Annual Report 1994

Annual Report 1994 financial information and reporting In order to participate in the meeting, shareholders must AB SKF is publishing the following financial reports be recorded in the shareholders’ register maintained by the concerning 1995: Securities Register Centre (VPC AB) by Thursday April Report on first quarter ...... April 27 13, and must notify the Company before noon Monday Report on first six months ...... July 21 April 24, of their intention to attend (AB SKF, Group Report on first nine months ...... October 25 Legal, S-415 50 Göteborg, Sweden, tel. + 46-31-37 26 52), Report on 1995 operations ...... February 7, 1996 giving details of name, address, telephone and shareholding. The Annual Report for 1994 will be published on April 5. payment of dividends The above reports are available in Swedish and English. The Board recommends that shareholders with holdings In addition to these reports, an annual report, Form recorded in the register on May 3 be entitled to receive 20-F, is produced for the Securities and Exchange dividends for 1994. If this date is accepted by the Annual Commission, U.S.A. General Meeting it is expected that the Securities Register Centre will send out notices of payment to recorded share- annual general meeting holders and listed depositaries on May 10, 1995. The Annual General Meeting will be held at SKF Kristine- To facilitate payment of dividends, shareholders who dal, Byfogdegatan 4, Göteborg, at 3.30 p.m. on Thursday have changed address are recommended to inform VPC April 27, 1995. AB, S-171 18 Solna, Sweden, well before May 3.

This annual report is a translation of the Swedish original.

partnership and product development are the keynotes of this year’s pictorial theme Working closely with customers in the development and improvement of their products and processes, SKF personnel contribute their expertise in the field of bearings, seals and special steels. The Group’s comprehensive resources in research and development play a significant role here. Cooperation and development work carried out with the customers often lead to new products or new solutions for improving existing products or processes. This year’s pictures show a few examples of the results being achieved.

contents

The Chairman’s Review ...... 2 Parent Company balance sheets ...... 32 Letter from the President and Group Chief Executive ....3 Parent Company statements of cash flow...... 33 Board of Directors’ Report ...... 4 Notes to the Parent Company financial statements...... 34 Proposed distribution of surplus ...... 10 Bearings and seals ...... 40 Auditor’s report...... 10 Special steels ...... 46 Consolidated income statements ...... 11 Parent Company Board of Directors ...... 48 Consolidated balance sheets ...... 12 Group organization ...... 50 Consolidated statements of cash flow ...... 13 Quality ...... 51 Notes to the consolidated financial statements ...... 14 Shares and shareholders ...... 54 Parent Company income statements...... 31 Seven-year review of the SKF Group ...... 56

Aktiebolaget SKF, S-415 50 Göteborg, Sweden. Telephone +46-31-37 10 00, Fax +46-31-37 28 32, Telex 2350, Cable KULLAGER

Printed on Munken Cream environmentally friendly stock. The SKF Group

SKF is the world’s leading company in the rolling bearing companies, or through authorized distributors – that SKF industry. The Company’s share of the world market, is always within reach of the customer. excluding China and the former Comecon countries, is The steel from which rolling bearings are made is of approximately 20 percent, making it twice as large as its decisive importance for the quality of the bearings. The nearest competitor. precision in the analysis of the steel content and the Wherever there is rotation, there is a need for some form extremely low rate of non-metallic inclusions are critical of bearing. The function of a rolling bearing is to eliminate factors for the life of the bearing. or reduce the friction between a fixed and a moving surface, SKF’s subsidiary Ovako Steel is Europe’s leading pro- and to carry a load. The life of a rolling bearing shall be ducer of rolling bearing steel, and the main supplier of compatible with the life of the application in which it is steel to the Group’s bearing production plants. More than installed. Since the use of rolling bearings is a cost-effective 80 percent of the steel used by SKF today comes from solution, they are found in all types of engines, machines Ovako Steel. and wheels. SKF is aiming to further enhance its leading position in A seal is a product that separates a machine component the core business. from the outside world, either by preventing penetration by foreign particles, or by ensuring that there is no leakage 1994 1993 out. Rolling bearings and seals constitute the Group’s core Net sales, SEK m 33 273 29 200 business. Income/loss after financial SKF’s policy is to provide a full range of rolling bear- income and expense, SEK m 1 817 – 515 ings, to ensure that it is always able to offer the best solu- Earnings per share, SEK 11.05 – 4.35 tion to a customer’s problem, regardless of the type of Dividends per share, SEK 4.25*– bearing required. Group policy also includes maintaining Number of employees registered 41 732 41 394 such a geographic presence – either through its own sales * Dividend according to the Board’s proposed distribution of surplus.

1994 in brief

35 000 employees engaged in quality-assurance training.

Income after financial income and expense improved by SEK 2 500 m.

Production increased by 20 percent, without any significant new hirings.

A joint venture agreement was signed with a Chinese partner to commence production of rolling bearings in China. SKF has a 60 percent ownership interest in the new company.

The decision was made to invest in a technical upgrade of the Cajamar plant in Brazil and in the plant outside Buenos Aires in Argentina.

The acquisition of the German company Goetze Elastomere strengthens SKF’s position in the European seals market.

Agreements signed with Volkswagen and Chrysler, among other companies, mean that new car models will be equipped with SKF bearings.

