank services. Global Technologies division Global Technologies division, Key figures Income statement Sales, external Sales, internal Sales Organic growth Operating income (EBIT) Operating margin (EBIT) Capital employed Capital employed – of which goodwill Return on capital employed Cash flow Operating income (EBIT) Depreciation Net capital expenditure Change in working capital Cash flow 1 2005 SEK M 2004 SEK M 5,638 4,811 122 100 5,760 4,911 10% 811 5% 632 14.1% 12.9% 6,180 4,736 5,322 4,313 14.1% 11.8% 811 78 –141 –100 648 632 95 –78 3 652 The business unit is active in the market for electronic Average number of employees 3,481 2,925 1 Excluding restructuring payments. passports, offering a product range that includes both transponders and readers. Worldwide regulations for more secure passports are driving efforts to improve the authenti- cating process for passports. The market for machine-read- able passport systems began to take off in 2005 and the business unit expects significant growth in this segment. During the year ITG won a high-profile contract, in part- nership with Philips, from the German government pass- port agency. SALES / EBIT 2 CAPITAL EMPLOYED / RETURN ON CAPITAL EMPLOYED 2 EBIT / CASH FLOW 2 1 Excluding restructuring payments. 2 2003 has not been adjusted for IFRS but goodwill amortization has been excluded. 37 Global Technologies division Good growth in the markets for tagging industrial prod- ucts and livestock benefited Sokymat, although the growth was partly offset by increased government regulations. 2005 also showed good growth for Omnikey’s desktop smart-card readers for logical access to computers. The applications include home banking, E-commerce and credit-card payments. ASSA ABLOY Entrance Systems The business unit changed its name from Automatic Doors to ASSA ABLOY Entrance Systems during 2005. Sales con- tinued to grow strongly during the year. In 2004 Besam’s US manufacturing was relocated to the Group’s production unit in Charlotte, North Carolina. It has generated good improvements in efficiency, allowing faster growth, and the US operations developed well in 2005. Most markets in Europe also generated higher prod- uct sales, and margins increased due to continued growth in service sales. ASSA ABLOY Entrance Systems’ EntreMatic brand, whose products are targeted at smaller customers via distributors, doubled its sales in 2005. A new factory in China, operated jointly with the Asia Pacific division, started production in January 2005. The factory will manufacture mainly low-price products for both local and export markets. The main factory in Landskrona, Sweden, focuses on high-end products, and has improved efficiency by adopting Lean manufacturing processes. ASSA ABLOY Entrance Systems made several small acquisitions during 2005. The most important was Door- man in the UK, which supplies, installs and services manual and automatic doors and roller shutters throughout the country and has a strong presence in the retail segment. ASSA ABLOY Hospitality The new management team focused on improving cus- tomer service, reorganizing the sales force, and reducing manufacturing costs and overheads. The business generated strong organic growth with clearly improved results. The travel industry has begun to pick up, which has stimulated building of new hotels, but high fuel costs and the impact of natural disasters on key vacation spots are raising concerns about this being sustained. Continued restructuring of the business unit aims to strengthen competitiveness further. Sales in 2005 were led by large casino and hotel pro- jects. They included installation of Timelox systems at the new Wynn’s Hotel in Las Vegas and VingCard systems at the newly opened Disneyland in Hong Kong. In addition, strong development in China was driven by construction of hotels for the 2008 Olympics and the general good eco- nomic climate in the region. Ongoing initiatives ASSA ABLOY HID As customers accelerate their upgrading from old technolo- gies, investment in new products and in sales and marketing resources will continue. The convergence of physical and IT security is helping to drive sales of higher-margin multi- technology ID cards. There is also great potential for adding new technology into traditional mechanical prod- ucts. One initiative is to focus on embedded technologies. ASSA ABLOY Identification Technology (ITG) In its core area of RFID and ID management, ITG expects significant growth from sales of the next generation of products using contactless smart card technology. The busi- ness unit will focus on industrial applications and on pass- ports, where RFID may be combined with biometrics. ITG has a strong growth potential in all segments, both organically and by acquisitions. The business unit continues to evaluate acquisition opportunities to further complement its product offering. GLOBAL TECHNOLOGIES DIVISION SALES BY PRODUCT GROUP 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 ASSA ABLOY Entrance Systems. Coordinate strategy for key-account management with the Group’s other divisions to increase sales of all Global Technologies products. 38 Global Technologies division ASSA ABLOY Entrance Systems The business unit will focus on providing customers with integrated solutions combining products and services for entrances. Marketing activities for the EntreMatic brand will be increased. New products are being developed for markets of low penetration or high growth such as eastern Europe and Asia. ASSA ABLOY Entrance Systems will continue to pursue an active acquisition strategy to expand its geographical presence, enlarge its product portfolio and augment its service operations. Focus on the higher-margin service business will continue, using key-account management to attract major retail, industrial and commercial customers. ASSA ABLOY Hospitality ASSA ABLOY Hospitality introduced its new modular Sig- nature product line in November 2005. This will be fol- lowed by a number of products to be released over the next year which can be used to upgrade existing hotel security solutions as well in new hotel systems. These include a new check-in system, a ‘contactless’ RFID lock system and a wireless communications system. The business unit will focus on its strongest and best- known brands, VingCard and Elsafe. Ongoing restructur- ing will be directed at reducing manufacturing costs and overheads, streamlining logistics and the supply chain, and developing key-account management. The focus on services will continue. High stakes and high security Bellagio, one of Las Vegas’s most famous luxury hotel- casinos, opened its newly built Spa Tower at the start of the year. The Spa Tower is a 33-storey hotel complex with 809 rooms, 109 suites and two presidential suites. The extension gives the hotel a total of 4,000 rooms. The new hotel rooms in the Spa Tower are fitted with hotel locks and safes supplied by ASSA ABLOY. Most of the room locks have infrared communication with a receiver inside the room, providing a cost-effec- tive online alternative to other types of connection. The receiver is linked to a server that allows receptionists and security staff to see if a door has been left ajar. If a staff member loses a pass card it can easily be cancelled without having to physically check locks. Guests can also change rooms without having to be issued with a new card. In addition, the system provides sequential and roaming intruder alarms, low-battery or mainte- nance-needed notification, an instant staff locator, and electronic event lists with real-time data transfer. Bellagio chose to work with ASSA ABLOY because this provided access to local sales and support in Las Vegas, a factor that turned out to be decisive. The client was also looking for the features that the online system could offer. Furthermore, Bellagio had good experience from an earlier partnership in 2003, when hotel rooms in the older building were renovated. 39 Safety is paramount in a child’s world 40 Schools and day nurseries should be safe places to attend. They are second homes for most children Security in such places must not be neglected – it must be easy for children, small or large, to get out if an incident if you consider how much time they spend there. But home occurs. And just the same degree of security should be comforts and safety do not always go together. During provided for a small nursery or rural school as for those school lessons the classroom may be crowded and stressful, with the resources of a large city. and children in nurseries often become very lively. 41 Report of the Board of Directors for 2005 The Annual Report of ASSA ABLOY AB (publ.), Corporate identity number 556059-3575, contains the Group’s accounts for the financial year 1 January – 31 December 2005. ASSA ABLOY is the world’s leading manufacturer and supplier of locking solutions, meeting tough end-user demands for safety, security and user-friendliness. Important events New President and CEO On 1 December 2005 Johan Molin was appointed as the new President and CEO of ASSA ABLOY. From that date he also became a coopted member of the Board of Directors. On the Board’s initiative Bo Dankis left his post as President and CEO on 1 December 2005. He also left ASSA ABLOY’s Board. Juan Vargues, Head of ASSA ABLOY Entrance Systems, has been appointed as a new member of the Executive Team. Sales and earnings Sales increased during the year to SEK 27,802 M (25,526), with organic growth of 5 percent and acquired growth of 1 percent. Operating income (EBIT) amounted to SEK 4,078 M (3,683). The operating margin was 14.7 percent (14.4). Earnings before tax totaled SEK 3,556 M (3,199). Operating cash flow increased to SEK 3,702 M (3,439). Earnings per share were SEK 6.97 (6.33). Strategy During the year a number of activities were initiated with the aims of increasing efficiency and exploiting synergies within the Group, in line with the strategy defined in 2004. For example, work is in progress to reduce the large num- ber of brands in the Group. Efforts to consolidate, relocate and outsource the Group’s production are continuing. The Leverage & Growth action program The two-year action program that began in November 2003 was concluded during the year. Savings are expected to amount to SEK 450 M a year from the start of 2006. About SEK 350 M of savings were achieved in 2005. During the year payments related to the action program amounted to SEK 298 M and the total of employees who have left the Group reached 1,300. The remaining 100 employees affected are expected to have left the Group during the first quarter of 2006. Acquisitions BEST Metaline and Doorman Services were consolidated from 1 February 2005. BEST Metaline is active in locks and door fittings in South Korea. Doorman Services is one of Britain’s leading door service companies. The two compa- nies together have annual sales of over SEK 200 M. The combined acquisition price including estimated earn-outs was about SEK 150 M. Goodwill and other intangible assets with indefinite life total about SEK 100 M. On 1 June ASSA ABLOY acquired 70 percent of Wangli, a major supplier of high-security doors and high-security locks in China. The company has built up a comprehensive distribution network in China and holds a leading position in its segment. Annual sales total about SEK 200 M. The acquisition price including estimated earn-outs was about SEK 115 M. Goodwill and other intangible assets with indefinite life total about SEK 100 M. In addition a number of smaller acquisitions were made during the year. These include the Swedish company Habo Industry, active in locks and fittings for the window and door industry; Security World, a franchise chain of security stores in South Africa; and Tag Technology, a distributor of RFID products in Italy. Some smaller distributors of auto- 42 matic doors in the USA, Canada and New Zealand were also acquired. Combined sales for all the companies amount to some SEK 200 M a year. The total acquisition price including estimated earn-outs was about SEK 150 M. Goodwill and other intangible assets with indefinite life total about SEK 115 M. Financing In the second quarter of the year a refinancing of USD 330 M was arranged in the form of a private placement. The loan consists of five tranches with terms between seven and fifteen years and with both fixed and variable interest rates. After the refinancing, the Group’s average loan dura- tion is about three years. Research and development ASSA ABLOY’s expenditure on research and development during the year amounted to SEK 588 M (500), which is equivalent to 2.1 percent (2.0) of sales. A central function known as Shared Technologies is responsible for the stan- dardization of electronics in ASSA ABLOY’s Group-wide common platforms. The goal of standardization is to achieve lower development costs and a shorter develop- ment time for new products. 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 exter- nal environment chiefly through the subsidiaries Assa AB, Assa Industri AB, AB FAS Låsfabrik and FIX AB. The com- panies operate machine shops and foundries and associated surface-coating plants, which have an impact on the exter- nal environment through the discharge of water, air and solid waste. The subsidiaries Assa AB, Assa Industri AB, AB FAS 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 legislation. Accounting principles From 1 January 2005 ASSA ABLOY has adopted Inter- national Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). The Parent company’s accounts are prepared in accordance with the Swedish Financial Accounting Standards Council’s recommendation RR 32 ‘Preparation of Accounts for Corporate Bodies’. The accounting principles of the Group and the Parent com- pany are described in Note 1 on page 66. The effects of the Group’s transition to IFRS are described in Note 38 on page 85. Outlook Organic sales growth is expected to continue at a good rate. The operating margin (EBIT) and operating cash flow are expected to develop well, excluding the effects of future restructuring. 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 position will accelerate growth and increase profitability. 43 Corporate governance report ASSA ABLOY AB is a Swedish public company with head- quarters in Stockholm, Sweden. The company’s governance is based on its own articles of association, the Swedish Companies Act, the rules of the Stockholm Stock Exchange including the Swedish Code of Corporate Governance, and other applicable Swedish and foreign laws and regulations. ASSA ABLOY’s objective is that its activities should gen- erate 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. Shareholders The number of shareholders in ASSA ABLOY at year-end was 31,702. ASSA ABLOY’s principal shareholders are Investment AB Latour and SäkI (9.5 percent of the capital and 29.7 percent of the votes) and Melker Schörling and companies (4.0 percent of the capital and 11.6 percent of the votes). Foreign shareholders account for 41 percent of the share capital and 28 percent of the votes, while the ten largest shareholders account for 37 percent of the share capital and 57 percent of the votes. Both the total number of shareholders and the proportion of foreign shareholders increased during the year. Share capital and voting rights ASSA ABLOY’s share capital at year-end amounted to SEK 366 M, distributed among 19,175,323 Series A shares and 346,742,711 Series B shares. Each Series A share carries ten votes and each Series B share one vote. All shares give the holders equal rights to the company's assets and earnings. Share and dividend policy ASSA ABLOY’s Series B share is quoted on the A list of the Stockholm Stock Exchange. The trading lot is 200 shares. ASSA ABLOY’s stock-market value at the end of the year amounted to SEK 45,740 M (41,532). The goal of the Board of Directors is that, in the long term, the dividend should correspond to 33–50 percent of earnings after stan- dard tax of 28 percent, but always taking into account ASSA ABLOY's long-term financial requirements. 44 Annual General Meeting Shareholders’ rights to decide on the affairs of ASSA ABLOY are exercised at the Annual General Meeting. Shareholders who are recorded in the share register on the nominated day and who have notified their intention to attend may take part in the Meeting, either in person or via a proxy. Decisions at the Annual General Meeting are normally taken by simple majority. However, on certain matters the Swedish Companies Act or ASSA ABLOY’s articles of asso- ciation prescribe that proposals should be supported by a higher proportion of the shares represented or votes cast at the Meeting. The Annual General Meeting must be held within six months of the end of the company’s financial year. Matters considered at the Annual General Meeting include divi- dends; approval of the income statement and balance sheet; discharge from liability of the Board of Directors and the CEO; the election of Board members, the Chairman of the Board, the Nomination Committee and, where applicable, auditors; and the fixing of remuneration for the Board and auditors. The 2005 Annual General Meeting At the 2005Annual General Meeting Bo Dankis, Carl Douglas, Gustaf Douglas, Georg Ehrnrooth, Per-Olof Eriksson, Lotta Lundén, Sven-Christer Nilsson, Melker Schörling and Carl-Henric Svanberg were elected as Board members. Georg Ehrnrooth was additionally elected Chair- man of the Board. The Meeting fixed the dividend at SEK 2.60 per share. The Meeting also decided on the fees payable to the Board and to elected members of the Nomination Commit- tee up to the end of the 2006 Annual General Meeting. If a shareholder represented by one of the members of the Nomination Committee ceases to be among the major shareholders in ASSA ABLOY, the Committee has the right to elect a representative of any of the current major share- holders to take the place of such a member. The same applies if a member of the Nomination Committee ceases to be employed by such a shareholder or for any other rea- son leaves the Committee before the 2006 Annual General Meeting. All members of the Board and the company’s appointed auditor were present at the Annual General Meeting. Nomination Committee The duties of the Nomination Committee are to consider the choice of the Chairman and other members of the Board of Directors, the choice of Auditor, the choice of the Chairman of the Annual General Meeting, questions of remuneration and associated matters. The members of the Nomination Committee before the 2006 Annual General Meeting are Gustaf Douglas, Chairman (Investment AB Latour and SäkI), Staffan Grefbäck (Alecta), Marianne Nilsson (Robur) and Melker Schörling (Melker Schörling and companies). As a basis for its proposals to the 2006 Annual General Meeting, the Nomination Committee has carried out an assessment of whether the current Board is appropriately composed for its purpose and is fulfilling the demands placed on the Board by the company’s present situation and future objectives. As one factor in this assessment, the Com- mittee has studied the results of the evaluation of the Board’s work carried out under the leadership of the Com- mittee’s Chairman. Any recruitment of new Board members is based on a profile of requirements laid down by the Committee. The search for new Board members continues throughout the year. The basis of the Committee’s proposed choice of auditor is the preparatory work done by the Audit Committee. Shareholders who wish to put forward proposals to the Nomination Committee can do so by e-mailing nomina- tioncommittee@assaabloy.com. The Committee’s proposals are published at the latest in conjunction with the formal notification of the Annual General Meeting. Board of Directors In accordance with the Swedish Companies Act, the Board of Directors is responsible for the organization and admin- istration of the Group and for ensuring proper control of bookkeeping, management of assets, financial circum- stances etc. The Board decides on the Group’s overall goals, strategies and policies and on acquisitions, divestments and investments. The Board approves the Annual Report and Interim Reports, recommends a dividend to the Annual General Meeting and takes decisions about the Group’s financial structure and the principles for remunerating the management. The Board’s other duties include: • continually evaluating the company’s operating manage- ment and the work of the CEO, • ensuring that there are effective systems for monitoring and regulating the company’s operations and financial position with reference to its stated goals, • ensuring that the company’s external presentation of information is marked by openness and accuracy, • ensuring that there is satisfactory control of the com- pany’s compliance with laws and other regulations applying to the company’s operations, • ensuring that necessary ethical guidelines for the com- pany’s conduct are set down. Working procedures for the Board and instructions for the division of duties between the Board and the CEO are reviewed and set down at least once a year. The Board has also issued written directives specifying how financial reporting to the Board shall be presented, the division of duties between the Board and the CEO, and the cir- cumstances in which the Deputy CEO should stand in for the CEO. Corporate governance report In addition to leading the work of the Board, the Chair- man of the Board shall continually monitor the Group’s operations and development by means of discussions with the CEO. The Chairman shall consult with the CEO on strategic issues and shall represent the company in matters concerning the ownership structure. The Chairman shall also, when necessary, take part in particularly important external discussions and, in consultation with the CEO, in other matters of especial significance. The Chairman shall ensure that the work of the Board is evaluated each year and that new members of the Board receive appropriate training. The Board meets at least four times a year. The regular meetings take place in connection with the company’s pub- lication of its year-end or quarterly results. At least one of the Board meetings is combined with a visit and an in-depth review of one of the Group’s businesses. Extra Board meet- ings are held when necessary. The Board has a Remuneration Committee and an Audit Committee. The purpose of these Committees is to make the work of the Board in these areas deeper and more effective and to lay the ground for decision-making. The Committees themselves have no decision-making powers. The members of the Committees are chosen annually at the first Board meeting. Instructions to the Committees are included in the Board’s working procedures. The Board’s work during 2005 The Board met eight times during the year. At three of the meetings one Board member was absent. At the others, all members were present. At the start of the year the strategy for ASSA ABLOY Entrance Systems was discussed. In this context the Board approved the acquisition of Doorman Services, which repre- sents a broadening of the Group’s offering in automatic doors. Asia Pacific’s management presented the case for investment in Wangli Security Products, which was approved by the Board as an element in the Group’s strategy for the Chinese market. During the spring and summer the Executive Team’s action program for some of EMEA’s markets was discussed. The Board also reviewed the results of the Leverage & Growth action program, which was concluded during the year. In September the Board made a round trip to the Group companies Urbis in Romania, Sokymat in Switzer- land, Nemef in the Netherlands and Ruko in Denmark. The visit to Sokymat’s factory in Granges formed the occasion for a consideration of the strategy for ASSA ABLOY Identi- fication Technology. In the fall, recruitment was put in hand and the decision taken to appoint Johan Molin as the new President and CEO. As well as the new CEO, the Board also approved the appointment of Juan Vargues as a member of the Executive Team during the year. At the last Board meeting of the year, the Executive Team presented its updated plans for the ongoing work of consolidation, restructuring and out- sourcing of the Group’s production. 