Report of the Board of Directors
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.
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).
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 number 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.
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 companies 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 automatic 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.
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 duration 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 standardization of electronics in ASSA ABLOY's Group-wide common platforms. The goal of standardization is to achieve lower development costs and a shorter development time for new products.
Four of the ASSA ABLOY Group's subsidiaries in Sweden carry out licensable business activities in accordance with Swedish environmental regulations. The Group's activities liable to license and registration affect the external environment chiefly through the subsidiaries Assa AB, Assa Industri AB, AB FAS Låsfabrik and FIX AB. The companies operate machine shops and foundries and associated surface-coating plants, which have an impact on the external environment through the discharge of water, air and solid waste.
The subsidiaries Assa AB, Assa Industri AB, AB FAS Låsfabrik 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.
From 1 January 2005 ASSA ABLOY has adopted International 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 company 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.
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.