Ovako Steel focus is now on rolling bearing steel.

The corporate goal, that inventories should total less than 30 percent of annual sales, was achieved. A new goal of 25 percent has now been established.

3 The Chairman’s Review

increased volumes, these measures enabled the Group to improve its income after financial income and expense in 1994 by close to SEK 2 500 m, compared with 1993. A decision was made at the 1993 Annual General Meeting to suspend dividend payments due to the Group’s negative results. The Board of Directors made it clear that it intended to propose the resumption of dividend payments as soon as possible. Based on the trend of earnings and conditions during the years immediately ahead, the Board has decided to propose to the 1995 Annual General Meeting that a resumed dividend of SEK 4.25 per share be paid. In future, the dividend should be adapted to reflect the trend of earnings and cash flow, with consideration also given to the Company’s opportunities for development and its financial position. It is the Board’s view that the dividend to shareholders should correspond to approximately one third of average net income during an economic cycle. SKF’s financial position needs to be strengthened after the prolonged recession. However, we also see many inter- esting investment projects with considerable potential for profitability. Highest priorities during the years immediately ahead have thus been placed on strong cash flow, which would enable us to pursue our investment program, restore usiness trends in the Western World improved dur- financial stability and at the same time provide shareholders ing 1994. Favorable economic growth continued in with dividend payments based on the model described B North America and a gradual improvement was above. noted in European market demand. Growth remained In conclusion, on behalf of the Board of Directors, I want strong in Asia and certain countries in South America. to thank Group Management and all our employees for Prospects for increased world trade were enhanced by the their exceptional efforts. The strong improvement in Group completion of the Uruguay Round during 1994. The agree- earnings during 1994 was the result of hard work and con- ment is based on further elimination of commercial trade siderable sacrifice. barriers between countries. In parallel, regionalization of world markets is increasing. Mercosur, the free trade region comprising Argentina, Brazil, Paraguay and Uruguay, is one example. During 1994, the North American Free Trade Agreement (NAFTA) was created, covering Canada, the United States and Mexico. This growing trend is important to SKF’s future production strategies. Freedom to transport products from one country to another, is a basic requirement for optimal utilization of the Group’s production resources. Geographical concentration will continue, and SKF’s goal is to be competitive both globally and regionally, with leading market positions in our primary business sectors. Special attention has been directed towards rapidly growing markets, as shown in the Board of Directors’ Report. SKF’s high level of business activities in Asia has strengthened the Group’s position in the region and provides a strong foundation for continued growth. Another SKF goal is to further improve customer service, quality and cost efficiency, thus resulting in better profitability. Business activities will continue to be concentrated on rolling bearings and seals. Based on various programs now in progress, I feel confident about the Group’s future. SKF has gone through a difficult period. The recession and tough competition resulted in financial deficits for the years 1991, 1992 and 1993. A comprehensive restructuring program – including sales of Group units and further concentration on primary business activities – combined with measures to increase quality and productivity, have increased our competitive strength. Combined with 4 Letter from the President and Group Chief Executive

received optimum grades in a comprehensive quality audit by MELCO before it was approved as a qualified supplier.

• Efforts were continued in Korea to develop SKF’s market for Hub Units. A licensing agreement was reached with Hanwha Machinery Co. Ltd., which will start production of SKF’s first generation Hub Units in Korea.

Further improvements were made to the Channel concept during the year, leading to greater flexibility and higher productivity. Investments in 1994 increased approximately 45 percent, compared with 1993, and will be increased further during 1995–97. SKF’s production plants always receive “top grades” and the Group plans to strengthen its favorable image even more. To enable the Group to implement technology improvements and engage in restructuring work, investments will be in the range of seven to eight percent of annual turnover during boom periods. Our highly sophisticated manufacturing plants produce rolling bearings for a demanding market. Skilled and well- trained employees are needed to maximize output from our channels. SKF today is able to meet growing demand with was a quality year for SKF. We taught our less machinery, employees and production plants, a trend 1994 quality philosophy to 35 000 Group employees that will be continued. and invested SEK 100 m in training programs. And our It is gratifying, therefore, that our industrial college in efforts are continuing. During 1995, we plan to invest an Göteborg, Sweden, has been so well received. With three additional SEK 50 m in training programs. All 42 000 applicants for every available place, SKF has quickly employees will participate in our quality training. The assumed a leadership position in this field as well. results have been gratifying. Claims have been cut by 30 SKF made a further advance in the seals industry during percent and we are approaching our objective of zero mis- 1994 through the acquisition of Goetze in Germany. Seals takes in the workplace. represent a product group closely related to rolling bearings. A good rolling bearing requires a good seal. Continued 1994 was a good year in terms of results, and earnings rose growth is planned in this field. sharply. Income after financial income and expense totaled SKF’s overall financial objective is to provide sharehold- SEK 1.8 billion. The increase was attributable to lower ers sustained and satisfactory returns – in terms of dividend costs, higher volumes, some improvement in prices and and value increment – which, in the Board’s opinion, should weaker exchange rates for SEK. Effects of the latter were exceed the risk-free interest rate by some percentage units. estimated at SEK 500 m, or approximately one-fifth of the This goal will be reached by focusing our financial increase. Group earnings will continue to improve in 1995. strength on cash flow, profitability and capital management. The bearings industry is characterized by high refinement 1994 was a breakthrough year with regard to inventories. value and capital intensity. Consequently, financial strength Initially, we achieved our objective during the first quarter and solid credit are required to offset the sharply fluctuating of the year to limit inventories to less than 30 percent of business trends. SKF’s objective for solvency is 35 percent annual sales and then made strides toward reaching the new during an economic cycle. goal of 25 percent. At year-end, inventories corresponded to The structure of the industry is changing gradually. The 25.9 percent of annual sales. We will reach our goal in 1995, recession took its toll on most bearings companies, and which will be sooner than anticipated. some were forced to give up completely or partly. Even during periods of economic prosperity, our Japanese competi- 1994 was a year characterized by several turning points in tors fight an uphill battle with high costs and an expensive the Asian market. currency. SKF’s geographic spread provides benefits today. Demand for rolling bearings increased rapidly during • Prolonged negotiations concerning a majority sharehold- 1994 and SKF sales finished the year at a high level. We ing in a manufacturing company in China were completed expect, therefore, that volumes in 1995 will be between 6 in December. Production of rolling bearings in Shanghai and 12 percent higher than last year. Price trends are also will start during the autumn of 1995. expected to be better than in 1994.