45 Corporate governance report Board members elected at the 2005 Annual General Meeting Georg Ehrnrooth, Chairman Board member and Chairman of ASSA ABLOY since 1994 Born 1940 Graduate Engineer, Helsinki Technical University, Honorary Doctor of Tech- nology. President of Metra Oyj Abp (now Wärtsilä Oyj Abp) 1991–2000, President of Lohja Oyj Abp 1979–1991, various posts in Wärtsilä Oyj Abp 1965–1979. Other appointments: Vice Chairman of Rautaruukki Oyj, Board member of Nokia Abp, Sampo Abp, Sandvik AB and Oy Karl Fazer Ab. Shareholdings (including family and through companies): 251,680 Series B shares. Melker Schörling, Vice Chairman Member of the ASSA ABLOY Board since 1994 Born 1947 Master of Business Administration, Gothenburg School of Economics. Presi- dent and CEO of Skanska AB 1993–1997, President and CEO of Securitas AB 1987–1992, President of Crawford Door 1984–1987, President of Essef Service 1979–1983, Controller at ABB Fläkt 1975–1979, Controller at LM Ericsson, Mexico 1970–1975. Other appointments: Chairman of Securitas AB and Hexa- gon AB, Vice Chairman of AarhusKarlshamns AB and Board member of Hennes & Mauritz AB. Shareholdings (including family and through companies): 5,310,080 Series A shares and 9,297,734 Series B shares. Carl-Henric Svanberg, Vice Chairman Member of the ASSA ABLOY Board since 1994 Born 1952 Master of Science, Linköping University and Bachelor of Economics, Uppsala University. President and CEO of Telefonaktiebolaget LM Ericsson since 2003, President and CEO of ASSA ABLOY AB (publ) 1994–2003, various posts including Deputy Pres- ident of Securitas AB 1986–1994, various posts in the ABB Group 1977–1985. Other appointments: Board member of Hexagon AB. Shareholdings (including family and through companies): 3,920,031 Series B shares and Incentive 2001 convertibles corresponding to 60,000 Series B shares. Carl Douglas Member of the ASSA ABLOY Board since 2004 Born 1965 Bachelor of Arts. Self-employed. Other appointments: Board member of Securitas AB, Swegon AB and SäkI AB. Shareholdings (including family and through companies): – Gustaf Douglas Member of the ASSA ABLOY Board since 1994 Born 1938 MBA, Harvard Business School. Principal owner of Investment AB Latour and SäkI AB. Self-employed since 1980. Other appointments: Chairman of Investment AB Latour, Boxholms Skogar AB and Säkl AB, Vice Chairman of Securitas AB, Board member of Moderata Samlingspartiet since 2002. Shareholdings (including family and through companies): 6,746,425 Series A shares and 19,000,000 Series B shares through Investment AB Latour, and 7,118,818 Series A shares and 2,000,000 Series B shares through SäkI AB. Per-Olof Eriksson Member of the ASSA ABLOY Board since 1995 Born 1938 Master of Engineering, Honorary Doctor of Technology. President and CEO of Sandvik AB 1984–1994, various posts in the Sandvik Group 1965–1984. Other appointments: Chairman of Callans Trä AB and Odlander, Fredriksson & Co, Board member of Senea AB, SSAB Svenskt Stål AB, AB Volvo, Investmentbolaget Öresund and Elkem AS. Member of the Royal Swedish Academy of Engineering Sciences. Shareholdings (including family and through companies): 10,000 Series B shares. Lotta Lundén Member of the ASSA ABLOY Board since 2003 Born 1957 Bachelor of Economics. Founder and part- ner in Konceptverkstan since 2004, Gen- eral Manager of Coop Forum Sverige 2002–2003, Head of Purchasing and later President and CEO of Guldfynd/Hall- bergs Guld 1999–2001, various posts, mostly in marketing and sales in IKEA both in Sweden and internationally 1980–1991 and 1994–1998. Other appointments: Board member of JC AB, Bergendahls Gruppen AB, Expanda AB, Exportrådet and Glitter. Shareholdings (including family and through companies): – 46 Sven-Christer Nilsson Member of the ASSA ABLOY Board since 2001 Born 1944 Bachelor of Science, Lund University. Pres- ident and CEO of Telefonaktiebolaget LM Ericsson 1998–1999, various posts, mainly in marketing and management, in the Ericsson Group 1982–1997. Other appointments: Chairman of the National Swedish Public Service Broadcasting Foundation (Sveriges Radio AB, Sveriges Television AB and Sveriges Utbildningsradio AB), Chairman of Swedish ICT Research AB and Board member of TeliaSonera AB, CEVA Inc, i3 Micro Technol- ogy AB, Innovationsbron AB and Startupfactory B.V. Shareholdings (including family and through companies): – Board members appointed by employee organizations Seppo Liimatainen Member of the ASSA ABLOY Board since 2003 Born 1950 Employee representative, Federation of Salaried Employees in Industry and Services. Shareholdings: 2,600 Series B shares and Incentive 2001 convertibles corresponding to 125 Series B shares. Mats Persson Member of the ASSA ABLOY Board since 1994 Born 1955 Employee representative, Swedish Metal Workers Union Shareholdings: – Deputy members appointed by employee organizations Shareholdings: – Rune Hjälm Member of the ASSA ABLOY Board since 2005 Born 1964 Employee representative, Swedish Metal Workers Union Per-Edvin Nyström Member of the ASSA ABLOY Board since 1994 Born 1955 Employee representative, Swedish Metal Workers Union Shareholdings: 7,727 Series B shares, Incentive 2001 con- vertibles corresponding to 125 Series B shares and Incentive 2004 convertibles corresponding to 7,800 Series B shares. Corporate governance report Remuneration Committee The duty of the Remuneration Committee is to survey and discuss, on behalf of the Board, issues concerning the remu- neration of the CEO and the Executive Team. The Commit- tee also puts forward proposals for changes in the com- pany’s remuneration policy. Subjects covered by this policy include: • the balance between fixed and variable remuneration and the relationship between performance and remuneration, • the main terms of bonus and incentive programs, • the main conditions applying to non-monetary benefits, pensions, periods of notice and severance pay. The Board is responsible for decisions about the remunera- tion of the CEO and other senior office-holders and any changes to the company’s remuneration policy. The Remu- neration Committee consists of Georg Ehrnrooth (Chair- man), Melker Schörling and Sven-Christer Nilsson. The Remuneration Committee held two meetings in 2005. At one of the meetings one Committee member was absent. In addition to its normal duties, the Remuneration Committee this year oversaw the implementation of the Group’s new pensions policy, which involves a change from defined benefit to defined contribution pension plans. Meetings of the Remuneration Committee are minuted, material for the Board is attached, and an oral report is made at Board meetings. Audit Committee The areas of responsibility of the Audit Committee include: • review of treasury policy, • control of the company’s financial reporting and internal reporting and control systems, • the scope and evaluation of the external audit, • legal risks. The Audit Committee consists of Gustaf Douglas (Chair- man), Per-Olof Eriksson and Lotta Lundén. There is an ongoing dialog with the appointed auditor, who also parti- cipates in the Committee’s meetings. The Audit Committee held three meetings in 2005, at all of which all members were present. In addition to its normal duties, the Commit- tee this year focused especially on preparatory work for the Nomination Committee’s proposed choice of auditor at the 2006 Annual General Meeting, and a review of the admin- istration of the Group’s pension assets. Meetings of the Audit Committee are minuted, material for the Board is attached, and an oral report is made at Board meetings. Remuneration of the Board Remuneration of the Board is in accordance with decisions taken at the Annual General Meeting. The 2005 Annual General Meeting decided that fees paid to the Board should comprise a total sum of SEK 3.6 M (excluding remunera- tion for Committee work), to be divided between the 47 Corporate governance report members as follows: SEK 750,000 to the Chairman, SEK 550,000 to each of the Vice Chairmen and SEK 350,000 to each of the other members who is not employed by the company. In addition, there should be payments to mem- bers of the Audit and Remuneration Committees of SEK 100,000 to each of the Chairmen and SEK 50,000 to each of the other members. The Chairman and other Board members have no pension benefits or severance pay agree- ments. The CEO and the employee representatives do not receive a Director’s fee. FEES TO BOARD MEMBERS IN 2005 SEK thousands Fees Social costs Chairman of the Board Other Board members (7) Total 850 3,150 4,000 – 970 970 Total 850 4,120 4,970 Operating management and internal control ASSA ABLOY’s business operations are split into divisions. The Executive Team (Group Management) consists of the CEO, the heads of the Group’s divisions, the Deputy CEO (who is also Chief Financial Officer) and an Executive Vice President responsible for market and business develop- ment. The composition of this group gives a geographical and strategic spread of responsibility designed to ensure short decision-making paths. Management philosophy ASSA ABLOY’s firm conviction is that people make the company. The Group’s management philosophy is based on trust, positive thinking, and respect for local conditions and cultures. The four cornerstones of Vision, Realism, Ethics and Courage play a central role in the Group. Composition of the Board ASSA ABLOY’s Board consists of ten full members – eight elected at the Annual General Meeting and two employee representatives chosen by the trades unions – plus two deputy employee representatives. Bo Dankis left the Board in December. Johan Molin has been a coopted member since 1 December 2005. The majority of the Board members elected at the Annual General Meeting are independent in relation to the company and the company management. Most of that majority are also independent in relation to the company’s major shareholders. One Board member is from Finland; the others are from Sweden. The average age of the Board is 56. One member of the Board is a woman. INDEPENDENCE OF THE BOARD Name Georg Ehrnrooth Melker Schörling Carl-Henric Svanberg Carl Douglas Gustaf Douglas Per-Olof Eriksson Lotta Lundén Sven-Christer Nilsson Independent in relation to the company and its management Independent in relation to the company’s major shareholders Yes Yes No Yes Yes Yes Yes Yes Yes No Yes No No Yes Yes Yes Guidelines and policies The Group’s most important guidelines and policies con- cern financial control, communication issues, the Group’s brands, business ethics, and environmental issues. Common financial, accounting and investment policies set the frameworks for financial control and monitoring. 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 to observe relevant stock market rules. Guidelines concerning brands aim to protect and develop the major assets that the Group’s brands represent. ASSA ABLOY has 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. 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. Decentralized organization with a strong control environment ASSA ABLOY’s organization is strongly decentralized, which is explained by a deliberate strategic choice imposed primarily by the local and fragmented nature of the lock industry, but also to some extent by the fact that the Group was built up in a relatively short period by a large number of acquisitions. Viewed historically, this structure has meant that internal control originated from a strong, 48 centrally based control environment where the integrity, ethical values, expertise and management philosophy of the Executive Team (which achieved high visibility out in the organization) were decisive in forming the basis for other areas of internal control. ASSA ABLOY’s operating structure is designed to create the greatest possible transparency, to facilitate monitoring and to promote the flow of information in different direc- tions through the Group. The Group’s smallest component units are 160 so-called benchmarking units, which nor- mally correspond to a legal entity or part of a legal entity. The next level in the operating structure currently consists of 26 business units. Most of these are geographically based but in Global Technologies and parts of Americas the breakdown is based on different types of product group. All business units belong to one of the Group’s divisions, which form the next higher level in the Group’s structure. At each of these three levels, there is a responsible person and/or a management group who ensures that internal control of financial reporting maintains a satisfactory quality. Financial reporting and benchmarking All benchmarking units submit their financial results monthly, reported according to the Group’s IFRS account- ing principles in the Hyperion Financial Management sys- tem. The reports are consolidated and form the basis for quarterly reports and monthly operating reviews at every- thing from benchmarking-unit to Group level. The operat- ing reviews conform to a long-established structure – Lock- Pack – in which sales, income, cash flow and other key fig- ures and trends are combined and form the basis for analy- sis and actions by management and controllers at different levels. The benchmarking units are compared and ranked each month in relation to other units in the Group. The ranking is in terms of the most important key figures for the Group. This benchmarking, one of whose effects is to reveal a number of winners in various categories every quarter, provides an effective tool for review and for spreading good ideas and business methods among the Group’s companies. The financial reviews take the form both of regular monthly meetings at divisional level – so-called perform- ance reviews – and of more informal analysis. Other impor- tant Group-wide components of internal control are the annual business planning and budgeting process, and quarterly forecasts of financial results for the current calendar year. Corporate governance report Group-wide tools for increasing efficiency As well as the guidelines and policies discussed above, some 20 systems and applications for increasing the efficiency of business operations have been developed centrally. These aids can, and in some cases should, be used by Group com- panies – for example, for optimizing inventories and for cost control. The tools are intended primarily for opera- tional use, but in many cases also result in general and spe- cific control activities linked to financial reporting being implemented in the business and create increased aware- ness of the importance of internal control. The acquisition process A large part of the ASSA ABLOY Group’s historical growth and present size is explained by acquisitions. Acquisition is also an important component of future strategy – mainly with the aim of expanding into new markets and new seg- ments. Against this background ASSA ABLOY has thought it right to establish and refine a special Group-wide acquisi- tion process, which lays down how acquisitions should be handled. The process consists of four phases – strategy, evaluation, execution and integration – and each phase includes various predefined activities, decisions and docu- mentation requirements. The goodwill and other intangible assets with indefinite useful life resulting from acquisitions are subject to a quar- terly simplified valuation test and to an annual detailed in- depth impairment testing. Group internal control and internal audit functions In 2005 the Parent company established a department for Management Assurance and Special Assignments. Its activities during the year included review and coordi- nation of the external audit, and the launch of a project to evaluate the Group’s internal control. In 2006 ASSA ABLOY in general and this department in particular will focus further on issues of internal control. One project, known as Control Self Assessments, has been initiated as a method for central recording of internal control combined with support for the subsidiaries’ own procedures. There is currently a limited internal audit within the divisions, whereby the more experienced of the financial staff carry out internal audits in units other than those they are employed in. The audit results are currently reported to divisional management and to the Management Assurance department. In 2006 this operation will be developed: it will become more Group-wide, special internal auditors will be recruited, and the audit results will be reported to the Board’s Audit Committee. 49 Corporate governance report Financial objective ASSA ABLOY’s primary financial objective is that return on capital employed should exceed 20 percent. During the acquisition phase of the Group’s strategy, substantial amounts of goodwill were added, which have reduced return on capital employed. The Group’s stated goal now is to achieve its financial objective by 2008 at the latest. • Sales should, on average, grow organically at about 5 percent a year over a business cycle. • The EBIT margin should be improved to 16–17 percent. This should be achieved mainly by exploiting synergies within the Group. marks ASSA ABLOY, and to keep risk analysis and risk management as close as possible to the risks themselves, a large proportion of risk management takes place at division and business-unit level. Strategic and operational risks The main risks of these kinds that ASSA ABLOY encounters relate to customers, suppliers, employees, competitors and acquisition situations. Some country-specific risks also arise. Customers and suppliers, and relationships with them, are a matter for continuous local supervision. Cus- tomers, suppliers and employees are also covered by the Group’s Code of Conduct. • The long-term positive trend in ASSA ABLOY’s operating Competitors are subjected to both central and local risk cash flow should be maintained. • Capital employed should be maintained at the present absolute level, despite organic growth. Measures to make production more specialized are reducing capital tied up in inventory. Given the potential to increase utilization of current production capacity, capital expenditure can be maintained at today’s level – below current depreciation. The new CEO has initiated a review of future restructuring measures. The results of this review may affect the long- term financial objective. Risks and risk management As an international Group with a wide geographic spread, ASSA ABLOY is exposed to a number of business and financial risks. The business risks can be divided into strate- gic, operational and legal risks. The financial risks are related to exchange rates, interest rates, liquidity, the giving of credit, raw materials and financial instruments. The financial risks and the Group’s management of them are described in the section ‘Financial risk management’ on pages 63–65. Risk management in ASSA ABLOY aims to identify, control and reduce risks. This work begins with an assess- ment of the probability of risks occurring and their poten- tial effect on the Group. In the decentralized spirit that analysis. In recent years low-price competition, mainly from Asia, has increased in some segments. Quality fea- tures, total solutions and breadth of product range have become natural responses to reduce such risks. As regards risks related to acquisitions, the Group fol- lows a standardized, predefined process. Legal risks ASSA ABLOY continuously keeps track of likely or enacted changes in the laws of the countries it operates in. From time to time ASSA ABLOY is involved in legal disputes, mainly concerned with such matters as product liability, protection of intangible rights, the environment, and the interpretation of supplier, distribution and employment contracts. Where it is considered necessary, local legal expertise is engaged to deal with these matters. With the aim of charting and controlling legal risks, there is a system of regular Group-wide reporting of outstanding legal mat- ters. This is managed and coordinated by the Group’s cen- tral legal department. Many of the legal risks, for example those concerning real estate or questions of liability, are covered by insur- ance. ASSA ABLOY carries out regular reviews of risks and risk assessment together with insurance-company represen- tatives. At present there are no legal disputes that it is believed could lead to significant costs. 50 The Executive Team Back row (left to right): Göran Jansson, Åke Sund, Thanasis Molokotos and Juan Vargues. Front row (left to right): Joseph J. Grillo, Johan Molin and Geoff Norcott. Corporate governance report Joseph J. Grillo Born 1957 Bachelor of Finance and Economics Executive Vice President and Head of Global Technologies division Employed since 2001 Shareholdings: Incentive 2001 convertibles corresponding to 32,500 Series B shares and Incentive 2004 convertibles corresponding to 132,300 Series B shares. Thanasis Molokotos Born 1958 Master of Science Executive Vice President and Head of Americas division Employed since 1996 Shareholdings: 25,000 Series B shares, Incentive 2001 con- vertibles 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 and Head of Asia Pacific division Employed since 2000 Shareholdings: Incentive 2001 convertibles corresponding to 60,000 Series B shares and Incentive 2004 convertibles corresponding to 101,200 Series B shares. Johan Molin Born 1959 Bachelor of Science in Economics President and CEO and Head of EMEA division Employed since 1 December 2005 Shareholdings: 21,900 Series B shares1). CEO of Nilfisk-Advance 2001–2005. Various posts mainly in finance and marketing, later divisional head, in the Atlas Copco Group 1983–2001. Åke Sund Born 1957 Graduate Diploma in Marketing Executive Vice President and Head of Market and Business Development Employed since 1994 Shareholdings: Incentive 2001 convertibles corresponding to 60,000 Series B shares and Incentive 2004 convertibles corresponding to 93,400 Series B shares. Göran Jansson Born 1958 Graduate Diploma in Business Administration Deputy CEO and Chief Financial Officer Employed since 1997 Shareholdings: Incentive 2001 convertibles corresponding to 60,000 Series B shares and Incentive 2004 convertibles corresponding to 171,000 Series B shares. Juan Vargues Born 1959 Graduate in Mechanical Engineering, Master of Business Administration Executive Vice President and Head of ASSA ABLOY Entrance Systems division Employed since 2002 Shareholdings: Incentive 2004 convertibles corresponding to 47,000 Series B shares. Johan Molin acquired an additional 500,000 Series B shares on 17 February 2006. 