• SKF’s focus on the Japanese market was successful in several respects. Deliveries were started from the Group’s plant in Malaysia to the Mitsubishi Electric Corporation, MELCO, and other customers. Mitsubishi is well-known for its high demands on quality, and the Malaysia plant 5 Board of Directors’ Report

he 1994 fiscal year was a good U.S. continued to grow new company, SKF Automotive year for the SKF Group. The In the U.S., all major industrial seg- Bearings Co. Ltd., in which SKF holds T favorable effects of the restruc- ments continued to grow during the fis- a 60-percent interest, will manufacture turing and cost-reduction programs cal year. This was the fourth consecu- bearings for China’s expanding car implemented during recent years tive year of growth in the U.S. industry. During the first stage, an became increasingly apparent. economy. GNP growth was four per- assembly plant is being established. The rate of production at the cent, while industrial output rose by This will involve the import of compo- Group’s plants was raised substantially slightly more than five percent com- nents from SKF’s European plants and in order to satisfy the increasing pared with 1993. Growth in the cus- their subsequent assembly in the new demand. At year-end 1994, production tomer segments of greatest significance plant. Following this, the intention is to had risen by approximately 30 percent, to SKF – namely automotive compa- gradually increase the domestic content compared with the lowest level, which nies, paper machines, steel, electric of products as the market grows, was noted during the third quarter of motors and the after-market – assuming it develops as expected. 1993. This was achieved with virtually exceeded the general growth rate in the Discussions regarding two other joint an unchanged number of employees. U.S. ventures in China are in progress. One The Group’s efforts to reduce costs In Mexico, the closure of the plant in of these relates to a plant for the manu- continued throughout the year, in the Celaya and the concentration of pro- facture of bearings for the railway form of various programs. duction to the Puebla plant yielded sig- industry. China has the world’s largest During the year, the Group strength- nificant savings and a lower level of production of train engines and passen- ened its position as a leading supplier production costs. Three local sales ger and freight wagons. The other of bearings, particularly in Europe, but offices were closed and the work-force involves negotiations regarding the also in the Far East. was reduced. As a result of these meas- possibility of SKF forming a joint ven- In Europe, where the first signs of ures, the Mexican company was able to ture for the production of seals. In the improved demand for rolling bearings offset the weaker demand and latter case, CR, the Group’s seals com- became noticeable during the second depressed price situation. The devalua- pany, is the driving force representing half of 1993, the favorable trend contin- tion of the Mexican peso had an SKF. ued and was strengthened during 1994. adverse financial effect on SKF’s However, the rate of increase varied Mexican company. Uncertainty regard- SKF expands in Korea according to customer segment. The ing the country’s economic situation Korea is the world’s fastest-growing European automotive industry noted was exacerbated. automotive market. SKF has sold bear- the strongest and most rapid recovery. Sales in Canada, the third country in ings for some time to Hyundai, KIA the North American Free Trade and Daewoo, the three largest vehicle Favorable growth in Europe Association (NAFTA) area, were very producers in Korea. A substantial part All of the European countries that are favorable in 1994. As a result of the of these sales has been effected via of importance to SKF experienced upswing in volume, which mainly Hanwha Machinery Co. Ltd. (HWMC), GNP growth compared with 1993. The derived from the automotive industry a leading local manufacturer of rolling rates of increase varied from between and the after-market, SKF reported its bearings. During 1994, SKF further nearly three percent in Germany and best sales in Canada since the begin- advanced its positions through a license close to four percent in the U.K. ning of the 1980s. agreement with HWMC, whereby Industrial output also increased in most In Latin America, the positive sales HWMC is entitled to manufacture European countries, by slightly more trend continued in the largest markets, SKF’s Hub Unit I for the Korean mar- than five percent in the U.K. and Brazil and Argentina, driven in both ket. SKF accounts for approximately nearly five percent in Italy. In cases by growth in the automotive half of the Korean market for Hub Germany, the largest European market, industry. Units. As a result of this license agree- industrial output rose by approximately ment, SKF will further strengthen its three percent. The upswing in Increased efforts in the Far East market share. SKF has captured its Germany, and in the other countries, In the fast-growing Far Eastern market, share of the Korean market in the face was driven by the export industry. demand for the Group’s products con- of intense competition, mainly from SKF’s position as the leading sup- tinued to be very favorable. SKF’s vari- Japanese manufacturers. plier to the European automotive ous companies reported sales increases industry was strengthened during the ranging from 15 to 57 percent, thereby Favorable results year. SKF accounts for an ever-increas- further enhancing the Group’s position In the mid-1980s, SKF established its ing share of the bearing content in most in this important part of the world. strategy for the Asia Pacific region. of the cars produced in Europe and is During the autumn of 1994, SKF and The objective was to enhance the more than twice as large as its closest Shanghai Bearing Corporation signed a Group’s direct presence by increasing competitor. joint venture agreement. As a result, the number of wholly owned sales com- SKF also benefited from the sharp SKF entered a new era of operations in panies. This was designed to bring SKF growth in the truck segment, since it is China. From having operated solely as closer to its end customers and gain a major supplier of taper roller bear- a supplier of bearings to the country, greater insight into their needs. At the ings to this segment. via exports, the foundation was thereby same time, it increased the potential for laid for the local production of bearings offering technical and other services. in this rapidly expanding market. The 6 7 Board of Directors’ Report

To gain access to the customers in Group’s plant in Argentina and the two struts. The acquisition of Goetze the region who use rolling bearings as bearing production plants in Brazil broadens SKF’s product range, components in their products (OEM were to be integrated. As a result, ball improves its geographic presence and customers), manufacturing operations bearings will be manufactured at the adds a new technology for seal produc- were started up in Malaysia in 1992. plant in Buenos Aires, while production. SKF now delivers bearings from the tion of taper roller bearings and Hub Malaysian plant to Japanese OEM cus- Units will be undertaken at the plant in Restructuring of Textile tomers, who were previously supplied Cajamar, outside São Paulo. Machinery Components exclusively by Japanese manufacturers. Both of the remaining plants will Sales by Textile Machinery Components SKF will continue to consolidate its have a smaller product range, but declined during 1994, as a result of position in this expansive region. The larger manufacturing volumes, which weaker market demand. To adapt oper- Asia Pacific share of SKF’s sales of will strengthen their competitiveness. ations to demand, production cutbacks bearings has doubled to approximately continued during the year, at the same 12 percent during the past five years. In First objective attained time as a comprehensive restructuring Japan, where SKF has a market share One important feature of SKF’s efforts project was initiated. Within the frame- of less than one percent, sales efforts to reduce fixed costs and release capital work of this project, portions of the are being focused on a number of is to reduce the Group’s inventories. manufacturing operations at the plant important customers, with the aim of For several years, the Group’s goal was in Cannstatt, Germany, are being trans- strengthening SKF’s foothold in the to reduce inventories to a level corre- ferred to the sister plant in Singapore, market. sponding to 30 percent of annual sales. where production lines are in the pro- During the first quarter of 1994, cess of being expanded. Continued restructuring efforts inventories were reduced to a level At the end of 1993, SKF Textil- During the recession, SKF formulated under 30 percent. A new objective of maschinen-Komponenten GmbH and guidelines to offset cyclical effects, 25 percent was then set. At year-end Shanghai Erfangji Co., China’s largest which included a number of measures: 1994 the level was 25.9 percent. manufacturer and exporter of spinning The relocation of local European machines, formed a joint venture com- • Reduce inventories stores to the new central warehouse for pany for the manufacturing of spindles • Adapt the work-force to the lower the European market in Tongeren, for spinning machines. Preparations for level of production Belgium, proceeded as planned. The the transfer of the operations at the • Reduce fixed costs inventories previously stocked by SKF’s Swiss company, SMM Spindel AG, to • Streamline the product range sales companies in the Netherlands, the Chinese company proceeded during • Focus operations on the core busi- Belgium, Switzerland, Denmark, 1994 and production under the man- ness of rolling bearings and seals. Norway, Finland and Greece have been agement of the new company is The Group’s objective was to lower transferred, and the customers in these expected to start at the beginning of the break-even point and thereby countries are now served from 1995. The Swiss manufacturing opera- improve its earnings capacity. As a Tongeren. France and Italy are next in tions are being discontinued. result, SKF would be able to quickly line. The entire project is expected to Gebr. Loepfe AG, based in Switzer- earn money again, as soon as business be completed by the end of 1996, by land, a former Textile Machinery conditions turned around, and would which time 20 local European ware- Components unit that manufactures also be able to face new recessions houses will have been discontinued. electro-optical monitoring systems for without incurring any losses. The cost of the project is estimated textile machines, was sold during 1994. The fact that business conditions to amount to approximately SEK The Channel concept, which has have now improved does not mean that 200 m. The new warehouse is estimated been successfully introduced within the Group’s efforts to reduce fixed to generate annual savings of approxi- SKF’s bearing operations, is now being costs have abated. SKF is to implement mately SEK 250 m. gradually introduced within the pro- further structural changes, with the aim duction of textile machinery compo- of continuing to strengthen its competi- European operations strengthened nents. tiveness. The 1990 acquisition of CR – Chicago The measures being implemented as The closure of the plant in Madrid, Rawhide – strengthened SKF’s position part of the restructuring project are announced in December 1993, was in the American market for oil seals. In strengthening SKF’s position as one of implemented during the autumn of Europe, SKF already owned RFT the world’s leading suppliers of textile 1994. The final bearings were manufac- S.p.A., the leading manufacturer of machinery components. tured at the end of October. The plant bearing and shock absorber seals. was sold to a German company, which Accordingly, SKF’s position in the also employed a large proportion of the European seals market was previously existing work-force. The closure was limited to this range. In order to implemented through close coopera- strengthen positions in Europe, SKF tion between the company’s manage- acquired the German company, Goetze ment, trade unions and local author- Elastomere GmbH, during the autumn ities. of 1994. Goetze is a state-of-the-art During the autumn of 1994, SKF manufacturer that specializes in various announced that the operations at the types of valve seals and seals for gas 8 Board of Directors’ Report