51 Corporate governance report Remuneration of the Executive Team Remuneration of the Executive Team consists of fixed salary, variable salary, other benefits, and pensions. For the CEO, variable salary is based partly on improve- ment in earnings per share compared with the previous year (75 percent) and partly on organic growth (25 percent). The variable salary is capped at a maximum of three- quarters of fixed salary. For other members of the Execu- tive Team, variable salary is based primarily on improve- ment in operating income (for their own area of responsi- bility) compared with the previous year (50 percent), and also on organic growth (25 percent) and a personal target (25 percent). In this case variable salary is capped at two- thirds of fixed salary. The members of the Executive Team other than the CEO also have the opportunity to receive variable salary based on improvement in earnings per share (67 percent) and organic growth (33 percent). The maximum payment of SEK 2 M per person applies if earnings per share increase by 15 percent compared with the previous year and organic growth reaches 9 percent. One-third of such variable salary is paid the following year, while the other two-thirds is retained for two years and grows at the same rate as the Group’s return on capital employed. This residual two- thirds is paid only if, at the end of the period, the 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 other members of the Executive Team are through participation in the ITP plan or equivalent. In addition, the CEO and cer- tain other senior executives have the right to retire with a pension at the earliest on reaching the age of 60. ASSA ABLOY pays pension contributions amounting to 35 per- cent of fixed salary to the CEO and pension contributions amounting to about 60 percent of fixed salary to certain other members of the Executive Team. Provided that cer- tain assumptions about the return on pension capital are met, this means that pensions will amount to about 65 per- cent of fixed salary at the time of retiring for those between the ages of 60 and 65, and about 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 fixed salary for 24 months. The payment is made only where the company terminates the contract. Others in the Executive Team are entitled to six months’ notice and receive a severance payment of 100 percent of their fixed salary for a maximum of 12 months, which is reduced by any income from employment that may arise. Bo Dankis ceased to be employed as President and CEO during the year. Under his contract he receives severance pay amounting to 100 percent of his fixed salary for 24 months. During this period the company will also pay pen- sion contributions equal to about 60 percent of his fixed salary. External audit The 2002 Annual General Meeting appointed Pricewater- houseCoopers as the company’s external auditors for a four-year period up to the 2006 Annual General Meeting. The auditor in charge during this period was Authorized Public Accountant Anders Lundin. PricewaterhouseCoopers have been the Group’s chief auditors since the Group was formed in 1994, and Anders Lundin has been the auditor or the auditor in charge since 1999. As well as ASSA ABLOY, Anders Lundin (born in 1956) is responsible for auditing the following companies: Electrolux, Axis, Bong Ljungdahl, Industrivärden, AarhusKarlshamn and SäkI. PricewaterhouseCoopers undertake the audit of ASSA ABLOY AB, the Group and a substantial 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 company’s auditor attends all meetings of the Audit Committee and also the Board meeting in February, at which he submits his observations and recommendations concerning the Group’s annual accounts. The external audit is carried out in accordance with good auditing practice in Sweden. The auditing of annual financial statements for legal entities outside Sweden is in accordance with legal requirements and other applicable regulations in the countries concerned and with good audit- ing practice as defined by the International Federation of Accountants (IFAC) for the issue of audit reports for the legal entities. For information about fees paid to auditors in 2005, see Note 3. REMUNERATION AND OTHER BENEFITS PAID TO THE EXECUTIVE TEAM IN 2005 SEK thousands Bo Dankis Johan Molin Other members of the Executive Team (6) Total Fixed salary Variable salary Pension costs Other benefits Social costs 6,250 583 21,000 27,833 2,195 11,000 13,195 3,950 187* 7,700 11,837 80 15 1,500 1,595 3,500 230 5,500 9,230 Total 15,975 1,015 46,700 63,690 * As part of his employment contract, Johan Molin has received a one-off pension payment of SEK 5 M from the company. 52 Corporate governance report Explanation of the deviation: the Board considers that issues of responsibility are comprehensively regulated by the Swedish Companies Act, and that a special statement as proposed by the Code would be superfluous. Clause 3.7.2 The Board should issue a report annually about how that part of internal control that relates to financial reporting is organized and how well it has functioned during the last financial year. The report should be checked by the com- pany’s auditor. Explanation of the deviation: the Board considers that internal control is an integrated part of corporate gover- nance. No separate statement from the Board about how well internal control has functioned during the financial year need be issued.1 Nor is any separate audit needed, which means that, overall, there is no reason to issue a sep- arate report about internal control. Instead, ASSA ABLOY has included its report on internal control in this corporate governance report. Clause 4.2.2 At the Annual General Meeting the Board should present a proposal about the principles of remuneration for the com- pany management and other conditions of employment for approval by the Meeting. The proposal should be placed on the company’s website in conjunction with the formal noti- fication of the Annual General Meeting. Explanation of the deviation: The principles applied in ASSA ABLOY concerning the principles of remuneration and other conditions of employment for the company man- agement are presented at the Annual General Meeting and on the website. According to the Swedish Companies Act it is the Board’s duty to make regular decisions on such issues. The Board does not consider that this responsibility should be removed from the Board. Other requirements of the Code In all other respects ASSA ABLOY believes that it is meeting the requirements of the Code at the end of 2005, while not- ing that some of the requirements will apply for the first time at the 2006 Annual General Meeting. The Swedish Code of Corporate Governance ASSA ABLOY has adopted the Swedish Code of Corporate Governance, which has formed part of the rules of the Stockholm Stock Exchange since 1 July 2005. The Code, which is based on self-regulation using the ‘comply or explain’ principle, deals mainly with the organi- zation 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 the auditor, the Board’s responsibility for internal control, processes for setting the remuneration of the company management, and information about corporate gover- nance. Deviations from the Code ASSA ABLOY has chosen to deviate from the following Clauses of the Code: Clause 2.1.2 A majority of the members of the Nomination Committee should not be members of the Board. Neither the Chairman of the Board nor any other Board member should be Chair- man of the Nomination Committee. Explanation of the deviation: the shareholders currently represented on the Nomination Committee consider that it is important, in the interests of an efficient, ongoing nomi- nation process, that the membership of the Nomination Committee should be limited in number. At the same time the two main shareholders must be represented. This results in an equal number of Board members and external mem- bers on the Nomination Committee. A majority of the external members had called for five members, which was adjudged to be too many. The shareholders mentioned above also consider it natural for the representative of the shareholder with the largest number of votes to be Chair- man of the Nomination Committee. Clause 3.6.2 Immediately before signing off the Annual Report, the Board and the CEO should issue a declaration that, to the best of their knowledge, the Annual Report has been pre- pared in accordance with good accounting practice for quoted companies, that the information presented reflects the facts and that nothing of significant importance is omit- ted that could affect the picture of the company created by the Annual Report. 1 According to the statement of the Swedish Council for Corporate Governance published on 15 December 2005. 53 Sales and earnings • Organic growth for comparable units was 5 percent (5). • The operating margin (EBIT) was 14.7 percent (14.4). • Earnings per share amounted to SEK 6.97 (6.33). Sales The Group’s sales increased to SEK 27,802 M (25,526). Exchange-rate effects affected sales positively by SEK 643 M compared with 2004. CHANGES IN SALES % Acquired growth Organic growth Currency effects Total 2005 2004 1 5 3 9 5 5 –4 6 In local currencies, sales increased by 6 percent (10). Of this, organic growth by comparable units accounted for 5 percent (5), while acquired units made a positive contribu- tion of 1 percent (5). SALES BY PRODUCT GROUP % 2005 2004 Mechanical locks, lock systems and accessories Electromechanical and electronic locks Security doors and fittings 53 29 18 53 27 20 Mechanical locks, lock systems and accessories accounted for 53 percent (53) of sales. Sales of electromechanical and electronic locks rose to 29 percent (27), while sales of secu- rity doors and fittings fell to 18 percent (20). Cost structure Total remuneration costs including social costs and pension costs amounted to SEK 9,260 M (8,899), which represents 33 percent (35) of sales. The average number of employees was 29,578 (29,160). The average number of employees in the Parent com- pany was 74 (52). The Group’s material costs totaled SEK 8,059 M (7,162), which represents 29 percent (28) of sales. The rise was mainly due to the increased costs of metals such as steel and brass. Other purchasing costs totaled SEK 5,557 M (4,888), which represents 20 percent (19) of sales. Depreciation and write-down of fixed assets amounted to SEK 884 M (924), which represents 3 percent (4) of sales. Operating income Operating income (EBIT) amounted to SEK 4,078 M (3,683) after positive currency effects of SEK 97 M. The operating margin was 14.7 percent (14.4). Operating income before depreciation (EBITDA) amounted to SEK 4,960 M (4,606). The corresponding margin was 17.8 percent (18.0). Income before tax Income before tax totaled SEK 3,556 M (3,199). This rep- resents an increase of 11 percent compared with the pre- vious year, with positive currency effects of SEK 73 M. Financial items amounted to SEK –522M (–484). The increase is due to higher interest rates mainly on borrowing in USD. Profit margin – defined as income before tax in relation to sales – amounted to 12.8 percent (12.5). The Parent company’s income before tax amounted to SEK 728 M (3,876). Tax The Group’s tax charge totaled SEK 943 M (843), which corresponds to an effective tax rate of 27 percent (26). Earnings per share Earnings per share amounted to SEK 6.97 (6.33), which represents an increase of 10 percent. 54 Income statements Sales Cost of goods sold Gross income Selling expenses Administrative expenses R&D costs Other operating income and expenses Share of earnings in associates Operating income Financial income Financial expenses Income before tax Tax on income Net income Allocation of net income: Shareholders in ASSA ABLOY AB Minority interests Earnings per share before dilution, SEK after dilution, SEK Note 2 3 4 5 6–10 11 10, 12 13 GROUP PARENT COMPANY EUR M1 2005 SEK M 2005 SEK M 2004 Note EUR M1 2005 SEK M 2005 SEK M 2004 2,996 27,802 25,526 –1,779 –16,508 –15,221 1,217 11,294 10,305 –526 –192 –63 3 1 440 5 –61 384 –102 282 –4,883 –1,781 –588 28 8 –4,272 –1,883 –500 24 8 4,078 3,683 51 –573 3,556 –943 2,613 164 –648 3,199 –843 2,356 281 1 2,608 2,349 5 7 – – – – – – – – – – – – 3, 6, 8, 9 –34 –313 –331 4 10 11 10, 12 13 –2 81 – 45 94 –60 79 –1 78 –21 749 – 415 867 –554 728 –13 715 – 580 – 249 4,550 –923 3,876 –7 3,869 14 14 7.13 6.97 6.42 6.33 1 Average EUR/SEK rate = 9.28. Used for conversion from SEK to EUR above. 55 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, comprises ASSA ABLOY Entrance Systems, ASSA ABLOY Hospitality, ASSA ABLOY Identification Technology and ASSA ABLOY HID, all of which serve a global market. Functions common to the whole Group appear in the column headed ‘Other’ in the table. From 1 January 2006 ASSA ABLOY Entrance Systems has become a separate division. EMEA Sales totaled EUR 1,255 M (1,210), with organic growth of 3 percent. Operating income amounted to EUR 184 M (174), with an operating margin (EBIT) of 14.7 percent (14.4). Return on capital employed amounted to 16.6 per- cent (16.3). Operating cash flow before interest paid amounted to EUR 205 M (201). EMEA made stable progress over the year as a whole, with good sales performance in Scandinavia and Britain in par- ticular. Growth markets in eastern Europe, the Middle East and Africa are continuing to develop well. Other European markets showed stable sales overall. The structural changes in the division affected results positively but were offset by higher selling costs. Americas Sales totaled USD 1,182 M (1,129), with organic growth of 5 percent. Operating income amounted to USD 217 M (199), with an operating margin (EBIT) of 18.3 percent (17.6). Return on capital employed amounted to 19.6 percent (18.2). Operating cash flow before interest paid amounted to USD 236 M (192). Americas’ good performance was due to improved demand in the USA, specifically in the important commer- cial segment. The Architectural Hardware Group, which represents about 40 percent of Americas’ sales, showed an improved sales trend and continued to improve its prof- itability. The Door Group showed strong growth, due Local currency Sales, external Sales, internal Sales Organic growth Share of earnings in associates Operating income (EBIT) Operating margin (EBIT) Net financial items Tax on income Net income Capital employed – of which, goodwill Assets – of which, shares in associates Liabilities Operating income (EBIT) Depreciation / amortization Investments in fixed assets Sales of fixed assets Change in working capital Cash flow 5 Adjustment for non-cash items Paid and received interest Operating cash flow 5 EMEA1 EUR M Americas2 USD M Asia Pacific3 AUD M 2005 2004 2005 2004 2005 2004 1,225 1,179 1,177 1,125 30 31 5 4 1,255 1,210 1,182 1,129 3% 0 184 3% 0 174 5% 1 217 6% 1 199 356 33 389 2% – 43 320 23 343 7% 0 52 Global Technologies 4 SEK M 2005 5,638 122 5,760 10% 2004 4,811 100 4,911 5% Other SEK M Total SEK M 2005 2004 2005 2004 –622 –622 –533 –533 27,802 25,526 27,802 25,526 – – – – 811 632 –300 –269 14.7% 14.4% 18.3% 17.6% 11.1% 15.1% 14.1% 12.9% 1,077 499 1,046 495 1,098 664 1 104 654 340 171 324 159 6,180 4,736 5,322 4,313 –389 –268 – – 5% 8 4,078 14.7% –522 –943 2,613 26,653 15,716 15.9% 5% 8 3,683 14.4% –484 –843 2,356 23,461 13,917 15.3% 1,417 1,424 1,341 1,264 417 388 9,104 6,431 –1,862 4 340 184 54 –42 6 3 205 4 376 174 58 –49 12 6 201 0 243 217 31 –17 2 3 236 0 160 199 31 –36 9 –11 192 – 77 43 12 –20 13 –2 46 0 64 52 12 –13 8 –8 51 811 78 –187 46 –100 648 632 95 –104 26 3 652 – – – 475 – 33,692 30,117 37 36 2,924 1,108 10,767 12,977 19,279 18,864 –300 –269 4,078 9 –57 20 –52 10 –24 16 53 –26 –455 –16 –489 –1 – 89 –13 – 65 882 –871 204 –110 4,183 –26 –455 3,702 –384 – 3,683 923 –894 244 –12 3,944 –16 –489 3,439 –917 62 29,578 29,160 Return on capital employed 16.6% 16.3% 19.6% 18.2% 12.9% 16.8% 14.1% 11.8% Acquisitions of shares in companies Disposals of shares in companies –3 – –78 – – – – 8 –27 – –18 – –195 – –62 – Average number of employees 12, 405 12,774 9,251 9,767 4,352 3,629 3,481 2,925 1 Europe, Middle East and Africa. 2 North and South America. 3 Asia, Australia and New Zealand. 4 ASSA ABLOY Entrance Systems, ASSA ABLOY Hospitality, ASSA ABLOY Identification Technology and ASSA ABLOY HID. 5 Excluding restructuring payments. 56 Comments by division largely to price rises resulting from the increased cost of steel. The Residential Group showed strong growth and profitability. Other units are showing weaker performance. Asia Pacific Sales totaled AUD 389 M (343), with organic growth of 2 percent. Operating income amounted to AUD 43 M (52), with an operating margin (EBIT) of 11.1 percent (15.1). Return on capital employed amounted to 12.9 percent (16.8). Operating cash flow before interest paid amounted to AUD 46 M (51). During the year Australia performed well in the com- mercial segment but the performance of the residential segment in Australia and New Zealand is a burden on the whole division. Restructuring costs and dilution by acquired units were the main factors in the division’s reduced margin. Sales in Asia were good. The acquisitions of BEST Metaline in South Korea and Wangli in China strengthen the division’s position on these important growth markets. Global Technologies Sales totaled SEK 5,760 M (4,911), with organic growth of 10 percent. Operating income amounted to SEK 811 M (632), with an operating margin (EBIT) of 14.1 percent (12.9). Return on capital employed amounted to 14.1 percent (11.8). Operating cash flow before interest paid amounted to SEK 648 M (652). Global Technologies is performing well, with strong sales growth and a rising margin. ASSA ABLOY Entrance Systems achieved good sales growth during the year, especially in the service sector, which improved its market position in both Europe and the USA. The market for ASSA ABLOY Hospitality developed well during the year. Profitability improved in line with growing sales and ongoing restructuring. ASSA ABLOY Identification Technology is showing strong sales growth for a variety of product applications based on RFID technology. ASSA ABLOY HID performed well, especially in North America, with strong growth and high margins. SEKM Sales, external Sales, internal Sales Organic growth Share of earnings in associates Operating income (EBIT) Operating margin (EBIT Net financial items Tax on income Net income Capital employed – of which, goodwill Return on capital employed EMEA1 Americas2 Asia Pacific3 2005 2004 2005 2004 11,369 10,747 8,775 8,242 280 284 31 28 11,649 11,031 8,806 8,270 3% 4 3% 4 5% 4 6% 4 1,707 14.7% 1,586 14.4% 1,615 18.3% 1,456 17.6% 2005 2,019 190 2,209 2% 2004 1,726 121 1,847 7% Global Technologies4 2005 5,638 122 5,760 10% 2004 4,811 100 4,911 5% Other Total 2005 2004 2005 2004 –622 –622 –533 –533 – 0 – – – – 245 278 811 632 –300 –269 11.1% 15.1% 14.1% 12.9% 27,802 25,526 27,802 25,526 5% 8 5% 8 4,078 14.7% 3,683 14.4% –522 –943 2,613 26,653 15,716 15.9% –484 –843 2,356 23,461 13,917 15.3% 10,151 4,709 16.6% 9,433 4,462 16.3% 8,726 5,276 7,303 4,324 1,985 995 1,671 818 6,180 4,736 5,322 4,313 –389 –268 – – 19.6% 18.2% 12.9% 16.8% 14.1% 11.8% Assets 13,360 12,850 10,657 8,360 2,432 2,001 9,104 6,431 –1,862 – – – 475 – 33,692 30,117 37 36 2,924 1,108 10,767 12,977 19,279 18,864 –300 –269 4,078 – of which, shares in associates 34 33 2 2 Liabilities 3,209 3,393 1,931 1,055 Operating income (EBIT) Depreciation / amortization Investments in fixed assets Sales of fixed assets Change in working capital Cash flow 5 Adjustment for non-cash items Paid and received interest Operating cash flow 5 1,707 499 –390 55 30 1,586 529 –436 96 51 1,615 230 –126 12 24 1,456 227 –263 68 –76 1,901 1,826 1,755 1,412 – 447 245 66 –111 71 –12 259 1 331 278 62 –67 38 –43 268 811 78 –187 46 –100 648 632 95 –104 26 3 652 Acquisitions of shares in companies Disposals of shares in companies –30 – –707 – – – – 62 –158 –135 – – –195 – –62 – Average number of employees 12,405 12,774 9,251 9,767 4,352 3,629 3,481 2,925 9 –57 20 –52 10 –24 16 53 –26 –455 –16 –489 –1 – 89 –13 – 65 882 –871 204 –110 4,183 –26 –455 3,702 –384 – 3,683 923 –894 244 –12 3,944 –16 –489 3,439 –917 62 29,578 29,160 1 Europe, Middle East and Africa. 2 North and South America. 3 Asia, Australia and New Zealand. 4 ASSA ABLOY Entrance Systems, ASSA ABLOY Hospitality, ASSA ABLOY Identification Technology and ASSA ABLOY HID. 5 Excluding restructuring payments. 57 Financial position • Capital employed amounted to SEK 26,653 M (23,461). • Net debt rose to SEK 12,240 M (12,208). • Net debt / equity ratio was 0.85 (1.09). SEK M Capital employed – of which, goodwill Net debt Minority interests Shareholders’ equity 2005 2004 26,653 15,716 12,240 71 23,461 13,917 12,208 27 14,342 11,226 Capital employed Capital employed in the Group – defined as total assets less interest-bearing assets and non-interest-bearing liabilities including deferred tax liabilities – amounted to SEK 26,653 M (23,461). The return on capital employed was 15.9 per- cent (15.3). Intangible assets amounted to SEK 16,078 M (14,138). The change is explained mainly by changes in exchange rates. During the year goodwill of SEK 249 M arose from acquisitions. A valuation model based on discounted future cash flow is used for impairment testing of goodwill and other intangible assets with indefinite life. No write-down took place this year. Tangible assets amounted to SEK 5,702 M (5,279). Investments in tangible and intan- gible assets, less sales of tangible and intangible assets, totaled SEK 667 M (650). Depreciation according to plan amounted to SEK 882 M (923). Deferred tax receivables amounted to SEK 1,349 M (1,488). The reduction is due principally to increased pay- ments into pension funds and claimed deductions for tax- deductible goodwill. Accounts receivable totaled SEK 4,818 M (4,146) and inventories totaled SEK 3,679 M (3,135). The average col- lection period for accounts receivable was 56 days (53). Material throughput time averaged 108 days (109). The Group has been making long-term systematic efforts to reduce capital tied up in inventory. Net debt Net debt amounted to SEK 12,240 M (12,208), of which pension obligations accounted for SEK 1,634 M (1,677). Net debt was reduced by the strong operating cash flow but increased to a comparable extent by changed exchange rates, dividends to shareholders and acquisitions. External financing The Group’s long-term loan financing consists mainly of a Private Placement program in the USA amounting to USD 330 M (–). The Group’s short-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) and a Swedish Com- mercial Paper program for SEK 5,000 M (5,000). There are also substantial credit facilities, chiefly in the form of a Multi-Currency Revolving Credit (MCRF) agree- ment for a maximum of EUR 1,000 M (1,000), which at year-end was not being utilized at all. At year-end the Private Placement was being utilized for SEK 2,625 M, the EMTN program for SEK 2,829 M, the global Commercial Paper program for SEK 1,302 M, and the Swedish Commercial Paper program for SEK 399 M. The interest coverage ratio, defined as income before tax, plus net interest, divided by net interest, amounted to 8.2 (7.6). Periods for fixed-interest-rate borrowings are generally short, averaging 16 months at the end of the year. This is partly because Group revenues largely follow economic trends in each country, and partly due to a strong cash flow. Cash and cash equivalents amounted to SEK 958 M (1,017). Cash and cash equivalents are invested in banks with high credit ratings. Equity Equity in the Group totaled SEK 14,413 M (11,253) at year-end. The return on shareholders’ equity amounted to 18.1 percent (20.0). The equity ratio was 42.8 percent (37.4). The net debt / equity ratio, defined as net debt divided by shareholders’ equity, was 0.85 (1.09). 58 Balance sheets ASSETS Non-current assets Intangible assets Tangible assets Shares in subsidiaries Shares in associates Receivables from subsidiaries Other long-term financial assets Deferred tax receivables Total non-current assets Current assets Inventories Accounts receivable Receivables from subsidiaries Current tax receivables Other short-term receivables Prepaid expenses and accrued income Derivative financial instruments Short-term investments Cash and cash equivalents Total current assets TOTAL ASSETS Assets pledged EQUITY AND LIABILITIES Equity (Group / Parent company) 2 Parent company’s shareholders Share capital Other contributed capital / Reserve fund Reserves / Premium reserve Retained earnings incl. / excl. net income Net income in Parent company Minority interests Total equity Non-current liabilities Long-term loans Convertible debenture loans Long-term loans to subsidiaries Deferred tax liabilities Pension obligations Other long-term provisions Other long-term liabilities Total non-current liabilities Current liabilities Short-term loans Convertible debenture loans Derivative financial instruments Accounts payable Short-term liabilities to subsidiaries Current tax liabilities Short-term provisions Other short-term liabilities Accrued expenses and prepaid income Total current liabilities TOTAL EQUITY AND LIABILITIES Contingent liabilities GROUP PARENT COMPANY Note EUR M1 2005 SEK M 2005 SEK M 2004 Note EUR M1 2005 SEK M 2005 SEK M 2004 15 16 18 20 19 21 22 23 24 25 27 28 25 25 19 29 30 25 25 23 30 31 32 33 1,705 16,078 14,138 605 5,702 5,279 – 4 – 18 143 – 37 – – 36 – 171 1,349 130 1,488 15 16 17 20 4 1 36 10 7 8 1,294 12,202 25,497 – 235 7 – – – 2,216 2,216 67 – 67 – 2,475 23,337 21,071 1,541 14,531 27,795 390 511 – 13 36 39 5 2 102 1,098 3,573 3,679 4,818 3,135 4,146 – 129 344 365 43 19 958 10,355 33,692 – 172 266 266 – 44 1,017 9,046 30,117 7 70 43 39 942 113 427 – 366 8,887 1,061 4,028 – 366 8,887 –479 2,452 – 1,521 14,342 11,226 7 71 27 1,528 14,413 11,253 295 100 – 16 173 9 17 610 739 100 6 207 – 21 36 70 2,783 943 – 153 4,225 1,804 – 245 1,634 1,677 88 156 93 68 5,757 8,112 6,966 5,594 943 54 – – 1,949 1,521 – 196 344 657 – 304 586 677 256 1,435 3,573 2,413 13,522 33,692 2,070 10,752 30,117 – – – – – – 1,989 18,758 5,105 – 2 4 – – – 15 41 – – 88 2,083 3,624 833 19,647 34,178 – 45 53 – – 4 5,207 33,002 None None None 39 944 – 519 76 366 8,905 – 4,892 715 366 645 8,260 2,014 3 869 1,578 14,878 15,154 – – – 1,578 14,878 15,154 – 100 235 – – – – – 943 2,216 3,104 1,804 2,216 – – – – – – – – 335 3,159 7,124 407 100 – 2 3,842 943 – 19 507 – – 22 1,192 11,241 10,108 1 – 1 8 13 – 5 78 12 – 11 64 1,711 3,624 16,141 34,178 10,724 33,002 24 26 27 25 29 25 25 32 111 1,050 817 33 1,070 10,088 7,393 1 Closing-day EUR/SEK rate used for conversion from SEK to EUR above = 9.43. 2 Restricted equity: share capital, reserve fund and premium reserve. Unrestricted equity: retained earnings and net income. 59 Cash flow • Operating cash flow amounted to SEK 3,702 M (3,439). • Net capital expenditure amounted to SEK 667 M (650). Relationship between cash flow from operating activities and operating cash flow SEK M Cash flow from operating activities 2004 Net capital expenditure 3,683 Tax paid Operating cash flow 2005 3,450 –667 919 3,702 2004 3,339 –650 750 3,439 Company acquisitions Total outlay on company acquisitions amounted to SEK 422 M (804). Acquired net debt totaled SEK –10 M (–30). Acquisitions made during the year were financed by intern- ally generated cash flow. Change in net debt Net debt was reduced by the strong operating cash flow but increased to a comparable extent by changed exchange rates, dividends to shareholders and acquisitions. SEK M Net debt at 1 January IFRS adjustment (IAS 39) Operating cash flow Restructuring payments Tax paid Acquisitions Dividend Translation differences Net debt at 31 December 2005 2004 12,208 13,454 77 – –3,702 –3,439 298 919 413 951 321 750 929 457 1,076 12,240 –264 12,208 Operating cash flow SEK M Operating income (EBIT) Depreciation / amortization Net capital expenditure Change in working capital Paid and received interest Adjustment for non-cash items Operating cash flow Operating cash flow / Income before tax 2005 4,078 882 -667 -110 -455 -26 3,702 1.04 923 -650 -12 -489 -16 3,439 1.08 The Group’s operating cash flow amounted to SEK 3,702 M (3,439), equivalent to 104 percent (108) of income before tax. The Parent company’s cash flow amounted to SEK 829 M (–648). Net capital expenditure Direct net capital expenditure on tangible and intangible fixed assets totaled SEK 667 M (650), equivalent to 76 per- cent (70) of depreciation / amortization of tangible and intangible fixed assets falling due during the financial year. The low level of capital expenditure is explained principally by the Group’s long-term efforts to optimize capital expen- diture. Change in working capital SEK M Inventories Accounts receivable Accounts payable Other working capital Change in working capital 2005 –108 –95 215 –122 –110 2004 –79 –135 95 107 –12 Efforts to reduce the Group’s average material throughput times in its inventories are continuing. During the year ris- ing material prices and increased volumes have increased the capital tied up in inventories, which burdened cash flow by SEK –108 M (–79). The average material throughput time is now 108 days (109). The increased capital tied up in accounts receivable is chiefly due to stronger sales. 60 Cash flow analysis GROUP PARENT COMPANY Note EUR M1 2005 SEK M 2005 SEK M 2004 Note EUR M1 2005 SEK M 2005 SEK M 2004 OPERATING ACTIVITIES Operating income Depreciation and amortization Non-cash items Cash flow before interest and tax Paid and received interest Dividends received Tax paid on income Cash flow before changes in working capital Changes in working capital Cash flow from operating activities INVESTING ACTIVITIES Investments in tangible and intangible assets Sales of tangible and intangible assets Investments in subsidiaries Reduction of equity in subsidiaries Sales of shares in subsidiaries Investments in associates Other investments 8 37 37 37 37 37 37 37 37 440 95 –3 532 –49 – –99 384 –12 372 –87 15 –41 – – 0 0 4,078 3,683 882 –26 923 –16 4,934 4,590 –455 –489 – –919 3,560 –110 3,450 –805 138 –384 – – 2 –3 – –750 3,351 –12 3,339 –842 192 –904 – 62 – –13 Cash flow from investing activities –113 –1,052 –1,505 FINANCING ACTIVITIES Dividends 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 24 Cash flow Effect of translation differences Cash and cash equivalents at 31 December 24 1 Average EUR/SEK rate = 9.28. 2 Closing-day EUR/SEK rate = 9.43. These rates have been used for the conversions from SEK to EUR above. –104 –147 –251 8 108 8 –14 102 –951 –1,374 –2,325 73 1,017 73 –132 958 –457 –1,277 –1,734 100 880 100 37 1,017 8 24 24 415 249 45 1 – 46 2 6 – 421 18 1,487 13,802 – –1 3 – 252 –187 3,322 – 1,536 14,240 3,387 –15 –133 91 1,520 14,107 3,478 –5 2 –15 – 24 – – 6 –45 18 –8 1 –142 –14,456 – 222 – – 8,348 4,996 – –5 53 –1,124 –102 –951 –1,335 –12,380 –1,437 –13,331 88 0 88 – 88 829 4 829 – 833 –457 –2,545 –3,002 –648 652 –648 – 4 61 Reserves Retained earnings Minority interests Share capital 366 Other contributed capital 8,905 –18 –18 0 –479 –479 –18 –479 366 366 8 887 8 887 366 8 887 –479 –479 4 –475 1,539 –3 1,536 1,536 366 8,887 1,061 4,028 560 2,349 2,349 –457 2,452 2,452 –81 2,371 2,608 2,608 –951 16 –2 –2 7 5 6 27 27 27 3 3 5 8 36 71 Unrestricted shareholders’ equity Retained earnings 2,472 3,869 3,869 –457 5,883 Total 9,847 –481 –18 –499 2,356 1,857 –457 6 11,253 11,253 –77 11,176 1,542 –3 1,539 2,613 4,152 –951 36 14, 413 Total 11,743 3,869 3,869 –457 15,154 5,883 15,154 –40 715 675 –40 715 675 –951 –951 5,607 14,878 Changes in equity GROUP SEK M Opening balance 1 January 2004 Translation differences for the year Transaction costs connected with convertible bond issue Income/expenses reported directly to equity Net income from income statement Total income and expenses Dividend for 2003 Acquisitions of shares of subsidiaries Closing balance 31 December 2004 Opening balance 1 January 2005 Effect of changed accounting principle, IAS 39 Adjusted opening balance 1 January 2005 Translation differences for the year Changes in value of cash flow hedging instruments Income/expenses reported directly to equity Net income from income statement Total income and expenses Dividend for 2004 Acquisitions of shares of subsidiaries Closing balance 31 December 2005 Note 27 28 27 27 27 28 28 27 27 PARENT COMPANY SEK M Opening balance 1 January 2004 Net income from income statement Total income and expenses Dividend for 2003 Closing balance 31 December 2004 Opening balance 1 January 2005 Group contributions net Net income Total income and expenses Dividend for 2004 Transfer from premium reserve Closing balance 31 December 2005 Restricted shareholders’ equity Share capital 366 Reserve fund Premium reserve 645 8 260 Note 26, 27 27 27 27 366 366 645 645 8,260 8,260 366 8,260 8,905 –8,260 0 62 Financial risk management ASSA ABLOY is exposed to a variety of financial risks through its international business operations. Organization and activities ASSA ABLOY’S Treasury Policy, which is reviewed annually by the Board of Directors, constitutes a framework of guide- lines and regulations for the management of financial risks and financial activities. ASSA ABLOY’S financial activities are coordinated cen- trally within the subsidiary ASSA ABLOY Treasury S.A. in Switzerland, which is 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. Exposure of Group earnings A general strengthening of the Swedish krona in 2006 by one percent is calculated to have a negative impact of about SEK 265 M on Group sales and of about SEK 20 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. From 2005 onwards, instead of hedging individual flows, the Group hedges a basket of flows with the aims of facilitating contract management and reducing administra- tive costs. FORECAST TRANSACTION FLOWS BY MAJOR CURRENCY FOR 2006 (IMPORTS + AND EXPORTS –) Currency risk Currency risk affects ASSA ABLOY mainly through transla- tion of capital employed and net debt, through translation of income in foreign subsidiaries, and through flow of goods between countries. Currency USD EUR CHF GBP Currency exposure (SEK M) 372 216 –254 257 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 inter- nal needs. Currency USD EUR SEK* GBP 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. At year-end, the aver- age interest rate duration, excluding pension obligations, was about 16 months. EFFECTIVE INTEREST RATE BY CURRENCY, 31 DECEMBER 2005 Interest rate 4.5% 4.4% 5.0% 4.3% 4.6% NET DEBT BY CURRENCY (IN MILLIONS) Average for the Group Currency USD EUR SEK GBP Other (SEK) Currency exposure Forward contracts External borrowing 546 278 1,347 119 905 –9 –381 948 119 905 555 659 399 0 0 Total internal bank (SEK) 11,012 11,012 SEK External loans Overdrafts Cash and cash equivalents Long-term interest-bearing receivables Pension obligations Accrued financial items Net debt 366 272 –958 –71 1,634 –15 12,240 * The SEK figure includes the effects of interest rate swaps. External funding and interest rate swap The table ‘External funding / net debt’ on page 64 gives an overview of interest rate swaps associated with debt. The interest-rate derivatives are structured to have durations matching the underlying debt securities. The internal bank swaps parts of the EMTN loan in EUR and the Private Placement program in USD to floating rates. Sensitivity analysis A rise/fall of 1 percentage point in market rates is calculated to have a negative/positive impact in the form of higher/ lower interest expense of SEK 65 M / SEK 69 M for the year 2006. 63 Financial risk management 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 available facilities should include a reserve (facilities confirmed but not used) equiva- lent to 10 percent of the Group’s annual total sales. Maturity structure The column ‘End of facility’ in the table ‘External funding / net debt’ below shows that duration until repayment of debts contracted 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 pension liabilities, was 35 months. This is up from 2004 (14 months) because a refinancing was arranged in the sec- ond quarter in the form of a Private Placement in the USA for USD 330 M. The loan consists of five tranches with durations between seven and fifteen years. RATINGS Agency Standard & Poor’s Moody’s Short term Long term Outlook A2 P2 A – n/a Stable Stable Ratings from both agencies remain unchanged from the previous year. Credit risk Financial risk management exposes ASSA ABLOY to cer- tain counterparty risks. Such exposure may arise, for exam- ple, from the placement of surplus cash, from trade receiv- ables, and from the use of debt securities and derivative financial instruments. EXTERNAL FUNDING / NET DEBT (IN MILLIONS) Credit facilities Private Placement Program Private Placement Program Private Placement Program Private Placement Program Private Placement Program Incentive Program Other long-term interest-bearing loans Total long-term loans Confirmed Confirmed Confirmed Confirmed Confirmed Committed Amount SEK End of facility 636 636 397 397 556 943 May-2012 May-2015 Apr-2017 May-2017 May-2020 Jun-2009 158 n/a 3,723 EMTN Program Confirmed 14,143 Dec-2006 Global CP Program Swedish CP Program Nordic MTN Program Incentive Program Bank loan Bank loan Other short-term interest-bearing loans Overdrafts etc Total short-term loans Confirmed Confirmed Confirmed Committed Committed Committed n/a n/a Jun-2006 Nov-2006 Feb-2006 Feb-2006 7,948 5,000 1,414 943 477 536 208 1,223 n/a 31,892 Book value, SEK 634 641 397 397 556 943 158 3,726 2,829 1,302 399 943 943 477 536 208 272 7,909 Multi-Currency RF Committed 9,429 Dec-2010 0 Total credit facilities 45,044 Cash and cash equivalents Long-term interest-bearing investments Pension obligations Net debt * Hedge accounting. 11,635 –958 –71 1,634 12,240 Currency Amount Market value, SEK USD USD USD USD USD EUR EUR USD SEK EUR EUR USD EUR 80 80 50 50 70 100 300 180 599 100 100 60 59 634 641 397 400 559 943 161 3,735 2,828 1,311 400 943 943 477 536 210 272 7,920 0 11,655 –958 –71 1,634 12,260 Interest rate swap Yes* Yes* No No No No Average interest rate duration Fixed six-monthly Fixed six-monthly Fixed quarterly 11.5 years 14.5 years Fixed quarterly Yes* 5 months No No No No Yes* No 15 days 16 days Fixed quarterly Fixed quarterly 1 month 1 month 64 Financial risk management ASSA ABLOY’s 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 through the cash pool network put in place by the internal bank. About 80 percent of commercial sales were settled through cash pools in 2005. The Group may nevertheless deposit surplus funds on a short-term basis with banks in order to match debt maturities. Derivative financial 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 counterparty) is agreed in the case of interest deriva- tives. 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 Derivative financial instruments such as currency and inter- est-rate forwards are used to the extent necessary. The use of derivative financial instruments is solely to reduce expo- sure to financial risks. Derivative financial instruments are not used with speculative intent. The positive and negative market values in the table below show the market values of instruments outstanding at year-end, based on available market values, and are the same as the values reported on the balance sheet. The nomi- nal value represents the gross value of the contract. OUTSTANDING DERIVATIVE FINANCIAL INSTRUMENTS AT 31 DECEMBER (SEK M) Instrument Foreign exchange forwards – funding Foreign exchange forwards – transaction Currency basket option Interest rate swaps Total Positive market value 2005 Negative market value 2005 27 7 7 2 43 –40 –6 – –8 –54 Nominal value 2005 8,417 621 572 3,326 12,936 Positive market value 2004 Negative market value 2004 63 7 13 8 91 –19 –26 – –88 –133 Nominal value 2004 7,032 452 504 4,823 12,811 65 Notes Note 1 Significant accounting and valuation principles The Group From 1 January 2005 ASSA ABLOY applies International Finan- cial Reporting Standards (IFRS) as endorsed by the European Union (EU), the Swedish Annual Accounts Act and standard RR 30 of the Financial Accounting Standards Council. The accounting principles are based on IFRS as endorsed by 31 December 2005 and have been applied to all years presented, unless stated other- wise. This Note describes the most significant accounting princi- ples that have been applied in the preparation of the financial reports, which comprise the information appearing on pages 42–94. Basis of preparation ASSA ABLOY’s consolidated financial statements have been pre- pared in accordance with IFRS. The preparation of financial state- ments is based on estimates and assumptions made for accounting purposes. The management also makes judgments about the appli- cation of the Group’s accounting principles. Estimates and assump- tions may affect the income statement and balance sheet as well as the supplementary information that appears in the financial reports. Thus changes in estimates and assumptions may lead to changes in the financial statements. For example, estimates and assumptions play an important part in the valuation of items such as identifiable assets and liabilities in acquisitions, impairment testing of goodwill and other assets, the fixing of actuarial assumptions for calculating employee benefits and other types of provisions. Estimates and assumptions are con- tinually reassessed and are based on a combination of historical experience and reasonable expectations about the future. The Group considers that estimates and assumptions relating to impairment testing of goodwill and other intangible assets with indefinite useful life are of significant importance to the consoli- dated financial statements. The Group tests carrying amounts for impairment on an annual basis. The recoverable amounts of Cash- Generating Units are established by calculating their values in use. The calculations are based on certain assumptions about the future which, for the Group, are associated with risks of material adjust- ments in reported amounts during the next financial year. Major assumptions and the effects of likely changes to them are described in Note 15. Also see Note 38 about the transition to, and adoption of, IFRS and the effects on the consolidated financial statements. New and amended standards not yet effective The following new standards and amendments to current stan- dards have been published but are not yet effective, and have not been applied in the preparation of the financial reports: • IAS 1 Amendment, Presentation of Financial Statements: Capital Disclosures, 1 January 2007 1, 2) • IAS 19 Amendment, Actuarial Gains and Losses, Group Plans and Disclosures, 1 January 2006 1) • IAS 21 Amendment, The Effects of Changes in Foreign Exchange Rates, Net Investment in a Foreign Operation, 1 January 2006 1, 2) • IAS 39 Amendment, Cash Flow Hedge Accounting of Forecast Intragroup Transactions, 1 January 2006 1) • IAS 39 Amendment, The Fair Value Option, 1 January 2006 1) • IAS 39 and IFRS 4 Amendment, Financial Guarantee Contracts, 1 January 2006 1, 2) • IFRS 1 and IFRS 6 Amendment, before 1 January 2006 2) • IFRS 6, Exploration for and Evaluation of Mineral Resources, 1 January 2006 1) • IFRS 7, Financial Instruments: Disclosures, 1 January 2007 1, 2) • IFRIC 4, Determining whether an Arrangement contains a Lease, 1 January 2006 1) • IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds, 1 January 2006 1) • IFRIC 6, Liabilities arising from Participating in a Specific Mar- ket: Waste Electrical and Electronic Equipment, 1 December 2005 2) • IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies, 1 March 2006 1, 2) • IFRIC 8, Scope of IFRS 2, 1 March 2006 1, 2) Of the new and amended standards listed above, it is assessed that the amendment to IAS 19 could have the most significant effect on the consolidated financial statements. The amendment means that the Group can choose to recognize actuarial gains and losses directly in equity instead of distributing them over the expected average remaining working lives of the employees as under the present principle. The potential effect of the amendment to IAS 19 and the possible effects of other new and amended standards are being assessed. Consolidated financial statements The consolidated financial statements cover ASSA ABLOY AB (the Parent company) and companies in which the Parent company held, directly or indirectly, more than 50 percent of the voting rights at the end of the period, as well as companies in which the Parent company exercises control by some other means. Compa- nies acquired during the year are included in the consolidated financial statements with effect from the date when control was obtained. Companies sold during the year are included in the con- solidated financial statements up to the date when control ceased. The consolidated financial statements have been prepared in accordance with the purchase method, which means that the cost of acquisition of shares in subsidiaries is eliminated against their equity at the time of acquisition. In this context, equity in sub- sidiaries is determined on the basis of the fair value of assets, liabil- ities and contingent liabilities at the date of acquisition. Thus only that part of subsidiaries’ equity that has arisen after the acquisition is included in the Group’s equity. A positive difference between the cost of acquisition and the fair value of the Group’s share of acquired net assets is reported as goodwill. Intra-group transactions and balance sheet items and un- realized profits on transactions between Group companies are eliminated in the Group financial statements. 1 Earlier adoption is encouraged. 2 Not endorsed by the EU at 31 December 2005. 