net sales sales by sales by application field 1994 geographical area 1994

SEK m Industrial distributors Europe excl. Sweden 50% Vehicle 25% 36 000 replacement Cars 33 000 8% 16% 30 000 27 000 End- users 24 000 6% 21 000 18 000 15 000 Electrical industry 12 000 Trucks Sweden 5% 5% 9 000 9% Railways North Aero- 6 000 2% Rest of America space 26% 3 000 Heavy the world 19% 2% 0 General industry 8% 90 91 92 93 94 machinery 19%

income/loss inventories profitability in percent of sales Operating income/loss Return on capital employed Income/loss after financial Return on total assets SEK m income and expense % % Return on shareholders’ equity 2 500 40 20

2 000 38 16

1 500 36 12 34 8 1 000 32 4 500 30 0 0 28 – 4 – 500 26 – 8

–1 000 24 –12

–1 500 22 –16

–2 000 20 –20 90 91 92 93 94 90 91 92 93 94 90 91 92 93 94

Key ratios for 1992 exclude CTT Tools Definitions see note 1

earnings and capital expenditures number of dividends per share employees registered

Earnings SEK Dividends SEK m 15 2 000 55 000

12 1 800 50 000

9 1 600 45 000 40 000 6 1 400 35 000 3 1 200 30 000 0 1 000 25 000 – 3 800 20 000 – 6 600 15 000 – 9 400 10 000 –12 200 5 000 –15 0 0 90 91 92 93 94 90 91 92 93 94 90 91 92 93 94

Definition see note 1

9 Board of Directors’ Report

Ovako Steel continues to improve employed was 14.7 percent (4.2) and on such as Sweden and Italy, and secondly The increase in worldwide sales of shareholders’ equity 13.3 percent because most of SKF’s competitors bearings resulted in greater demand for (–5.6). Group solvency was 30.8 per- have a larger portion of their manufac- Ovako Steel’s bearing steel. As a result cent (26.7) at year-end. turing operations in countries whose of better utilization of Ovako Steel’s currencies have appreciated. resources, at the same time as restruc- Strong cash flow The Group’s currency exposure is turing measures continued within the Calculated in fixed exchange rates, the centralized via the internal bank, SKF Steel Division, Ovako Steel was able to SKF Group’s operations generated a Treasury Centre AB, which manages report a profit. Well-needed price positive cash flow of close to SEK flows in some 20 currencies. In terms of adjustments resulting from the 1 700 m in 1994. As a result, the Group size, the major currency inflows are in improved demand contributed to the was able to further reduce its net USD, DEM and GBP, which are improvement. At present, the plant in indebtedness. Among other measures, exchanged into SEK, ITL and FRF. Hofors, Sweden, has a concession from approximately one-tenth of SKF’s con- This means that an appreciation in the the environmental authorities to pro- vertible bond loan in ECU was repur- export currencies, USD, DEM and duce 400 000 tons of steel per year. chased. The Group’s total loans GBP, has a beneficial effect on SKF, Ovako Steel has applied for an increase amounted to SEK 7 001 m (9 272) at while the opposite applies if the SEK, to 550 000 tons. year-end. At the same time, the Group ITL and FRF appreciate. With the Ovako Steel’s strategic focus on roll- had financial assets of SEK 3 594 m exception of the sharp weakening in ing bearing steel was strengthened dur- (4 034), of which current financial the SEK and ITL exchange rates during the year. The standardization of the assets amounted to SEK 2 356 m ing recent years, currency fluctuations company’s product range continued, (2 692). do not normally have a major impact while the connection between Ovako SKF’s policy is that Group opera- on SKF. Steel’s and the bearing plants’ produc- tions be funded through long-term SKF’s policy is to hedge currency tion channels was further strengthened. financing, and that in addition to nor- flows for an average of approximately mal liquidity the company shall have a three to six months. This is considered Group result payment capacity in the form of long- to be the time normally required to The Group’s income after financial term credit commitments amounting to adjust to new conditions. income and expense amounted to SEK at least USD 250 m. 1 817 m in 1994, compared with SEK During 1994, the renegotiation of a Increased investment activity –515 m in 1993. Group sales totaled number of loans and credit facilities Capital expenditures in property, plant SEK 33 273 m during the year, com- was initiated, with the objectives of and equipment during 1994 totaled pared with SEK 29 200 m in 1993. extending the lifetime of the loan port- SEK 1 356 m (933) and related to the Other operating income amounted to folio, extending credit commitments so ongoing rationalization and moderniza- SEK 151 m (427) . that they will be valid into the 21st cen- tion of the Group’s plants. The current According to a recommendation by tury, reducing the cost of financing, and intention is that this process be con- the Swedish Financial Accounting to phase out so-called material adverse ducted at a faster pace than previously. Standards Council only quite unique change clauses. The aim is to reduce fixed costs, events could motivate accounting of SKF’s policy is that both borrowing increase flexibility and improve the extraordinary items. A reclassification and financial assets be based on float- trend of productivity with the help of has therefore been made in the 1992 ing interest rates. technological upgrades and a further and 1993 income statements. concentration of resources. This means During the year, payments of SEK Currency trends that the Group expects its rate of 612 m were made from the provision The Group’s products are manufac- investment to increase during the years for restructuring costs to cover the tured and sold in many countries ahead to between five and eight per- Group’s ongoing rationalization pro- throughout the world, which provides cent of annual sales. gram. An amount of approximately the basis for a favorable spread of risks. Research and development costs SEK 400 m remains to be utilized in However, the overall assessment is that during the year totaled SEK 542 m ongoing projects. the Group has more production than (552), representing nearly two percent The Group’s operating income, after sales in Europe. Exports from Europe of sales during the year. depreciation of SEK 1 413 m (1 456), to America and Asia correspond to amounted to SEK 2 121 m (251). Net approximately 20 percent of SKF’s pro- Number of employees financial items amounted to SEK duction in Europe. In America and The number of Group employees regis- –304 m (–766). Asia the degree of self-sufficiency tered rose by 338 during the year and Of the Group’s income after finan- amounts to approximately 80 and 40 amounted to 41 732 (41 394) at the end cial income and expense, which percent, respectively. The objective is of 1994. The average number of amounted to SEK 1 817 m (– 515), to reach a balance within the various employees was 40 072 (39 439), of rolling bearings and seals operations currency zones. whom 6 282 (5 975) were located in accounted for SEK 1 617 m (–167) and During the past years, SKF has Sweden, see note 28 – average number special steels for SEK 188 m (–351). derived certain benefits from currency of employees, wages and salaries. Earnings per share amounted to trends. Firstly, because earnings have SEK 11.05, compared with SEK – 4.35 improved in countries with weakened in 1993. The return on capital currencies and which are net exporters, 10 11 Proposed distribution of surplus