66 Minority interests Minority interests are based on subsidiaries’ accounts with appli- cation of fair-value adjustments resulting from completed acquisi- tion analysis. Minority participations in subsidiaries’ income are reported in the income statement with net income divided between the Parent company’s shareholders and minority interests. Minor- ity participations in subsidiaries’ equity are reported as a separate item in the Group’s equity. Associates Associates are defined as companies which are not subsidiaries but in which the Group has a significant, but not a controlling, interest. This is usually taken to be companies where the Group’s share- holding represents between 20 percent and 50 percent of the voting rights. Participations in associates are accounted for in accordance with the equity method. In the consolidated balance sheet, share- holdings in associates are reported at cost, adjusted for participa- tion in income after the date of acquisition. Dividends from associ- ates are reported as a reduction in the carrying amount of the investment. Participations in the income of associates are reported in the consolidated income statement as part of operating income as the investments are related to business operations. Segment reporting The Group’s business operations are split organizationally into four divisions. Three divisions are based on products sold in local markets in the respective division: EMEA, Americas and Asia Pacific. Global Technologies’ products are sold worldwide. The divisions reflect a partition of the Group’s operations according to major risks and returns. The divisions form the operational struc- ture for internal control and reporting and also constitute the Group’s segments for external financial reporting. There are no secondary segments. Foreign currency translation Functional currency corresponds to local currency in each country where Group companies operate. Transactions in foreign currencies are translated to functional currency by application of the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses arising from the settlement of such transactions are normally reported in the income statement, as are those arising from translation of mon- etary balances in foreign currencies at the closing-day rate. Excep- tions are transactions relating to qualifying cash flow hedges or net investment hedges, which are reported in equity. Receivables and liabilities are valued at the closing-day rate. The Group applies the current method to translate the accounts of foreign subsidiaries prepared in functional currencies other than the Group’s presentation currency. The current method means that all balance sheet items except net income are translated at the clos- ing-day rate, net income being translated at the average rate. The income statement is translated at the average rate for the period. Exchange-rate differences arising from the translation of foreign subsidiaries are reported in the translation reserve in equity. Notes The rates for currencies used in the Group, relative to the Group’s presentation currency (SEK), were as follows – the weighted average for the year, and the closing-day rate: Currency Average rate 2005 2004 Country Argentina Australia Brazil Canada Switzerland Chile China Czech Republic Denmark Estonia Euro zone ARS AUD BRL CAD CHF CLP CNY CZK DKK EEK EUR Closing- day rate 2005 2.62 5.83 3.42 6.84 6.06 2004 2.22 5.15 2.49 5.50 5.85 2.54 5.68 3.09 6.17 6.00 2.49 5.39 2.51 5.65 5.90 0.013 0.012 0.015 0.012 0.91 0.31 1.25 0.59 9.28 0.88 0.29 1.23 0.58 9.12 0.98 0.32 1.26 0.60 9.43 0.80 0.30 1.21 0.58 9.02 United Kingdom GBP 13.54 13.38 13.73 12.74 Hong Kong Hungary Israel Kenya South Korea Lithuania Mexico Malaysia Norway New Zealand Poland Romania Russia Singapore Slovenia Slovakia Thailand USA South Africa HKD HUF ILS KES KRW LTL MXN MYR NOK NZD PLN ROL RUR SGD SIT SKK THB USD ZAR 0.96 0.94 1.03 0.85 0.037 0.036 0.037 0.037 1.66 1.64 0.099 0.093 1.74 0.110 0.00729 – 0.00791 2.69 0.68 1.97 1.16 5.25 2.31 2.64 0.65 1.93 1.09 4.85 2.02 2.73 0.75 2.10 1.18 5.43 2.44 1.53 0.08 – 2.61 0.59 1.74 1.09 4.75 2.21 0.0003 0.0002 0.0003 0.0002 0.26 4.48 0.25 4.34 0.28 4.78 0.24 4.05 0.039 0.038 0.039 0.038 0.24 0.18 7.45 1.18 0.23 0.18 7.33 1.15 0.25 0.19 7.95 1.26 0.23 0.17 6.62 1.17 Revenue Revenue comprises the fair value of goods sold, excluding VAT and discounts and after eliminating intra-group sales. The Group’s sales revenue arises principally from sales of products. Service related to products sold makes up a very limited fraction of revenue. Revenue from sales of the Group’s products is recognized when all signifi- cant risks and rewards associated with ownership are transferred to the purchaser in accordance with applicable conditions of sale, which is normally upon delivery. If the product requires installa- tion at the customer’s premises, revenue is recognized when instal- lation is completed. Revenue from service contracts is recognized through distribution over the contract period. 67 Notes Intra-group sales Transactions between Group companies are carried out at arm’s length and thus at market prices. Intra-group sales are eliminated from the consolidated income statement, and profits on such trans- actions have been eliminated in their entirety. Government grants Grants and support from governments, public authorities etc are reported when there is reasonable assurance that the company 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. Research and development Research costs are expensed as they are incurred. The costs of development work are reported in the balance sheet only to the extent that they are expected to generate future economic benefits for the Group and provided such benefits can be reliably measured. Development costs so reported are amortized over the expected useful life. Development costs recorded as assets but not yet in use are subject to annual impairment testing. Costs for development of existing products are expensed as they are incurred. Borrowing costs Borrowing costs are recognized as expenses in the period in which they are incurred. 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, associ- ated tax effects are also reported in the income statement. The tax effects of items reported directly against equity are themselves reported against equity. Deferred tax is accounted for under the lia- bility method. This means that deferred tax is accounted for on all temporary differences between the carrying amounts of assets and liabilities and their respective tax bases. 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 subsidiaries are not reported in the consoli- dated financial statements since the Parent company can control the time at which the temporary differences are cancelled and it is not considered likely that such cancellation will occur in the fore- seeable future. Deferred tax receivables and deferred tax liabilities are offset when there is a legal right to do so and when the deferred tax amounts concern the same tax authority. Cash flow statement The cash flow statement has been prepared according to the in- direct method. The reported cash flow includes only transactions involving cash payments. ‘Cash and cash equivalents’ covers cash and bank balances and short-term financial investments with dura- tions of less than three months. Goodwill and acquisition-related intangible assets Goodwill represents the positive difference between the cost of acquisition and the fair value of the Group’s share of the acquired company’s net identifiable assets at the date of acquisition, and is reported at cost less accumulated impairment losses. Goodwill is allocated to Cash-Generating Units (CGU) and each year is system- atically tested for impairment using a valuation model based on discounted future cash flow. Deferred tax receivables based on local tax rates are reported in terms of tax-deductible goodwill (with corresponding reduction of the goodwill value). Such deferred tax receivables are expensed as the tax deduction is utilized. Other acquisition-related intangible assets consist chiefly of various types of intangible rights such as brands, patents and cus- tomer relationships. Identifiable acquisition-related intangible assets are initially recognized at fair value at the date of acquisition and subsequently at cost less accumulated amortization and impairment losses. Amortization is on a straight-line basis over estimated useful life. Acquisition-related intangible assets with indefinite useful life are tested for impairment every year in the same way as goodwill, as described above. Other intangible assets An intangible asset that is not acquisition-related is reported only if it is likely that the future economic benefits associated with the asset will flow to the Group and if the cost of acquisition can be measured reliably. Such an asset is initially recognized at cost and is amortized over its estimated useful life, usually between three and five years. Its carrying amount is cost less accumulated amortiza- tion and impairment losses. Tangible assets Tangible assets are reported at cost less accumulated depreciation and impairment losses. Cost includes expenditure that can be directly attributed to the acquisition of the asset. Subsequent expenditure is added to the carrying amount if it is probable that economic benefits associated with it will flow to the Group and if the cost can be reliably measured. Expenditure on repairs and maintenance is expensed as it is incurred. No depreciation is applied to land. For other assets, cost is depreciated over estimated useful life, which for the Group leads to the following depreciation periods (on average): – office buildings, 50 years – industrial buildings, 25 years – machinery and other technical plant, 7–10 years – equipment and tools, 3–6 years. Profit or loss on the disposal of a tangible asset is recognized in the income statement as ‘Other operating income’ or ‘Other operating expenses’, based on the difference between the selling price and the carrying amount. 68 Notes Leasing The Group’s leasing is chiefly operational leasing. The leasing payments are expensed at a constant rate over the period of the contract and are reported as operating costs. Impairment Assets with indefinite useful life are not amortized but are tested for impairment on an annual basis. For impairment testing pur- poses assets are grouped at the lowest organizational level where there are separate identifiable cash flows, so called Cash-Generat- ing Units (CGU). For assets that are depreciated/amortized, impair- ment testing is carried out when events or circumstances indicate that the carrying amount may not be recoverable. When impairment has been established, the value of the asset is reduced to its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell, and its value in use. Inventories Inventories are valued in accordance with the ‘first in, first out’ principle at the lower of cost 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 a fair allocation of indirect manufacturing costs. Accounts receivable Accounts receivable are reported at their fair value, which corre- sponds to amortized cost less any provision for bad debts. A provi- sion is recognized when it is probable that the recorded amounts will not flow to the Group. The year’s change in such a provision is reported in the income statement. Financial instruments Financial instruments are initially recorded at fair value. Subse- quent measurement of financial instruments depends on the classi- fication at initial recognition, which in turn depends on the original purpose of acquiring the instrument. Financial instruments are divided into the following categories: • ‘Financial instruments at fair value through profit and loss’ are financial assets held for trading, financial assets at fair value through profit and loss (classified at inception) and derivatives that are not part of a hedge relationship qualifying for hedge accounting. Gains and losses arising from changes in the fair value of financial instruments at fair value through profit and loss are included in the income statement in the period in which they arise. The category includes current financial investments and derivatives that are not part of hedge relationships qualify- ing for hedge accounting. See also the section below regarding hedge accounting. • ‘Loans and other receivables’ are non-derivative financial assets, with fixed or determinable payments, which are not traded on an active market. Such a receivable usually arises when the Group provides a counterparty with cash or supplies a customer with goods or services without intention of trading the receivable. Loans and other receivables are carried at amortized cost using the effective interest method. The category covers non-current receivables, accounts receivable and other current receivables. • ‘Held-to-maturity investments’ are non-derivative financial assets with fixed or determinable payments and fixed maturities which the Group has the intention and ability to hold to matu- rity. After initial recognition, these investments are carried at amortized cost using the effective interest method. The Group normally holds no, or very limited, amounts as held-to-maturity investments. • ‘Available-for-sale financial assets’ includes non-derivative financial assets that are either classified as available for sale or are not classified in any of the other categories of financial assets. The Group normally holds no positions falling into this category. Financial liabilities, which are neither recorded at fair value through profit and loss nor included in a hedge relationship quali- fying for hedge accounting, are reported at amortized cost using the effective interest method. The category covers non-current and current loan liabilities which are not hedged items, other non- current and current liabilities, and accounts payable. Acquisitions and disposals of financial instruments are recog- nized on trade-date, i.e. when the Group is committed to the pur- chase or sale. Transaction costs are included initially in the fair value of all financial instruments apart from those reported at fair value through profit and loss. The fair value of a quoted financial instrument is based on the bid price on the closing day. Regarding financial instruments in a non-active market and for unlisted securities, fair value is deter- mined by using an appropriate method of valuation, for example using available information on comparable arm’s length transac- tions, comparison with similar instruments, and analysis of dis- counted cash flows. The current and non-current distinction is applied consistently to all financial instruments. When settlement or disposal is expected to occur more than 12 months after closing day, a finan- cial asset is reported as a non-current asset. Thus, when settlement or disposal is expected to occur within 12 months of closing day, financial assets are reported as current assets. Financial liabilities with maturity later than 12 months after closing day are reported as non-current liabilities and those with maturity within 12 months of closing day as current liabilities. A financial asset is derecognized when the right to receive cash flow from the asset expires or is transferred to another party because all risks and rewards associated with the asset have been transferred to that party. A financial liability is derecognized when the obligation is discharged or cancelled or when it expires. Hedge accounting Hedge accounting is applied only to transactions that are desig- nated to hedge a specific risk and that qualify for hedge account- ing. The Group holds a limited number of such hedge relationships and they include both fair value hedges and cash flow hedges. A financial liability is a hedged item when it is included in a hedge relationship qualifying for hedge accounting, thus effectively hedged by a derivative designated as a hedging instrument. The liability (the hedged item) as well as the derivative (the hedging instrument) is recognized at fair value. Changes in the fair value of a liability which is the hedged item of a qualifying fair value hedge are reported in the income statement in the period in which they arise. Gain or loss from revaluation of the hedging instrument of such a qualifying fair value hedge is reported in the income state- ment at the same time as gain or loss from the hedged item. 69 Notes Gain or loss from revaluation of a hedging instrument of a cash-flow hedge qualifying for hedge accounting is reported in equity in the period in which it arises and is transferred to the income statement in the period that the hedged cash flow is recog- nized. Ineffective portion of the gain or loss is reported in the income statement in the period in which it arises. Provisions Provisions are recognized when the Group has a legal or construc- tive obligation resulting from past events and it is probable that an outflow of resources will be required to settle the obligation and that a reliable estimate can be made of the amount. Provisions are reported at a value representing the probable outflow of resources that will be needed to settle the obligation. Employee benefits Both defined contribution and defined benefit pension plans exist in the Group. Comprehensive defined benefit plans are found chiefly in the USA, the UK and Germany. Post-employment medical benefits also exist, mainly in the USA, which are reported in the same way as defined benefit pension plans. Calculations related to the Group’s defined benefit plans are performed by independent actuaries and are based on a number of actuarial assumptions such as discount rate, future inflation and salary increases. Obligations are valued on the closing day at their discounted value. For funded plans, obligations are reduced by the fair value of the plan assets. Unrecognized actuarial gains and losses lying outside the so-called ten-percent corridor (i.e. exceeding the higher of 10 percent of the present value of the obligation or the fair value of plan assets) are spread over the expected average remaining working lives of the employees. In principle, pension costs for defined benefit plans are spread over the employee’s service period. The part of the interest component in the pension cost that relates to the deficit in pension plans is reported as a financial expense. The Group’s payments related to defined contribution pension plans are reported as cost in the period to which they refer, based on the services performed by the employee. The Parent company The Group’s Parent company, ASSA ABLOY AB, is responsible for the management of the Group and handles common Group func- tions. The Parent company’s revenue consists of intra-group fran- chise revenue, and its main balance sheet items consist of shares in subsidiaries, intra-group receivables and liabilities, and external borrowing. The Parent company has prepared its annual accounts in accor- dance with the Swedish Annual Accounts Act (1995:1554) and standard RR 32 of the Swedish Financial Accounting Standards Council. RR 32 requires the Parent company, in its annual accounts, to apply all the International Financial Reporting Standards (IFRS) endorsed by the EU in so far as this is possible within the frame- work of the Annual Accounts Act and with regard to the relation- ship between accounting and taxation. RR 32 states what excep- tions from, and additions to, IFRS should be made. The differences between the Group’s and the Parent company’s accounting principles are detailed below. In accordance with the transition rules in RR 32 the company has elected not to apply Chapter 14, sections a-e, of the Annual Accounts Act, which deal with the valuation of certain financial instruments at fair value. From 1 January 2006 the rules of Chapter 14, sections a–e, will be applied. This will represent a change in accounting principles. The accounting principles for the Parent company described below have been applied consistently to all periods presented in the Parent company’s financial statements. The Parent company’s changed accounting principles resulting from the adoption of RR 32 have not involved any adjustments to the figures reported for 2004. Revenue The Parent company’s revenue consists of intra-group franchise revenues. These are reported in the income statement as ‘Other operating income’ to make it clear that the Parent company has no product sales similar to those of other Group companies concerned with external business. Share-based incentive programs Current share-based incentive programs were issued at market value and therefore involve no personnel costs for the Group. Dividend revenue Dividend revenue is recognized when the right to receive payment is judged to be firm. Dividend The dividend is reported as a liability once the Annual General Meeting has approved the dividend. Tangible assets Tangible assets owned by the Parent company are reported at cost less accumulated depreciation and any impairment losses in the same way as for the Group. All leasing contracts in the Parent company consist of operational leasing and are reported according to applicable rules. Shares in subsidiaries Shares in subsidiaries are reported at cost less impairment losses. 70 Receivables from subsidiaries Receivables from subsidiaries are valued as the amounts that are expected to be received. Liabilities to subsidiaries Liabilities to subsidiaries are valued at the amounts at which the liabilities are expected to be settled. Employee benefits Payments related to defined contribution pension plans are expensed in the period they relate to. Group contributions The company reports Group contributions in accordance with a statement from the Emerging Issues Task Force of the Swedish Financial Accounting Standards Council. Group contributions are reported according to their financial implications. This means that Group contributions that are paid with the aim of minimizing the Group’s total tax charge are reported directly against equity after deduction for their actual tax effects. Group contributions compa- rable to dividends are reported as such, which means that received Group contributions and their actual tax effects are reported in the income statement and paid Group contributions and their actual tax effects are reported directly against equity. Notes Note 2 Sales The Group’s sales revenues come chiefly from sales of products. Service related to products sold accounts for a very limited part of revenues (3–4 percent). Sales to customers, by country SEK M USA France United Kingdom Germany Sweden Australia Netherlands Spain Finland Canada Norway Mexico Denmark Asia (excluding China) Italy China Belgium Middle East New Zealand Czech Republic Switzerland South America South Africa Austria Central America (excluding Mexico)) Russia Portugal Baltic countries Poland Romania Other countries Total Note 3 Auditors’ fees SEK M Audit PricewaterhouseCoopers Other Assignments other than audit PricewaterhouseCoopers Other Total Group 2005 2004 9,278 2,294 2,010 1,466 1,286 1,186 1,070 1,029 765 744 662 570 534 533 457 429 362 347 327 326 280 263 238 195 130 128 111 108 96 54 524 8,414 2,260 1,675 1,380 1,180 1,056 1,036 961 739 728 576 649 503 394 454 286 356 273 319 263 244 238 222 179 129 118 122 92 103 48 529 27,802 25,526 Group Parent company 2005 2004 2005 2004 26 4 10 4 44 22 4 12 7 45 3 – – 2 5 2 – 2 4 8 71 Notes Note 4 Other operating income and expenses Note 8 Depreciation and amortization SEK M Rent received Profit/loss from sales of fixed assets Government grants Other non-business-related income Business-related taxes Other, net Total Group 2005 2004 23 8 6 12 –42 21 28 20 4 6 30 –40 4 24 SEK M Intangible rights Machinery Equipment Buildings Land and land improvements Total Group Parent company 2005 2004 2005 2004 18 497 244 122 1 882 47 504 246 125 1 923 4 – 2 – – 6 1 – 2 – – 3 Parent company Other operating income in the Parent company consists mainly of franchise revenues from subsidiaries. Note 9 Employee benefits Salaries, wages and other remuneration (of which, performance-related salary paid to managing directors) Note 5 Share of earnings in associates SEK M Låsgruppen Wilhelm Nielsen AS Cerraduras de Colombia Cerracol S.A Total Group 2005 2004 4 4 8 4 4 8 Note 6 Operational leasing agreements SEK M Leasing fees paid during the year: Group Parent company 2005 200 2004 144 2005 2004 10 9 Group Parent company SEK M Sweden Finland Norway Denmark United Kingdom Belgium Netherlands France Germany Switzerland Italy Spain SEK M Nominal value of agreed future leasing fees: Due for payment in 2006 (2005) Due for payment in 2007 (2006) Due for payment in 2008 (2007) Due for payment in 2009 (2008) Due for payment in 2010 (2009) Due for payment in 2011 (2010) or later Total 2005 2004 2005 2004 Czech Republic 183 139 91 69 52 57 591 121 92 65 41 40 34 393 10 10 9 9 10 10 58 Romania Israel South Africa Canada USA Mexico South America China Australia 9 9 9 9 9 9 54 New Zealand Note 7 Expenses by nature In the income statement costs are broken down by function. Cost of goods sold, Selling expenses, Administrative expenses and Research & Development costs amount to SEK 23,760 M (21,873) in total. Below, these same costs are broken down by nature. SEK M Remuneration of employees (Note 9) Direct material costs Depreciation and write-downs (Notes 15, 16) Other expenses Total Group 2005 2004 9,260 8,059 884 8,899 7,162 924 5,557 4,888 23,760 21,873 Other Total SEK M Sweden Other Total Social costs (of which, pensions) SEK M Total SEK M Total Group 2005 2004 530 (4) 297 (0) 274 (3) 117 (1) 596 (1) 69 (0) 211 (2) 613 (2) 530 (2) 227 (2) 92 (–) 268 (1) 63 (0) 29 (0) 74 (0) 78 (0) 484 (9) 288 (1) 254 (1) 118 (0) 484 (2) 71 (0) 224 (1) 586 (2) 511 (1) 209 (0) 130 (–) 270 (–) 58 (0) 23 (–) 64 (0) 61 (–) 135 (0) 111 (0) 2,241 (21) 2,053 (11) 146 (1) 169 (0) 52 (0) 111 (1) 288 (0) 130 (–) 134 (2) 42 (–) 68 (0) 316 (0) 243 (–) 112 (2) 7,305 (43) 6,949 (30) Parent company 2005 72 (2) 9 (–) 81 (2) 2004 63 (4) 4 (–) 67 (4) Group 2005 2004 1,955 (384) 1,950 (433) Parent company 2005 2004 46 (22) 36 (17) 72 Remuneration of the Parent company’s Board of Directors and CEO Salaries and other remuneration paid to the Board of Directors and the CEO totaled SEK 13 M (15). Social costs for the Directors and the CEO amounted to SEK 14 M (10), of which SEK 9 M (4) con- sisted of pension costs. Detailed information about remuneration and social costs applying to the Directors and senior management appears in the Corporate Governance report. Severance pay agreement A severance pay agreement has been signed with the CEO by which he receives 100 percent of his fixed salary for 24 months. The agreement applies only where the company gives notice of severance. Absence for illness % Total absence for illness: – long-term – men – women – aged 29 or younger – aged 30–49 – aged 50 or older Parent company 2005 2004 1.5 – 0.4 2.7 1.4 1.8 0.3 1.1 – 0.2 2.1 0.6 1.5 0.5 Note 10 Exchange-rate differences in the income statement SEK M 2005 2004 2005 2004 Group Parent company Exchange-rate differences reported in the income statement Exchange-rate differences reported in financial expenses Total 3 –7 –4 –27 22 –5 – 43 43 – –20 –20 Note 11 Financial income Group Parent company Notes Note 12 Financial expenses Group Parent company SEK M 2005 2004 Intra-group interest expenses – – Interest expenses, convertible debenture loans Interest expenses, other liabilities –46 –499 Exchange-rate differences, net (Note 10) –7 Changes in value of derivative financial instruments Other financial expenses Total 15 –36 –573 –33 –632 22 193 –198 –648 2005 –348 –46 –183 43 – –20 –554 2004 –385 –33 –295 –20 – –190 –923 Towards the end of 2004, EUR 300 M of the EMTN program was redeemed with the aim of refinancing with a medium-term loan in USD in order to improve the average duration of liabilities. The redemption involved costs in the Parent company with corre- sponding income from the premature closure of the related interest rate swap. Note 13 Tax on income SEK M Current tax paid Tax attributable to prior years Deferred tax Total Group Parent company 2005 –818 8 –132 –942 2004 –707 –77 –59 2005 –13 – – –843 –13 2004 – –7 – –7 Explanation for the difference between nominal Swedish tax rate and effective tax rate based on income before tax: Percent 2005 2004 2005 2004 Group Parent company Swedish rate of tax on income Effect of foreign tax rates Non-taxable income / non-deductible expenses, net Deductible goodwill Tax losses utilized 28 3 –6 2 –1 1 28 –1 –3 2 –1 1 26 28 – –15 – –11 – 2 28 – –28 – – – 0 Group 2005 2004 SEK M 2005 2004 2005 2004 Other Earnings from participations in subsidiaries (A) Intra-group interest income External interest income and similar items Total – – 51 51 – – 164 164 375 491 4,044 506 1 0 867 4,550 Effective tax rate in income statement 27 Note 14 Earnings per share Earnings per share before dilution (A) Earnings from participations in subsidiaries Dividends from subsidiaries Write-downs of shares in subsidiaries Earnings from sales of shares in subsidiaries Total Parent company 2005 2004 13,588 2,845 –13,210 –3 375 –177 1 376 4,044 Write-downs of shares in subsidiaries of SEK 13,210 M (177) were mainly due to dividends received from subsidiaries. Earnings assigned to the Parent company’s shareholders 2,608 2,349 Weighted average number of shares issued (thousands) 365,918 365,918 Earnings per share before dilution (SEK per share) 7.13 6.42 Earnings per share after dilution Group 2005 2004 Earnings assigned to the Parent company’s shareholders 2,608 2,349 Interest expenses for convertible debenture loans, after tax 33 24 Net profit for calculating earnings per share after dilution 2,641 2,373 Weighted average number of shares issued (thousands) 365,918 365,918 Assumed conversion of convertible debentures (thousands) 12,800 9,185 Weighted average number of shares for calculation (thousands) 378,718 375,103 Earnings per share after dilution (SEK per share) 6.97 6.33 73 Notes Note 15 Intangible assets 2005 SEK M Opening accumulated acquisition value Purchases Acquisitions of subsidiaries Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value Opening accumulated amortization/impairment Sales/disposals Reclassifications Impairment Amortization for the year Translation differences Closing accumulated amortization/impairment Book value 2004 SEK M Opening accumulated acquisition value Purchases Acquisitions of subsidiaries Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value Opening accumulated amortization/impairment Sales/disposals Reclassifications Impairment Amortization for the year Translation differences Closing accumulated amortization/impairment Goodwill 13,917 18 249 – –3 1,535 15,716 – – – – – – – 15,716 Goodwill 13,814 125 461 –16 – –467 13,917 – – – – – – – Book value 13,917 Group Intangible rights 473 86 75 –20 8 44 666 –252 1 1 –1 –18 –36 –305 361 Group Intangible rights 410 40 79 –40 – –16 473 –230 14 – – –47 11 –252 221 Parent company Intangible rights 9 40 – –18 10 – 41 –1 – – – –4 – –5 36 Parent company Intangible rights 4 5 – – – – 9 –1 – – – –1 – –2 7 Total 14,390 104 324 –20 5 1,579 16,382 –252 1 1 –1 –18 –35 –304 16,078 Total 14,224 165 540 –56 0 –483 14,390 –230 14 0 0 –47 11 –252 14,138 Intangible rights consist mainly of brands and licences with finite useful life. The book value of intangible rights with indefinite life amounts to SEK 126 M (79). Useful life is taken as indefinite where the time period during which it is judged that an asset will contribute economic benefits cannot be defined. Amortization and write-down of intangible rights have mainly been reported as administrative costs in the income statement. In the Parent company the book value of intangible rights with indefinite life amounts to SEK 29 M (0). 74 Impairment testing of goodwill and intangible rights with indefinite useful life Goodwill and intangible rights with indefinite useful life are assigned to the Group’s Cash-Generating Units, as summarized in the following table: 2005 SEK M Goodwill Intangible rights with indefinite useful life 2004 SEK M Goodwill Intangible rights with indefinite useful life Architectural Hardware Group ASSA ABLOY Entrance Systems ASSA ABLOY Identification Technology 3,442 – 3,442 2,446 19 2,465 2,136 – 2,136 Architectural Hardware Group ASSA ABLOY Entrance Systems ASSA ABLOY Identification Technology 2,869 – 2,869 2,188 – 2,188 1,715 – 1,715 Other 7,692 107 7,799 Other 7,145 79 7,224 Notes Total 15,716 126 15,842 Total 13,917 79 13,996 For each Cash-Generating Unit, the Group assesses each year whether any write-down of goodwill is needed, in accordance with the accounting principles described in Note 1. Recoverable amounts for Cash-Generating Units have been established by cal- culation of value in use. These calculations are based on estimated future cash flows, which in turn are based on financial budgets approved by the management and covering a three-year period. Cash flows beyond three years are extrapolated using estimated growth rates according to the principles below. Main assumptions used to calculate useful values: • Budgeted operating margin. • Growth rate for extrapolating cash flows beyond the three-year period. • Discount rate after tax used for estimated future cash flows. The management has established the budgeted operating margin on a basis of earlier results and its expectations about future mar- ket development. For extrapolating cash flows beyond the three- year period, a growth rate of 3 percent is used for all Cash-Gener- ating Units. This growth rate is thought to be a conservative esti- mate. In addition, an average discount rate of 8 percent in Swedish kronor after tax is used for the Group. However the rate has been adjusted for a small number of Cash-Generating Units to reflect the specific risks faced by these Units. Overall, the discount rate employed varies between 8.0 and 9.5 percent. Sensitivity analysis A sensitivity analysis has been carried out for each Cash-Generat- ing Unit. The results of the analyses can be summarized as follows: If the estimated operating margin after the end of the budget period had been 10 percent lower than the management’s figure, total recoverable value would be 9 percent lower. If the estimated growth rate to extrapolate cash flows beyond the budget period had been 10 percent lower than the starting assumption of 3 percent, total recoverable value would be 5 per- cent lower. If the estimated weighted capital expenditure used for the Group’s discounted cash flow had been 10 percent higher than the starting assumption of 8.0 to 9.5 percent, total recoverable value would be 14 percent lower. These calculations are hypothetical and should not be viewed as an indication that these figures are any more or less likely to be changed. The sensitivity analysis should therefore be treated with caution. None of the hypothetical cases above would lead to a write- down of goodwill in a particular Cash-Generating Unit. 75 Group Land and land improvements Machinery Equipment 695 4,910 1,402 1 – –9 7 67 761 –16 0 –4 – –1 –3 –24 – 737 341 31 –106 66 503 234 20 –99 5 126 Total 9,899 664 51 –339 87 982 5,745 1,688 11,344 –3,006 –846 –4,919 66 2 – –497 –241 63 5 –1 –244 –61 186 –1 –1 –864 –397 –3,676 –1,084 –5,996 – 2,069 – 604 354 5,702 Group Machinery Equipment 4,974 1,361 365 44 –200 –35 –238 207 15 –138 26 –69 4,910 1,402 –2,940 193 35 – –504 210 –3,006 – 1,904 –789 136 –2 – –246 55 –846 – 556 Total 9,954 689 80 –436 40 –428 9,899 –4,796 397 22 –1 –876 335 –4,919 299 5,279 Parent company Equipment 18 5 – –4 – – 19 –9 2 – – –2 – –9 – 10 Parent company Equipment 17 3 –2 – – – 18 –9 1 – – –2 – –10 – 8 Notes Note 16 Tangible assets 2005 SEK M Opening accumulated acquisition value Purchases Acquisitions of subsidiaries Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value Buildings 2,892 88 – –125 9 286 3,150 Opening accumulated depreciation/impairment –1,051 Sales/disposals Reclassifications Impairment Depreciation for the year Translation differences Closing accumulated depreciation/impairment Construction in progress Book value 57 –4 – –122 –92 –1,212 – 1,938 The tax value of the Group’s Swedish buildings was SEK 83 M (87). The tax value of the Group’s Swedish land was SEK 11 M (12). 2004 SEK M Opening accumulated acquisition value Purchases Acquisitions of subsidiaries Sales/disposals Reclassifications Translation differences Closing accumulated acquisition value Buildings 2,922 66 20 –77 68 –107 2,892 Opening accumulated depreciation/impairment –1,051 Sales/disposals Reclassifications Impairment Depreciation for the year Translation differences 68 –12 – –125 69 Closing accumulated depreciation/impairment –1,051 Construction in progress Book value – 1,841 Land and land improvements 697 51 1 –21 –19 –14 695 –16 – 1 –1 –1 1 –16 – 679 76 Note 17 Shares in subsidiaries Company name ASSA ABLOY EMEA AB Timelox AB Corporate identity number, Registered office 556061-8455 Stockholm 556214-7735 Landskrona ASSA ABLOY Entrance Systems Group AB 556204-8511 Landskrona Sokymat AB ASSA ABLOY Kredit AB 556514-7997 Ronneby 556047-9148 Stockholm ASSA ABLOY Identification Technology Group AB 556645-4087 Stockholm ASSA ABLOY Svensk Fastighets AB ASSA ABLOY Asia Holding AB ASSA ABLOY IP 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. ASSA ABLOY Inc ABLOY Holdings Ltd 556645-0275 Stockholm 556602-4500 Stockholm 556645-4087 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 39347-83 Salem, Oregon 1148165260 St Laurent ASSA ABLOY Australia Pacific Pty Ltd ACN 095354582 Oakleigh, Victoria ASSA ABLOY South Asia Pte Ltd Grupo Industrial Phillips, S.A de C.V. Lips Technology BV ASSA ABLOY Innovation AB ASSA ABLOY Hospitality AB WHAIG Limited ASSA ABLOY Asia Pacific Ltd Total 199804395K Singapore GIP980312169 Mexico 33274584 Amsterdam 556192-3201 Stockholm 556180-7156 Göteborg EC21330 Bermuda 53451 Hong Kong Notes Parent company 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 1 48,190,000 3,400,000 27,036,635 400 2,500 1,000 100,100 1,000,000 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98 100 90 100 100 100 100 100 100 100 100 100 100 100 100 14 21 6 53 529 50 0 131 0 631 538 376 1,394 57 29 1 2 928 1,582 0 943 901 184 0 2,259 13 242 43 765 0 1 14 423 72 12,202 77 Notes Note 18 Shares in associates 2005 Company name Talleres Agui S.A. Låsgruppen Wilhelm Nielsen AS Cerraduras de Colombia Cerracol S.A Renato Fattorini SRL Other Total 2004 Company name Talleres Agui S.A. Låsgruppen Wilhelm Nielsen AS Cerraduras de Colombia Cerracol S.A Renato Fattorini SRL Other Total Country of registration Spain Norway Colombia Italy Country of registration Spain Norway Colombia Italy Number of shares 4,802 305 182,682 – – Number of shares 4,802 305 182,682 – – % of share capital Book value SEK M 40 50 29 25 – 17 15 2 2 1 37 % of share capital Book value SEK M 40 50 29 25 – 17 14 2 2 1 36 Note 19 Deferred tax on income Note 21 Inventories SEK M Deferred tax receivables Tax-deductible goodwill Provisions Other deferred tax receivables Deferred tax liabilities Fixed assets Other deferred tax liabilities Group 2005 2004 SEK M Materials and supplies 696 415 238 701 456 331 Work in progress Finished goods Paid in advance 1,349 1,488 Total Group 2005 2004 1,040 1,149 1,439 51 874 968 1,266 27 3,679 3,135 98 55 153 157 88 245 SEK 265 M (123) of the inventory value on 31 December 2005 was reported at net realizable value. Direct material costs during the year amounted to SEK 8,059 M (7,162), of which SEK 123 M (81) represented write-downs of inventory. Deferred tax entitlement, net 1,196 1,243 Change in deferred tax during the year Note 22 Accounts receivable At 1 January Exchange-rate differences Acquisitions of subsidiaries Reported in income statement Reported against equity At 31 December 1,243 1,344 SEK M 45 38 –132 2 –43 1 –59 – 1,196 1,243 Accounts receivable Provision for bad debt Total Group 2005 2004 5,102 4,404 –284 –258 4,818 4,146 There is limited concentration of credit risks associated with accounts receivable because the Group has a large number of customers with a wide international spread. The Group has additional tax losses carried forward of some SEK 700 M (500) for which tax receivables have not been recognized. Note 20 Other long-term financial assets Group Parent company SEK M 2005 2004 2005 2004 Other shares and participations Interest-bearing long-term receivables Other long-term receivables Total 12 62 97 22 31 77 171 130 6 – 61 67 6 – 61 67 78 Notes Group 2005 943 2,783 3,726 2004 5,983 46 6,029 3,735 6,152 70 0 70 43 0 43 Group 2005 2004 943 943 902 902 1,886 1,804 Note 23 Derivative financial instruments SEK M Currency contracts, positive value Interest rate swaps – cash flow hedging Interest rate swaps – fair value hedging Currency basket options Currency contracts – held for trading Currency contracts, negative value Interest rate swaps – fair value hedging Interest rate swaps – held for trading Currency contracts – held for trading Derivative financial instruments, net (liability) Group 2005 2004 (A) Long-term loans Maturities of long-term loans: 1 1 7 34 43 7 1 46 54 11 – – – – – – – – – – SEK M Between two and five years Over five years Book value Fair value of long-term loans Securities pledged against long-term loans: Real-estate mortgages Chattel mortgages Total (B) Convertible debenture loans Values of derivative financial instruments at the end of 2004 are reported in the comparatives as accrued interest expenses or accrued interest income. Note 24 Cash and cash equivalents SEK M Cash and bank balances Short-term investments (duration <3 months) Total Group Parent company 2005 916 42 958 2004 831 186 1,017 2005 223 610 833 2004 2 2 4 Short-term investments shown in the consolidated balance sheet amounted to SEK 104 M (230) at year-end, of which SEK 62 M (44) were either non-realizable receivables with a term to maturity of over three months or investments in securities. These items are not classified as cash and cash equivalents and are not included in the table above. Note 25 Borrowings SEK M 2005 2004 2005 2004 Long-term loans (A) 2,783 4,225 – 3,104 Group Parent company Convertible debenture loans long-term part (A, B) Convertible debenture loans short-term part (B) Short-term loans (C) Total 943 1,804 943 1,804 943 – 6,966 5,594 11,635 11,623 943 3,842 5,728 – 507 5,415 SEK M Incentive 2001 Incentive 2004 Book value Fair value of convertible debenture loans 1,886 1,804 Incentive 2001 has a variable interest rate equivalent to 0.9*EURI- BOR + 54 basis points. Any conversion of Incentive 2001 will take place in a 30-day period in October and November 2006. Full con- version 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 per- cent of the total number of votes. Incentive 2004 has a variable interest rate equivalent to 0.9*EURIBOR + 47 basis points. Any conversion of Incentive 2004 will take place in a 90-day period between March and June 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. (C) Short-term loans Also see the table ’External funding / Net debt’ on Page 64. SEK M Corporate credit line Other short-term loans Book value Fair value of short-term loans Group 2005 272 6,694 6,966 2004 204 5,390 5,594 6,977 5,595 Check credits granted to the Group totaled SEK 1,223 M (1,024), of which SEK 272 M (204) was utilized. 79 Notes Note 26 Parent company’s equity The Parent company’s equity is split between restricted and un- restricted equity. Restricted equity consists of share capital, the reserve fund and the premium reserve. Restricted funds must not be reduced by issue of dividends. Unrestricted equity consists of retained earnings and the year’s net income. The reserve fund contains premiums (amounts received from share issues that exceed the nominal value of the shares) relating to shares issued up to 1996. The premium reserve contains premiums (amounts received from share issues that exceed the nominal value of the shares) relating to shares issued from 1997 onwards. In accordance with the transition rules relating to the new Swedish Companies Act that came into force on 1 January 2006, the full amount held in the premium reserve on 31 December 2005 has been moved to the reserve fund. From 1 January 2006 the premium reserve is trans- ferred to form part of unrestricted equity. Note 27 Share capital, number of shares and dividend per share Opening balance at 1 January 2004 Closing balance at 31 December 2004 Number of votes, thousands Opening balance at 1 January 2005 Closing balance at 31 December 2005 Number of votes, thousands All shares have a par value of SEK 1.00 and provide the holders with equal rights to the Company's assets and earnings. All shares are entitled to dividends subsequently issued. Each Series A share carries 10 votes and each Series B share one vote. All issued shares are fully paid-up. 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 conversion of outstanding convertible bonds, similarly rounded, was 378,718 thousand (375,103). Note 28 Reserves Group SEK M Translation reserve Hedging reserve Opening balance at 1 January 2004 Currency translation differences Closing balance at 31 December 2004 Opening balance at 1 January 2005 Effect of changed accounting principle, IAS 39 Adjusted opening balance at 1 January 2005 – –479 –479 –479 – –479 Cash flow hedging instruments, fair value – Currency translation differences 1,539 Closing balance at 31 December 2005 1,060 – – – – 4 4 –3 – 1 Total 0 –479 –479 –479 4 –475 –3 1,539 1,061 Number of shares (thousands) Series A 19,175 19,175 191,753 19,175 19,175 191,753 Series B 346,743 346,743 346,743 346,743 346,743 346,743 Total 365,918 365,918 538,496 365,918 365,918 538,496 Share capital SEK (thousands) 365,918 365,918 365,918 365,918 Dividend per share The dividend paid out during the financial year amounted to a total sum of SEK 951 M (457), corresponding to SEK 2.60 (1.25) per share. At the Annual General Meeting on 25 April 2006, a dividend of SEK 3.25 per share for the year 2005 – a total sum of SEK 1,189 M – will be proposed. The hedging reserve consists of changes in the fair value of hedging instruments used to hedge cash flows. The translation reserve consists of all currency translation differences that arise in the translation of financial reports from foreign operations prepared in a currency other than Swedish kronor, the currency used to present the Group’s financial reports. Currency translation differences arising from the revaluation of liabilities originating from instruments used to hedge net capital expenditure in foreign operations are also carried to the translation reserve. 