Retained earnings Kr 3 228 064 788 Reported income for the year Kr 561 407 065 Total surplus Kr 3 789 471 853

The Board of Directors and Managing Director recommend: that a dividend of 4.25 Swedish kronor per share be paid to the shareholders Kr 480 248 113 that the balance be carried forward Kr 3 309 223 740 Kr 3 789 471 853

The results of operations and the financial position of the Parent Company and the Group 1994 are given in the income statements and in the balance sheets together with related notes.

Göteborg, February 23, 1995

Anders Scharp Göran Johansson Mauritz Sahlin Gösta Bystedt Per-Olof Eriksson Giovanni Mario Rossignolo Sune Carlsson Claes Dahlbäck Anders Sjöberg Stig Blomberg Melker Schörling

Auditor’s report

We have examined the annual report, the consolidated financial statements, the accounting records and the administration of the Board of Directors and the Managing Director for the year 1994. Our examination was made in accordance with generally accepted auditing standards.

Parent Company The annual report has been prepared in accordance with the Swedish Companies Act.

We recommend, that the general meeting of the shareholders resolve to adopt the income statement and the balance sheet, that the surplus is distributed in accordance with the proposal in the Board of Directors’ Report, and that the Board of Directors and the Managing Director are discharged from liability for their administration of the company for the year 1994.

Group The consolidated financial statements have been prepared in accordance with the Swedish Companies Act.

We recommend, that the general meeting of the shareholders resolve to adopt the consolidated income statements and the consolidated balance sheets.

Göteborg, March 3, 1995

Arthur Andersen AB

Mats Fredricson Authorized Public Accountant

12 Consolidated income statements

Millions of Swedish kronor 1994 1993 1992

Net sales 33 273 29 200 26 649 Other operating income note 6 151 427 213 Cost of goods sold note 6 – 23 269 – 21 561 – 20 596 Selling, administrative and technical expenses note 2 – 6 621 – 6 359 – 6 317 Depreciation note 3 – 1 413 – 1 456 – 1 296 Operating income/loss 2 121 251 – 1 347

Financial income and expense – net note 4 – 304 – 766 – 592 Income/loss after financial income and expense 1 817 – 515 – 1 939

Taxes note 5 – 541 24 280 Income/loss after taxes 1 276 – 491 – 1 659

Extraordinary expense note 7 – ––52 Minority interest –28 – 7

Net income/loss 1 248 – 491 – 1 704

13 Consolidated balance sheets

Millions of Swedish kronor 1994 1993 1992

ASSETS Current assets Current financial assets note 8 2 356 2 692 3 075 Trade accounts receivable note 9 6 157 5 655 5 332 Inventories note 10 8 606 9 220 9 435 Short-term tax assets note 5 606 415 110 Other current assets note 11 754 772 940 18 479 18 754 18 892 Capital assets Long-term financial assets note 12 1 238 1 342 1 240 Investments note 13, 30 110 110 411 Property, plant and equipment note 14 11 080 11 826 11 227 Long-term tax assets note 5 913 1 166 – Other capital assets note 15 740 994 944 14 081 15 438 13 822 Total assets 32 560 34 192 32 714