80 Notes Note 29 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 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. The figures below include both defined benefit pension plans and post-retirement medical benefits. Specification of pension obligations (SEK M) 2005 2004 Present value of funded defined benefit obligations 4,166 3,294 Fair value of plan assets Net value of funded plans Present value of unfunded defined benefit obligations Unrecognized actuarial gains (losses), net Unrecognized past service cost –3,009 –2,243 1,157 1,051 726 –326 3 666 –111 3 Provisions for defined benefit plans, net 1,560 1,609 The following amounts are recognized in the income statement: Pension cost (SEK M) Defined benefit plans: Current service costs Interest cost Expected return on plan assets Net actuarial losses (gains) Past service costs Losses (gains) on curtailments/settlements Specification of movements in provision for pensions 2005 2004 2005 2004 Opening balance, provisions for defined benefit plans, net 109 227 119 208 –183 –154 1 –2 17 – –5 –7 Pension cost, defined benefit plans Contributions Effect of acquisitions/disposals, net Curtailments Currency translation differences Closing balance, provisions for defined benefit plans, net 1,609 1,887 169 –352 –1 –7 142 161 –384 –1 –47 –7 1,560 1,609 Pension cost, defined benefit plans 169 161 of which, included in Operating income Net financial items Pension cost, defined contribution plans Total pension cost 125 44 215 384 116 45 272 433 Pension cost for defined contribution plans is recognized in its entirety in the income statement. Actuarial gains/losses resulting from changes in the actuarial assumptions for defined benefit pension plans are recognized to the extent that their accumulated amount exceeds the ‘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 cor- ridor is recognized as income/expense over the expected average remaining service period. Amortization of actuarial gains/losses that arose in 2005 will start in 2006. The actual return on plan assets regarding defined benefit plans was SEK 282 M (148) in 2005. The following amounts are recognized in the balance sheet: Pension obligations (SEK M) Dec 31 2005 Dec 31 2004 Provisions for defined benefit pension plans Provisions for defined contribution pension plans Provisions for pensions, total 1,560 74 1,634 Assets regarding defined contribution pension plans –22 Pension obligations, net 1,612 1,609 68 1,677 –22 1,655 There are no defined benefit plans with surpluses within the Group. Partly funded or unfunded pension plans are reported as provisions for pensions. Out of pension obligations for defined benefit plans, SEK 463 M (382) relates to post-retirement medical benefits. Key actuarial assumptions (weighted average)* 2005 2004 Discount rate Expected return on plan assets Future salary increases Future pension increases Future medical benefit increases Expected inflation 4.7% 7.3% 3.0% 2.3% 15.0% 2.3% 5.2% 6.9% 2.1% 1.5% 8.0% 2.5% * These 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 employees in Sweden are guaranteed in part through insurance with Alecta. According to statement URA 42 from the Swedish Financial Accounting Standards Council’s Emerging Issues Task Force, this is a defined benefit plan that covers many employers. For the 2005 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 con- tracted to Alecta amount to SEK 10 M (9), of which SEK 3 M (2) relates to the Parent company. Alecta’s surplus may be distributed to the policy-holders and/or the persons insured. At the end of 2005 Alecta’s surplus expressed as collective consolidation level amounted to 128.5 percent (128.0). Collective consolidation 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 IAS 19. 81 Notes Note 30 Other provisions Note 34 Net debt Group Total purchase price SEK M Long-term interest-bearing receivables Short-term interest-bearing investments Cash and bank balances Pension obligations Long-term interest-bearing liabilities Short-term interest-bearing liabilities Total Note 35 Company acquisitions 2005 SEK M Cash paid, including direct acquisition costs Unpaid parts of purchase prices Fair value of acquired net assets Goodwill Intangible assets Tangible assets Inventories Receivables Cash and cash equivalents Interest-bearing liabilities Other liabilities Minority interests Acquired net assets at fair value Acquired net assets at book value Purchase prices settled in cash Cash and cash equivalents in acquired subsidiaries Change in Group cash and cash equivalents resulting from acquisitions Net sales in 2005 from times of acquisition EBIT in 2005 from times of acquisition Net income in 2005 from times of acquisition Net sales, full year EBIT, full year Net income, full year Group 2005 –62 –104 –916 1,634 3,726 7,963 2004 –31 –230 –831 1,677 6,029 5,594 12,240 12,208 Total 393 29 422 –173 249 75 51 82 135 28 –18 –132 –48 173 143 393 –28 365 449 18 5 617 29 13 SEK M At 1 January Utilized during the year Currency translation differences At 31 December Balance-sheet breakdown: Other long-term provisions Other short-term provisions Total Restructuring reserve Group Other 586 –298 56 344 93 –5 – 88 Total 679 –303 56 432 88 344 432 The restructuring reserve is concerned chiefly with future restruc- turing measures and is expected to be utilized during 2006. Note 31 Other short-term liabilities SEK M Excise duty Employee withholding tax Advances received Social security contributions and other taxes Other short-term liabilities Total 2005 145 70 60 55 327 657 2004 133 62 40 49 393 677 Note 32 Accrued expenses and prepaid income SEK M 2005 2004 2005 2004 Group Parent company Personnel-related expenses 1,023 Customer-related expenses Prepaid income Accrued interest expenses Other Total 797 220 58 54 941 362 94 118 816 2,413 2,070 31 – – 36 11 78 29 – – 28 7 64 Note 33 Contingent liabilities Group Parent company SEK M Guarantees 2005 120 Guarantees on behalf of subsidiaries 924 2004 119 692 6 2005 125 2004 118 9,963 7,275 – – 6 1,050 817 10,088 7,393 Other Total The group has contingent liabilities in the form of bank guarantees and other guarantees that arose in the normal course of business. No significant liabilities are expected to occur through these con- tingent liabilities. 82 No individual major acquisitions were made in 2005. The year’s largest acquisitions are described below. 2004 SEK M BEST Metaline On 31 January 2005 the Group acquired 100 percent of the share capital of BEST Metaline, one of South Korea’s leading suppliers of lock and door fittings. The acquisition has given ASSA ABLOY a foothold on the South Korean market. BEST Metaline was founded in 1994 and specializes in lock and door fittings and also in auto- matic doors. The company has a strong position in the customer specification segment serving architects and construction compa- nies. Its goodwill lies mainly in synergies and intangible assets that do not meet the criteria for separate reporting. Doorman Services On 1 February 2005 the Group acquired 100 percent of the share capital of Doorman Services, one of the United Kingdom’s leading door service companies. The acquisition has strengthened ASSA ABLOY’s automatic-door business. Doorman Services supplies installations and servicing of manual and automatic doors and security shutters for stores in Britain. The acquisition gives ASSA ABLOY a strong position in the store segment and the opportunity to offer a broad range of services for the entire entrance environ- ment. Goodwill lies mainly in synergies. Wangli On 1 June 2005 ASSA ABLOY acquired 70 percent of Wangli, a leading supplier of high-security doors and high-security locks in China. The company has built up a comprehensive distribution network in China and holds a leading position in its segment. Wangli’s business is located in the Zhejiang region of southern China. Its goodwill lies mainly in synergies and intangible assets that do not meet the criteria for separate reporting. Cash paid, including direct acquisition costs Unpaid parts of purchase prices Total purchase price Fair value of acquired net assets Goodwill Intangible assets Tangible assets Inventories Receivables Cash and cash equivalents Interest-bearing liabilities Other liabilities Acquired net assets at fair value Acquired net assets at book value Purchase prices settled in cash Cash and cash equivalents in acquired subsidiaries Change in Group cash and cash equivalents resulting from acquisitions Net sales in 2004 from times of acquisition EBIT in 2004 from times of acquisition Net income in 2004 from times of acquisition Net sales, full year EBIT, full year Net income, full year Notes Total 785 19 804 –343 461 79 83 154 107 43 –13 –110 343 257 785 –13 772 696 111 56 755 120 63 83 Notes Note 36 Average number of employees, with breakdown into women and men Average number of employees by country and by gender Women 2005 2004 585 423 205 128 745 65 103 922 465 207 158 267 505 420 105 370 77 2,178 1,791 366 1,366 333 140 272 552 424 202 126 780 69 106 918 472 198 242 297 475 385 104 360 64 1,880 1,992 141 1,082 396 165 192 Men Total 2005 923 686 466 144 1,010 136 521 2004 836 680 461 152 927 132 551 1,386 1,444 802 268 212 577 372 507 267 404 322 3,919 1,150 325 1,659 583 300 443 788 250 278 636 376 553 265 389 292 4,389 1,235 508 1,084 630 328 354 2005 1,508 1 108 672 271 2004 1,388 1 104 663 278 1,755 1,707 201 624 2,308 1,268 475 370 844 877 927 372 774 399 6,097 2,941 691 3,025 916 440 715 201 657 2,362 1,260 448 520 933 851 938 369 749 356 6,269 3,227 649 2,166 1,026 493 546 12,196 11,622 17,382 17,538 29,578 29,160 Women Men Total 2005 2004 2005 2004 2005 2004 30 5 35 20 4 24 32 7 39 23 5 28 62 12 74 43 9 52 Women Men Total 2005 2004 2005 2004 2005 2004 1 – 1 1 – 1 7 7 14 8 6 14 8 7 15 9 6 15 Group Sweden Finland Norway Denmark United Kingdom Belgium Netherlands France Germany Switzerland Italy Spain Czech Republic Romania Israel South Africa Canada USA Mexico South America China Australia New Zealand Other Total Parent company Sweden Other Total Gender-split in senior management Group Board of Directors * Executive Team Total * Excluding employee representatives. 84 Note 37 Cash flow SEK M Adjustments for non-cash items Profit on sales of equipment Change in pension obligations Other Adjustments 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 and intangible assets Sales of tangible and intangible assets Net capital expenditure Investments in subsidiaries Acquired assets and liabilities according to acquisition analyses: Intangible assets Tangible assets Inventory Accounts receivable Other receivables Minority interests Long-term liabilities Accounts payable Other short-term liabilities Acquired net debt Purchase price Less, acquired cash and cash equivalents Less, unpaid parts of purchase prices Plus, paid parts of purchase prices relating to previous years Investments in subsidiaries Investments in associates Investments in associates Investments in associates Other investments Investments in / sales of other shares Investments in / sales of other financial assets Other investments –324 –51 –82 –79 –56 48 60 42 30 –10 –422 28 29 –19 –384 2 2 10 –13 –3 Group 2005 2004 –14 –4 –8 –26 –475 20 –455 –108 –95 215 –122 –110 –805 138 –667 –18 2 – –16 –663 174 –489 –79 –135 95 107 –12 –842 192 –650 –671 –63 –135 –101 –8 – 91 52 61 –30 –804 43 – –143 –904 – – –4 –9 –13 Notes Note 38 Transition to IFRS Summary According to the EU, from 2005 onwards quoted companies should prepare their Group accounts in accordance with interna- tional accounting principles issued by the International Accounting Standards Board (IASB), which have been endorsed by the EU. The principles are known as International Financial Reporting Stan- dards (IFRS). Accordingly, ASSA ABLOY has adopted IFRS from 2005. The transition to IFRS came into effect from 1 January 2004, which means that comparative figures for 2004 have been adjusted in accordance with IFRS. However, comparatives relating to finan- cial instruments have not been adjusted, since IAS 39 has been adopted only from 1 January 2005. The information given here provides an overview of the impact of the new accounting regula- tions on the Group’s 2004 accounts. In summary, the transition has had the following effects: • Amortization of goodwill has ceased, and amortization of good- will charged as a cost during 2004 was reversed. • Deferred tax receivables relating to future tax-deductible good- will have been taken into consideration from 1 January 2004. • Intangible rights pertaining to 2004 acquisitions have been distinguished from goodwill and amortized over their estimated useful life. • Some provisions for acquisition-related restructuring that did not meet the requirements of IFRS have been expensed. • Financial instruments are being reported at fair value from 1 January 2005. Summary of effects on the consolidated income statement for 2004 SEK M Sales Operating income Net income 2004 Adjustment Under IFRS 25,526 2,770 1,495 – 25,526 + 913 + 861 3,683 2,356 Summary of effects on the consolidated balance sheet at 31 December 2004 SEK M Capital employed* Net debt* Equity 2004 Adjustment Under IFRS 22,683 12,208 10,448 + 778 – + 805 23,461 12,208 11,253 * See the section ‘Definitions of key data terms’, page 93. The transition to IFRS in general In recent years Swedish accounting practice, through the standards of the Swedish Financial Accounting Standards Council, has moved steadily towards IFRS. However, there remained a number of differences at the transition to IFRS, mainly related to date of adoption and transition rules but also to the changes in IFRS made by the Improvement Project of the IASB. 85 Notes The transition to IFRS for ASSA ABLOY ASSA ABLOY introduced IFRS at the start of the 2005 financial year on 1 January 2005, and the opening balance sheet and the quarterly information for 2004 were adjusted in accordance with IFRS at the transition. Earlier financial years were not adjusted, which accords with the transition rules in IFRS 1. The most signifi- cant effects concern the reporting of acquisitions, including the reporting of goodwill, and the reporting and valuation of financial instruments. Reclassifications affecting cash and cash equivalents, shareholders’ equity, minority interests, provisions and share of income in associates were also carried out to adjust the income statement and the balance sheet to accord with IFRS. The transition followed the rules of IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’. IFRS contains some rules offering alternative options, and ASSA ABLOY made the following choices: • IFRS 3 'Business Combinations’ has been adopted prospectively, and no adjustments have been made for acquisitions made before 1 January 2004. • Accumulated translation differences relating to the translation of foreign operations were zeroed at the time of transition. Alternative transition rules regarding initial values of tangible fixed assets, compound financial instruments, different transition dates within the Group, classification of financial instruments previously reported, share-based remuneration, and insurance contracts, did not apply to the Group. Business Combinations IFRS 3 'Business Combinations’ deals with the reporting of com- pany acquisitions. Adjustments relating to allocation of the pur- chase price were made for acquisitions made after 1 January 2004. Adjustments were also made for restructuring reserves that did not meet the requirements of IFRS because goodwill had diminished and restructuring costs had been set against income. Under IFRS 3 amortization of goodwill has ceased, and the amortization of goodwill set against income in 2004 is reversed in line with IFRS. To the extent that amortization of goodwill is tax-deductible, goodwill has been reduced and the corresponding deferred tax receivables reported, which are then expensed when the tax deduc- tion is utilized. Amortization of goodwill has been replaced by an annual impairment test. Goodwill and other acquisition-related intangible assets with indefinite life are tested for the need of write-down. The impairment testing is carried out systematically each year on Cash- Generating Units with the aid of a valuation model based on dis- counted future cash flow. The acquisition process has changed under IFRS 3, mainly as regards allocation of the purchase price. To a greater extent than before, the purchase price is allocated to identifiable intangible assets, which are amortized over their estimated useful life. The adoption of IFRS 3 has thus affected the accounting for acquisi- tions of companies but not the Group's acquisition strategy. Financial instruments IAS 39 ‘Financial Instruments’ has been adopted from 1 January 2005, without adjustment of comparatives. The accumulated effects of revaluation of financial instruments in accordance with IAS 39, SEK -77 M, has been reported as an adjustment of equity. The adoption of IAS 39 represents a change in accounting princi- ples and has been reported as a reduction in unrestricted reserves. Reporting of financial instruments under IAS 39 is giving rise to increased volatility in both the income statement and the balance sheet because of fair-value adjustments. These fluctuations are rela- tively limited for ASSA ABLOY. ASSA ABLOY has used financial instruments chiefly to hedge transaction exposure and in Treasury operations. Changed methods of carrying out hedging operations in 2005 have limited fluctuation effects following the adoption of IAS 39. Also see the section on Financial Risk Management, pages 63–65. Effects on key data The adoption of IFRS has had a positive effect on ASSA ABLOY’s key data. For example, Return on capital employed1, Return on shareholders’ equity1, Earnings per share1 and Net debt / Equity ratio1 have improved, mainly because goodwill is no longer amortized. Reconciliation of financial reports produced in accordance with earlier Swedish accounting rules (‘SW GAAP’) and IFRS The reconciliation on the following pages shows the effects of the change to IFRS on the balance sheets at 1 January 2004 and 31 December 2004 and the income statement for 2004. IAS 39 was adopted from 1 January 2005 and the effects of that change (SEK –77 M in unrestricted reserves) are therefore not shown in the reconciliation. A summary of the adjustments made appears on page 89. 86 1 See the section ‘Definitions of key data terms’, page 93. IFRS adjustments Balance sheet at 1 January 2004 EUR M SEK M Note SW GAAP Adjustment IFRS SW GAAP Adjustment IFRS Notes B, C 1,628 –105 1,523 –952 13,814 ASSETS Non-current assets Goodwill Intangible rights Tangible assets Shares in associates Other long-term financial assets Deferred tax receivables Total non-current assets Current assets Inventories Accounts receivable Current tax receivables Other short-term receivables Prepaid expenses and accrued income Short-term investments Cash and bank balances Cash and cash equivalents Total current assets TOTAL ASSETS Assets pledged EQUITY AND LIABILITIES Equity Share capital Restricted reserves Other contributed capital Reserves Unrestricted reserves Net income B B, C E E E D D D D Retained earnings including net income B, D Minority interests Total equity Minority interests Provisions Pension provisions Deferred tax liabilities Other provisions Total provisions Non-current liabilities Long-term loans Convertible debenture loans Deferred tax liabilities Pension obligations Other long-term provisions Other long-term liabilities Total non-current liabilities Current liabilities Short-term loans Accounts payable Current tax liabilities Short-term provisions Other short-term liabilities Accrued expenses and prepaid income Total current liabilities TOTAL EQUITY AND LIABILITIES Contingent liabilities F F G H I H G I I B 18 588 4 19 94 2,351 334 455 15 28 23 41 79 – 975 3,326 5 40 1,005 – – 41 1 – – 1,087 2 208 31 103 342 881 100 – – – 11 992 421 164 28 – 85 205 903 3,326 77 11 85 –9 –18 –79 97 0 –9 –1,005 982 –41 –1 62 2 –1 –2 –208 –31 –103 –342 31 208 38 18 599 4 19 179 2,342 334 455 15 28 23 23 – 97 975 3,317 5 40 – 982 – – – 62 2 1,086 0 – – – 0 881 100 31 208 38 11 277 1,269 421 164 28 65 85 199 962 3,317 77 65 –6 59 –9 167 5,431 37 173 1,626 21,248 3,030 4,131 139 253 207 208 – 880 8,848 30,096 46 366 – 8,905 – – – 560 16 9,847 0 – – – 0 7,987 907 283 1,887 349 100 102 770 –80 –167 –713 880 0 –80 –9,118 8,905 370 –370 9 – – 9,863 16 –9 560 16 –16 –16 1,887 –1,887 283 935 –283 –935 3,105 –3,105 14,766 167 5,329 37 173 856 21,328 3,030 4,131 139 253 207 375 713 – 8,848 30,176 46 366 9,118 – – 7,987 907 – – – 100 8,994 3,821 1,489 250 – 776 1,862 8,198 30,176 696 283 1,887 349 2,519 11,513 3,821 1,489 250 586 776 1,814 8,736 30,096 696 586 –48 538 –80 87 Notes IFRS adjustments Balance sheet at 31 December 2004 EUR M SEK M Note SW GAAP Adjustment IFRS SW GAAP Adjustment IFRS A,B,C 1,553 ASSETS Non-current assets Goodwill Intangible rights Tangible assets Shares in associates Other long-term financial assets Deferred tax receivables Total non-current assets Current assets Inventories Accounts receivable Current tax receivables Other short-term receivables Prepaid expenses and accrued income Short-term investments Cash and bank balances Cash and cash equivalents Total current assets TOTAL ASSETS Assets pledged EQUITY AND LIABILITIES Equity Share capital Restricted reserves Other contributed capital Reserves Unrestricted reserves Net income B B B, C E E E D D D D D Retained earnings including net income A,B,C,D Minority interests Total equity Minority interests Provisions Pension provisions Deferred tax liabilities Other provisions Total provisions Non-current liabilities Long-term loans Convertible debenture loans Deferred tax liabilities Pension obligations Other long-term provisions Other long-term liabilities Total non-current liabilities Current liabilities Short-term loans Accounts payable Current tax liabilities Short-term provisions Other short-term liabilities Accrued expenses and prepaid income Total current liabilities TOTAL EQUITY AND LIABILITIES Contingent liabilities 88 F F G H I H G I I B 16 572 4 14 88 2,247 348 460 19 30 29 25 92 – 1,003 3,250 5 41 1,009 – – –56 164 – – 1,158 3 186 23 75 284 468 200 – – – 8 676 620 169 34 – 75 232 1,129 3,250 91 –10 8 13 77 88 –21 –92 113 88 –1,009 984 –53 56 –164 272 3 89 –3 –186 –23 –75 –284 27 186 10 223 65 –2 63 88 1,543 24 585 4 14 165 2,335 348 460 19 30 29 4 – 113 1,003 3,338 5 41 – 984 –53 – – 272 3 1,247 0 – – – 0 468 200 27 186 10 8 899 620 169 34 65 75 230 1,193 3,338 91 14,012 142 5,163 36 130 793 20,276 3,135 4,146 172 266 266 230 831 – 9,046 29,322 43 366 9,106 – – –519 1,495 – – 10,448 27 4,225 1,804 – – – 68 6,097 5,594 1,521 304 677 2,089 10,185 29,322 817 –95 79 116 695 795 –186 –831 1,017 13,917 221 5,279 36 130 1,488 21,071 3,135 4,146 172 266 266 44 – 1,017 9,046 795 30,117 43 366 – 8,887 –479 – – 2,452 27 11,253 0 – – – 0 4,225 1,804 245 1,677 93 68 245 1,677 93 2,015 8,112 5,594 1,521 304 586 677 2,070 10,752 30,117 817 586 –19 567 795 –9,106 8,887 –479 519 –1,495 2,452 27 805 –27 1,677 –1,677 209 679 –209 –679 2,565 –2,565 IFRS adjustments Income statement for 2004 Sales Cost of goods sold Gross income Selling expenses Administration expenses R&D costs Other operating income and expenses Amortization of goodwill Share of earnings in associates Operating income Net financial items Share of earnings in associates Income before tax Tax Minority interests Net income Allocation of net income: Shareholders in ASSA ABLOY AB Minority interests Earnings per share after tax and before dilution, SEK after tax and dilution, SEK Notes Note SW GAAP Adjustment IFRS SW GAAP Adjustment IFRS EUR M SEK M B A J B, C F 2,799 –1,661 1,138 –468 –206 –55 2 –107 – 304 –53 1 252 –87 –1 164 –8 –8 107 1 100 –1 99 –6 1 94 2,799 –1,669 1,130 –468 –206 –55 2 – 1 404 –53 – 351 –93 – 258 257 1 25,526 –15,148 10,378 –4,272 –1,883 –500 24 –978 – 2,770 –484 8 2,294 –792 –7 1,495 –73 –73 978 8 913 –8 905 –51 7 861 4.09 4.05 2.33 2.28 25,526 –15,221 10,305 –4,272 –1,883 –500 24 – 8 3,683 –484 – 3,199 –843 – 2,356 2,349 7 6.42 6.33 The table below shows the adjustments (A–J) made in the balance sheets and the income statement presented above. Where an item in a balance sheet or the income statement is affected by several different types of adjustment (Notes A–D), a breakdown and totals are given. The amounts of the other adjustments are given directly in the balance sheets and the income statement above. Summary of IFRS adjustments (SEK M) Note Adjustment Balance sheet at 1 January 2004 Income statement for 2004 Balance sheet at 31 December 2004 Goodwill Deferred tax receivables Retained earnings Tax charge Goodwill Deferred tax receivables Retained earnings A B C D E F G H I J Reversal of goodwill amortization for 2004 Acquisition-related adjustments Deferred tax on tax-deductible goodwill Reclassification of equity –166 –786 –952 –16 786 770 –32 592 560 9 –60 –51 929 –267 –757 –95 –6 701 695 929 –94 –57 1,674 2,452 Cash and bank balances and Short-term investments (<3 months) moved to Cash and cash equivalents Minority interests moved into Equity Pension provisions moved from Provisions to Liabilities Deferred tax moved from Provisions to Liabilities Other provisions split up and moved to Current / Non-current liabilities Share of earnings in associates moved into Operating income 89 Five years in summary 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. 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 earnings. 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 were to realize Group synergies and strengthen sustainable 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 strat- egy 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. 2005 Sales were relatively weak at the start of the year but then steadily improved, which resulted in good organic growth for the year as a whole. The Group’s performance was founded on good demand in the US market. A number of relatively small companies were acquired, mainly in the Asia Pacific and Global Technologies divisions. The Leverage & Growth program was concluded by the end of the year. The program has contributed to increasing the Group’s efficiency and productivity, with annual sav- ings of around SEK 450 M. Operating margin and operat- ing cash flow both improved during the year. Johan Molin succeeded Bo Dankis as President and CEO. ASSA ABLOY strengthened its overall position by focusing on customer value both in its traditional business and in segments of rather higher market growth such as electromechanical locks, automatic doors, access control systems and identification technology. 90 Five years in summary (Amounts in SEK M unless stated otherwise) 2001 2002 2003 20041) 2005 2001-2003 have not been adjusted for IFRS Sales and income Sales Organic growth, % Acquired growth, % Operating income before depreciation / amortization (EBITDA) Depreciation / amortization 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 (excluding minority interests) Data per share, SEK Earnings per share after tax and before dilution Earnings per share after tax and dilution (EPS) Cash earnings per share after tax and dilution (CEPS) Shareholders’ equity per share after dilution Dividend per share (for 2005, as proposed by the Board) Price of Series B share at year-end Key data Gross margin (EBITDA), % Operating margin (EBIT), % Profit margin (EBT), % Return on capital employed, % Return on shareholders’ equity, % Equity ratio, % Net debt / equity ratio, times Interest coverage ratio, times Interest on convertible debenture loan after tax, SEK M Number of shares, thousands Number of shares after dilution, thousands Average number of employees 22,510 25,397 24,080 25,526 27,802 3 44 4,020 1,721 2,133 1,476 949 2,631 –7,112 4,259 –222 2,338 27,861 16,371 15,534 481 11,846 2.992 2.982 8.072 35.80 1.00 151.00 17.9 10.22 7.32 9.72 8.92 35.6 1.31 3.5 9.0 2 15 4,545 1,907 2,638 2,015 1,270 3,847 –4,268 568 146 3,525 26,701 16,213 13,989 331 12,381 3.53 3.53 9.08 35.85 1.25 99.50 17.9 10.4 7.9 9.9 9.9 38.2 1.13 3.9 27.2 0 5 4,249 1,856 1,073 583 9 3,180 –1,827 –1,772 –419 3,265 22,984 14,766 12,290 16 10,678 3.302 3.312 8.612 31.23 1.25 85.50 17.6 9.92 7.92 9.62 9.92 35.9 1.15 4.7 17.8 5 5 4,606 923 3,683 3,199 2,356 3,339 –1,505 –1,734 100 3,4393 23,461 13,917 12,208 27 11,226 6.42 6.33 8.93 34.74 2.60 113.50 18.0 14.4 12.5 15.3 20.0 37.4 1.09 7.6 24.0 5 1 4,960 882 4,078 3,556 2,613 3,450 –1,052 –2,325 73 3,7023 26,653 15,716 12,240 71 14,342 7.13 6.97 9.64 42.85 3.25 125.00 17.8 14.7 12.8 15.9 18.1 42.8 0.85 8.2 33.1 353,751 361,730 24,211 365,918 370,935 28,754 365,918 370,935 28,708 365,918 378,718 29,160 365,918 378,718 29,578 1 2004 has been adjusted for IFRS – see information about main effects in Note 38 on pages 85-89. 2 Excluding non-recurring items. 3 Excluding restructuring payments. 91 Quarterly information THE GROUP IN SUMMARY (Amounts in SEK M unless stated otherwise) Q1 2004 Q2 2004 Q3 2004 Q4 Full year 2004 2004 Q1 2005 Q2 2005 Q3 2005 Q4 Full year 2005 2005 Sales Organic growth Gross income Gross income / Sales 6,283 6,533 6,447 6,263 25,526 6,269 6,984 7,019 7,530 27,802 3% 7% 6% 4% 5% 2% 6% 5% 7% 5% 2,487 2,658 2,621 2,539 10,305 2,544 2,860 2,851 3,039 11,294 39.6% 40.7% 40.7% 40.5% 40.4% 40.6% 41.0% 40.6% 40.4% 40.6% Operating income before depreciation / amortization (EBITDA) 1,102 1,165 1,189 1,150 4,606 1,102 1,243 1,317 1,298 4,960 Gross margin (EBITDA) 17.5% 17.8% 18.4% 18.4% 18.0% 17.6% 17.8% 18.8% 17.2% 17.8% Depreciation / amortization –233 –236 –224 –230 –923 –212 –221 –214 –235 –882 Operating income (EBIT) Operating margin (EBIT) 869 929 965 920 3,683 890 1,022 1,103 1,063 4,078 13.8% 14.2% 15.0% 14.7% 14.4% 14.2% 14.6% 15.7% 14.1% 14.7% Net financial items –118 –121 –127 –118 –484 –126 –122 –134 –140 –522 Income before tax (EBT) Profit margin (EBT) Tax Net income Allocation of net income: Shareholders in ASSA ABLOY AB Minority interests OPERATING CASH FLOW Operating income (EBIT) Depreciation / amortization Net operating capital expenditure Change in working capital Paid and received interest Non-cash items Operating cash flow 1 751 808 838 802 3,199 764 900 969 923 3,556 12.0% 12.4% 13.0% 12.8% 12.5% 12.2% 12.9% 13.8% 12.3% 12.8% –196 –210 –221 –216 –843 –205 –243 –263 –232 –943 555 598 617 586 2,356 559 657 706 691 2,613 553 2 Q1 2004 869 233 –123 –344 –45 25 615 596 2 Q2 2004 929 236 –166 –184 –144 –19 652 615 2 Q3 2004 965 224 585 2,349 1 7 Q4 Full year 2004 2004 920 230 3 683 923 –146 –215 –650 142 –67 –36 374 –12 –233 –489 14 –16 1,082 1,090 3,439 558 1 Q1 2005 890 212 –140 –333 –83 3 549 0.72 654 3 705 1 691 2,608 0 5 Q2 2005 Q3 2005 Q4 Full year 2005 2005 1 022 1,103 1,063 4,078 221 –161 –201 –80 12 214 235 –135 –231 102 –87 –7 322 –205 –34 882 –667 –110 –455 –26 813 1,190 1,150 3,702 0.90 1.23 1.25 1.04 Operating cash flow / Income before tax 0.82 0.81 1.29 1.36 1.08 CHANGE IN NET DEBT Net debt at start of period Effects of IFRS (IAS 39) Operating cash flow Restructuring payments Tax paid Acquisitions Dividend Translation differences Net debt at end of period Net debt / equity ratio Q1 2004 Q2 2004 Q3 2004 Q4 Full year 2004 2004 Q1 2005 Q2 2005 Q3 2005 Q4 Full year 2005 2005 13,454 14,481 14,570 13,387 13,454 12,208 12,499 13,860 12,769 12,208 – – – – – 77 – – – 77 –615 –652 –1 082 –1,090 –3,439 –549 –813 –1,190 –1,150 –3,702 35 164 830 – 45 322 23 457 112 103 –27 – 129 161 103 – 321 750 929 457 613 –106 –289 –482 –264 56 167 111 – 429 59 373 123 951 668 42 122 66 – 141 257 113 – 298 919 413 951 –131 110 1,076 14,481 14,570 13,387 12,208 12,208 12,499 13,860 12,769 12,240 12,240 1.36 1.35 1.20 1.09 1.09 1.03 1.07 0.94 0.85 0.85 NET DEBT Long-term interest-bearing receivables Short-term interest-bearing investments Cash and bank balances Pension obligations Q1 2004 –57 Q2 2004 –34 –263 –160 –859 –1,062 Q3 2004 –35 –232 –878 Q4 2004 –31 –230 –831 Q1 2005 –37 –171 –896 Q2 2005 –40 –249 –881 Q3 2005 –36 –147 –945 Q4 2005 –62 –104 –916 1,954 1,946 1,782 1,677 1,739 1,860 1,601 1,634 Long-term interest-bearing liabilities 9,032 8,980 8,861 6,029 6,138 8,068 7,908 3,726 Short-term interest-bearing liabilities 4,674 4,900 3,889 5,594 5,726 5,102 4,388 7,963 Total 1 Excluding restructuring payments. 14,481 14,570 13,387 12,208 12,499 13,860 12,769 12,240 92 Quarterly information CAPITAL EMPLOYED AND FINANCING Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Capital employed – of which, goodwill Net debt Minority interests 25,159 25,350 24,577 23,461 24,675 26,759 26,292 26,653 14,611 14,644 14,382 13,917 14,562 15,631 15,519 15,716 14,481 14,570 13,387 12,208 12,499 13,860 12,769 12,240 17 20 20 27 29 79 74 71 Shareholders’ equity (excl. minority interests) 10,661 10,760 11,169 11,226 12,147 12,820 13,449 14,342 DATA PER SHARE SEK Earnings per share after tax and before dilution Earnings per share after tax and dilution Cash earnings per share after tax and dilution Q1 2004 1.51 1.50 2.12 Q2 2004 1.62 1.61 2.26 Q3 2004 1.68 1.65 2.28 Q4 Full year 2004 2004 1.60 1.57 2.27 6.42 6.33 8.93 Q1 2005 1.52 1.49 2.11 Q2 2005 1.79 1.75 2.36 Q3 2005 1.93 1.89 2.75 Q4 Full year 2005 2005 1.89 1.84 2.42 7.13 6.97 9.64 Shareholders’ equity per share after dilution 31.24 33.88 34.72 34.74 34.74 36.90 38.84 40.44 42.85 42.85 NUMBER OF SHARES March 2004 June 2004 Sept 2004 Dec 2004 March 2005 June 2005 Sept 2005 Dec 2005 Number of shares before dilution, thousands 3 365,918 365,918 365,918 365,918 365,918 365,918 365,918 365,918 Number of shares after dilution, thousands 3 370,935 371,449 373,889 375,103 378,718 378,718 378,718 378,718 3 Accumulated weighted average. Definitions of key data terms 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 assets. Gross margin (EBITDA): Operating income before depreciation and amortization as a percentage of sales. Operating margin (EBIT): Operating income as a percentage of sales. Profit margin (EBT): Income before tax as a percentage of sales. Operating cash flow: See consolidated operating cash flow for definitions. Net capital expenditure: Investments in fixed assets less disposals of fixed assets. Depreciation: Depreciation/amortization of tangible and intangible fixed assets. Capital employed: Total assets less interest-bearing assets and non- interest-bearing liabilities including deferred tax liability. Equity ratio: Shareholders‘ equity as a percentage of total assets. Interest coverage ratio: Income before tax plus net interest divided by net interest. Return on shareholders’ equity: Net income excluding minority interests, plus interest expenses after tax for convertible deben- ture loans, as a percentage of average sharehold- ers‘ equity (excluding minority interests) after dilution. Return on capital employed: Income before tax plus net interest as a percent- age of average capital employed. Earnings per share after tax and before dilution: Net income excluding minority interests divided by weighted average number of shares before dilution. Earnings per share after tax and dilution: Net income excluding minority interests, plus interest expenses after tax for convertible deben- ture loans, divided by weighted average number of shares after dilution. Cash earnings per share after tax and dilution: Net income plus interest expenses after tax for convertible debenture loans, plus depreciation and amortization, less share of earnings in associ- ates and adjustments for changes in deferred tax, divided by weighted average number of shares after dilution. Shareholders’ equity per share after dilution: Equity excluding minority interests, plus convert- ible debenture loan, divided by number of shares after dilution. 93 Proposed disposition of earnings The following retained earnings are available for disposition by the shareholders at the Annual General Meeting: Net income for the year: SEK 715 M Retained earnings brought forward: SEK 4,892 M TOTAL: SEK 5,607 M The Board of Directors and the President and CEO propose that a dividend of SEK 3.25 per share, a maximum total of SEK 1,189 M, be distributed to shareholders and that the remainder, SEK 4,418 M, be carried forward to the new financial year. Friday 28 April 2006 has been proposed as the qualification day for dividends. If the Annual General Meeting confirms this proposal, the dividend is expected to be distributed by VPC AB on Thursday 4 May 2006. Stockholm, 9 February 2006 Georg Ehrnrooth Chairman Melker Schörling Vice Chairman Carl-Henric Svanberg Vice Chairman Johan Molin 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 9 February 2006 PricewaterhouseCoopers AB Anders Lundin Authorized Public Accountant 94 Audit report To the Annual General Meeting of the shareholders of ASSA ABLOY AB Corporate identity number 556059-3575 We have audited the annual accounts, the consolidated accounts, the accounting records and the adminis- tration of the Board of Directors and the President and CEO of ASSA ABLOY AB (publ) for the year 2005. The Board of Directors and the President and CEO are responsible for these accounts and the administra- tion of the company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of International Financial Reporting Standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. 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 disclosures in the accounts. An audit also includes assess- ing the accounting principles used and their application by the Board of Directors and the President and CEO and significant estimates made by the Board of Directors and the President and CEO when preparing the annual accounts and consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any Board member or the President and CEO. We also examined whether any Board member or the President and CEO has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company’s financial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated accounts have been prepared in accordance with International Financial Reporting Standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the Group’s financial position and results of operations. The statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the Annual General Meeting of shareholders that the income statements and balance sheets of the Parent company and the Group be adopted, that the profit of 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 and CEO be discharged from liability for the financial year. Stockholm 9 February 2006 PricewaterhouseCoopers AB Anders Lundin Authorized Public Accountant 95 The ASSA ABLOY share Share price movement in 2005 The closing price of ASSA ABLOY’s Series B share at the end of 2005 was SEK 125.00 (113.50), corresponding to a market capitalization of SEK 45,740 M (41,532). The price of the ASSA ABLOY share thus rose by 10 percent com- pared with its closing price at the end of 2004. During the same period, the all-share index of the Stockholm Stock Exchange (OMXS) rose by 33 percent. The highest closing price for the share was SEK 126.00, recorded on 29 Decem- ber, and the lowest was SEK 89.25, recorded on 28 April. Listing and trading 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. During 2005 a total of 648 million shares (594) were traded, which is an average of 2.6 million shares (2.3) per trading day and represents about 180 percent (165) of the listed shares. Ownership structure The number of shareholders at year-end was 31,702 (30,191). Investors outside Sweden accounted for 41 per- cent (36) of the capital and 28 percent (24) of the votes. The ten largest shareholders accounted for some 37 percent (37) of the share capital and 57 percent (57) of the votes. Share- holders with more than 50,000 shares represented about 1 percent of the total number of shareholders and accounted for 91 percent of the capital and 94 percent of the votes. Share capital and voting rights 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. Dividend and dividend policy The Board of Directors and President propose that SEK 3.25 per share (2.60) – a maximum total amount of SEK 1,189 M – be paid as a dividend to shareholders for the 2005 financial year, corresponding to a direct return of 2.6 percent (2.3) on the Series B share. The aim is that, in the long term, the dividend should correspond to 33–50 per- cent 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 1996–2005 DIVIDEND PER SHARE 1996–2005 Data per share SEK/share 1 Earnings after tax and dilution 8 Dividend Direct yield, % 5 Dividend % 6, 8 Share price at end of period Highest share price Lowest share price Shareholders’ equity 8 1996 0.93 0.30 1.0 31.6 29.28 28.97 12.38 5.40 1997 1.23 0.43 0.8 31.6 51.24 52.95 28.69 8.64 1998 1.76 0.60 0.8 33.5 75.65 92.73 48.07 1999 2.00 3 0.74 0.6 32.6 2000 2.73 0.90 0.5 30.9 2001 2.98 2 1.00 0.7 30.5 2002 3.53 1.25 1.3 32.2 2003 3.31 2 1.25 1.5 33.9 2004 6.33 2.60 2.3 42.0 2005 6.97 3.25 4 2.6 47.6 119.50 184.50 151.00 99.50 85.50 113.50 125.00 140.00 206.70 186.00 159.50 110.00 113.50 126.00 73.21 110.50 9.93 16.95 3 30.58 3 94.50 35.80 76.50 35.85 67.00 31.23 84.00 34.74 89.25 42.85 Number of shares (thousands) 7 265,396 295,448 295,448 324,200 356,712 361,730 370,935 370,935 378,718 378,718 1 Adjustment made for new issues. 2 Excluding non-recurring items. 3 Key data adjusted following change in accounting principle. 4 Proposed dividend. 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 dilution. 8 1996–2003 have not been adjusted for IFRS. 96 ASSA ABLOY’s 10 largest shareholders Based on the share register at 31 December 2005. Owner Investment AB Latour SäkI Melker Schörling and companies Alecta Wärtsilä Corporation Robur unit trusts SEB unit trusts SHB/SPP unit trusts Nordea unit trusts Second Swedish National Pension Fund Other shareholders Total number Source: SIS Ägarservice AB and VPC AB. The ASSA ABLOY share A shares 6,746,425 7,118,818 5,310,080 B shares 19,000,000 2,000,000 9,296,636 18,375,000 17,270,350 17,247,595 10,224,530 9,500,612 6,662,811 6,418,026 230,747,151 19,175,323 346,742,711 Capital, % Voting rights, % 16.1% 7.0% 2.5% 4.0% 5.0% 4.7% 4.7% 2.8% 2.6% 1.8% 1.8% 63.1% 100.0% 13.6% 11.6% 3.4% 3.2% 3.2% 1.9% 1.8% 1.2% 1.2% 42.9% 100.0% OWNERSHIP STRUCTURE (BY SHARE CAPITAL) OWNERSHIP STRUCTURE (BY VOTES) 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 dilution * 1 SEK per share – number of shares at end of period. Source: SIS Ägarservice AB and VPC AB. A shares C shares B shares Share capital, SEK* 20,000 2,000,000 1,746,005 1,428,550 50,417,555 2,095,206 1,714,260 60,501,066 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 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 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 97 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. Any conversion of Incentive 2001 will take place in a 30- day period in October and 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. Any conversion of Incentive 2004 will take place in a 90-day period between March and June 2009. Over 4,000 employees in more than 15 countries are participating in the two current Incentive programs, Incen- tive 2001 and Incentive 2004. Financial analysts who follow ASSA ABLOY Company ABG Sundal Collier Alfred Berg ABN AMRO Bear Stearns International Carnegie Cheuvreux CSFB Danske Bank Deutsche Bank Dresdner Kleinwort Wasserstein Goldman Sachs Hagströmer & Qviberg Handelsbanken Capital Markets JP Morgan Kaupthing Bank Lehman Brothers Merrill Lynch Morgan Stanley SEB Enskilda Société Générale S&P Equity Research Swedbank UBS Name Anders Jegers Henrik Fröjd Daniel Cunliffe Anders Idborg Lars Norrby Patrick Marshall Henrik Breum Christofer Sjögren Colin Grant James Moore Patric Lindqvist Henrik Saläng Nick Paton Peder Frölén Brian Hall Ben Maslen Gustaf Lindskog Julian Beer Gaël de Bray Lars Glemstedt Niclas Höglund Olof Cederholm Telephone number +44 207 905 5631 +46 8 572 358 33 +44 207 516 6628 +46 8 676 86 88 +46 8 723 51 76 +44 207 888 0289 +45 33 44 09 04 +46 8 463 55 15 +44 207 475 9161 +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 8 522 296 52 +33 1 42 13 84 14 +46 8 545 069 68 +46 8 5859 1800 +46 8 453 73 06 E-mail anders.jegers@abgsc.com henrik.frojd@alfredberg.se dcunliffe@bear.com andidb@carnegie.se lnorrby@cheuvreux.com patrick.marshall@csfb.com hbre@danskebank.com christofer.sjogren@db.com colin.grant@drkw.com james.moore@gs.com patric.lindqvist@hq.se hesa06@handelsbanken.se nicholas.j.paton@jpmorgan.com peder.frolen@kaupthing.se brhall@lehman.com Ben_Maslen@ml.com Gustaf.Lindskog@morganstanley.com julian.beer@enskilda.se gael.de-bray@sgcib.com lars_glemstedt@sandp.com niclas.hoglund@swedbank.com olof.cederholm@ubs.com 98 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 Tuesday 25 April 2006. Shareholders wishing to attend the Annual General Meeting should: – be registered in the share register kept by VPC AB no later than Wednesday 19 April 2006 – notify ASSA ABLOY AB of their intention to attend by 16.00 on Wednesday 19 April 2006. Registration in the share register To have the right to attend the Annual General Meeting, shareholders whose shares are nominee-registered through a bank or other nominee must request, by Wednesday 19 April 2006 at the latest, that their holdings be temporarily registered under their own names in the share register kept by VPC AB. Shareholders must notify the nominee well in advance about this. 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 19 April 2006 via: – Website – E-mail – Post www.assaabloy.com bolagsstamma@assaabloy.com ASSA ABLOY AB, “Årsstämma”, 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 identity number – Address and daytime telephone number – Number of shares held – Any accompanying adviser A shareholder who is to be represented by a proxy should send in a form of appointment for the proxy. Where a cor- porate body appoints a proxy, the form of appointment should be accompanied by a proof of registration for the corporate body (or, if this is not available, by a document carrying similar authority). Documents must not be more than one year old. To ensure admission to the Annual Gen- eral Meeting, forms of proxy and proofs of registration should reach the company at the above address by 19 April 2006 at the latest. Nomination Committee The duties of the Nomination Committee are to consider the choice of the Chairman and other members of the Board of Directors, the choice of Auditor, the choice of the Chairman of the Annual General Meeting, the remunera- tion of the Board, and associated matters. The current members of the Nomination Committee before the 2006 Annual General Meeting are Gustaf Douglas (Investment AB Latour and SäkI), Chairman, Staffan Grefbäck (Alecta), Marianne Nilsson (Robur) and Melker Schörling (Melker Schörling and companies). Dividend Friday 28 April 2006 has been set as the qualification day for dividends. If the Annual General Meeting decides to follow the recommendation of the Board of Directors, divi- dends are expected to be distributed through VPC AB on Thursday 4 May 2006. www.assaabloy.com Reports can be ordered from: ASSA ABLOY AB – Website – Telephone 08-506 485 00 08-506 485 85 – Fax ASSA ABLOY AB – Post Box 70340 SE-107 23 Stockholm, Sweden Future financial reports First quarter: 25 April 2006 Second quarter: 9 August 2006 Third quarter: 8 November 2006 Fourth quarter and Year-end Report: February 2007 2006 Annual Report: March 2007 99 Production: ASSA ABLOY in partnership with n3prenör. English editing: Marcom International. Photographs: Ulf Huett, Kristian Älegård and others. Printing: Ljungbergs tryckeri AB, Klippan. 100 ASSA ABLOY is the world’s largest lock Group and the only global player in our industry. By means of organic growth based on innovative products, global presence and improved efficiency and backed by selective acquisitions, we will continue to lead development in the lock industry. Johan Molin President and CEO ASSA ABLOY AB (publ) Box 70340, SE-107 23 Stockholm · Visiting address: Klarabergsviadukten 90 Tel: +46 8 506 485 00 · Fax: +46 8 506 485 85 Corporate identity No.: 556059-3575 www.assaabloy.com 

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