LIABILITIES AND SHAREHOLDERS’ EQUITY Short-term liabilities Short-term loans note 16 2 047 2 228 3 258 Trade accounts payable note 17 2 635 2 182 1 915 Short-term tax liabilities note 5 552 528 74 Other short-term liabilities note 18 4 211 4 970 5 130 9 445 9 908 10 377 Long-term liabilities Long-term loans note 19 3 567 5 536 5 244 Pensions and other postretirement benefits note 20 6 573 6 571 5 045 Long-term tax liabilities note 5 1 248 1 194 1 360 Other long-term liabilities note 21 324 339 372 Convertible bonds note 23 1 387 1 508 1 273 13 099 15 148 13 294 Minority interest 144 127 113 Shareholders’ equity note 24 Restricted equity Share capital 1 412 1 412 1 412 Restricted reserves 5 043 5 497 4 064 Unrestricted equity Unrestricted reserves 2 169 2 591 5 158 Net income/loss 1 248 – 491 – 1 704 9 872 9 009 8 930

Total liabilities and shareholders’ equity 32 560 34 192 32 714

Assets pledged note 25 915 1 308 1 994 Contingent liabilities note 26 628 750 807

14 Consolidated statements of cash flow

Millions of Swedish kronor 1994 1993 1992

Operating income/loss 2 121 251 – 1 347 Depreciation and goodwill amortization 1 518 1 525 1 344 Extraordinary expenses – ––52 Changes in working capital: Inventories 614 215 – 853 Trade accounts receivable – 502 – 323 – 664 Trade accounts payable 453 267 – 293 Other current assets and liabilities – net – 741 8 1 148 Cash flow from operations 3 463 1 943 – 717

Additions to property, plant and equipment – 1 356 – 933 – 1 121 Additions to property, plant and equipment through acquisition of companies – –– 7 Sales of property, plant and equipment 149 138 539 Sale of net operating assets in CTT Tools – – 1 873 Cash flow after investments 2 256 1 148 567

Financial income and expense – net – 304 – 766 – 592 Cash dividends, AB SKF shareholders – ––480 Taxes – 401 – 1 253 189 Change in loans – 2 271 – 503 354 Change in other long-term assets and liabilities – net 235 1 569 – 40 Change in accounting principles (FAS 106 and 109) – 160 – Translation adjustments 149 – 738 – 746

Change in current financial assets – 336 – 383 – 748

15 Notes to the consolidated financial statements Amounts in millions of Swedish kronor unless otherwise stated. note 1 – accounting principles Accounting for investments in Associated Companies Investments in Associated Companies are accounted for in accordance with the equity method. The value of the invest- General ments is equal to the Group’s share of shareholders’ equity The consolidated financial statements include the Parent in these companies, determined in accordance with the Company AB SKF and all companies in which AB SKF, accounting rules of the Group. The Group’s share of these directly or indirectly, owns shares representing more than companies’ results is based on their income/loss after taxes. 50 percent of the voting rights. AB SKF and its subsidiaries At present no such investments are accounted for. are referred to as “the SKF Group” or “the Group”. Investments in companies, representing 20 to 50 percent Translation of foreign financial statements of the voting rights, and where the SKF Group has a signifi- The current rate method is used for translating the financial cant influence, are referred to as “Associated Companies”. statements of the major part of the foreign subsidiaries into All companies within the Group apply the accounting Swedish kronor. Under this method, all assets and liabilities rules as stated in the “SKF Accounting and Financial are translated into Swedish kronor at year-end exchange Reporting Manuals”. These rules are primarily based on rates, whereas income and expense items are translated at generally accepted accounting principles in Sweden average exchange rates. The translation adjustments that (Swedish GAAP). In general, the rules applied by the SKF arise are transferred directly to shareholders’ equity. Group are also in accordance with generally accepted For the translation of financial statements of subsidiaries accounting principles in the United States (U.S. GAAP). operating in highly inflationary economies, the Group Significant differences between Swedish GAAP and U.S. applies the monetary/non-monetary method (MNM- GAAP are described in note 29. method) according to the Statement of Financial Accounting Standards No. 52, “Foreign Currency Consolidation – subsidiaries Translation” (FAS 52). Monetary balance sheet items are The consolidated financial statements are prepared using translated at year-end exchange rates and non-monetary the purchase method. The consolidated shareholders’ balance sheet items, as well as related income and expense equity includes the Parent Company’s equity and that part items, are translated at rates in effect at the time of acquisi- of the equity in subsidiaries which has arisen after the acqui- tion (historical rates). Other income and expense items are sition. translated at average exchange rates. Translation differ- The difference between the cost of acquiring the shares in ences that arise are included in the related lines in the a subsidiary and the shareholders’ equity of that subsidiary income statement. at the time of acquisition, adjusted for revaluations of assets and liabilities, is accounted for: Foreign currency transactions – as goodwill in the consolidated balance sheets, if the cost Receivables and payables denominated in foreign of acquiring the subsidiary is higher than the shareholders’ currencies are translated at year-end exchange rates. The equity, or resulting gains and losses are classified as either operational or financial items in the income statement. – as a decrease in the value of acquired capital assets, if the cost of acquiring the subsidiary is lower than the Forward exchange contracts shareholders’ equity. Forward exchange contracts, which serve as hedges of the flow of goods and services between countries, have been Intercompany accounts, transactions and unrealized profits treated such that trade accounts receivable and payable have been eliminated in the consolidated financial state- have been valued at the applicable forward rates. In those ments.

Exchange rates In translating the financial statements of foreign subsidiaries, operating in the countries shown below, the following exchange rates into SEK have been used: Average rate Year-end rate 1994 1993 1992 1994 1993 1992 Belgium 100 BEF 23.17 22.55 18.06 23.42 23.20 21.34 Canada 1 CAD 5.63 6.01 4.80 5.30 6.23 5.54 France 1 FRF 1.39 1.38 1.10 1.39 1.42 1.28 Germany 1 DEM 4.77 4.71 3.71 4.81 4.81 4.37 India 100 INR 24.17 24.27 19.50 23.37 26.11 22.49 Italy 100 ITL 0.48 0.49 0.47 0.46 0.48 0.48 Japan 100 JPY 7.60 7.03 4.63 7.47 7.44 5.65 The Netherlands 1 NLG 4.25 4.19 3.30 4.29 4.30 3.89 Spain 100 ESB 5.77 6.13 5.68 5.64 5.84 6.15 Switzerland 1 CHF 5.67 5.28 4.15 5.68 5.67 4.82 United Kingdom 1 GBP 11.80 11.69 10.21 11.63 12.33 10.67 USA 1 USD 7.71 7.79 5.81 7.44 8.32 7.04 16 cases where receivables and payables have not yet arisen, Income taxes valuation of the forward exchange contracts has not been All companies within the SKF Group compute current made. income taxes in accordance with the tax rules and regula- Currency gains and losses on forward exchange contracts tions of the countries where the income is taxable. and loans, serving as hedges of net investments in foreign As from 1993 deferred taxes are accounted for according subsidiaries, are excluded from the income statement. to FAS 109 “Accounting for Income Taxes”. FAS 109 These gains and losses, less current and deferred income requires that deferred taxes be calculated on differences taxes, are transferred directly to shareholders’ equity, between the book and tax bases of assets and liabilities in thereby offsetting gains and losses arising from the transla- accordance with the liability method which, among other tion of the financial statements of the foreign subsidiaries. things, means that changes in tax rates affect the year’s For these forward exchange contracts, the interest results. Additionally, it allows the recognition of loss carry- difference between currencies is evenly allocated over the forwards if they, more likely than not, can be utilized. The life of the contract. difference between the gross effect and the amounts Forward exchange contracts which are not considered expected to be utilized are provided for in a valuation hedges of firm commitments have been valued at market allowance. The cumulative effect of this change per the value. Gains and losses are included in financial income and beginning of 1993 was accounted for as extraordinary expense. income in the income statement for 1993. As from the Annual Report 1994 this item has been reclassified. See Debt and marketable equity securities below under the heading “Change in accounting principles”. The Group applies FAS 115 “Accounting for Certain Provisions have been made in the consolidated financial Investments in Debt and Equity Securities”. There are no statements for estimated taxes on earnings of subsidiaries marketable equity securities held. Debt securities held for expected to be remitted in the following year, but not for trading purposes are recorded at market value with changes tax liabilities which may arise on distribution of the remain- in value recognized in the income statement. ing unrestricted earnings of foreign subsidiaries.

Inventories Postretirement benefits Inventories are stated at the lower of cost (first-in, first-out FAS 106 “Employers’ Accounting for Postretirement basis) or market (net realizable value). Net realizable value Benefits Other Than Pensions” requires that the cost of is defined as the lower of current replacement cost or mar- health insurance and other similar benefits provided to ket value less selling cost. Cost includes material, labor and employees after their retirement be expensed during an manufacturing overheads. employee’s active service life. Previously the cost of these benefits was expensed on a cash basis. The cumulative after- Capital and intangible assets tax effect of this change in accounting principle was Depreciation is provided on a straight-line basis and is reflected as extraordinary expense in the income statement calculated based on the cost of the asset. In some countries, for 1993. As from the Annual Report 1994 this item has legal revaluations are made in addition to cost, and been reclassified. See below under the heading “Change in depreciation is then based on the revalued amounts. accounting principles”. The rates of depreciation are based on the estimated economic lives of the assets, generally 33 years for build- Postemployment benefits ings, 10–17 years for machines and 4–5 years for tools, FAS 112 “Employers’ Accounting for Postemployment office equipment and vehicles. Benefits” establishing standards for employers’ accounting Goodwill is amortized over 10 years on a straight-line for benefits provided to former employees before retire- basis, except for goodwill related to significant strategic ment has been implemented as of January 1, 1994. The acquisitions, which is amortized over a maximum of 20 Group currently has no such obligations. years. Amortization of goodwill is included in administrative expenses. Change in accounting principles Patents and similar rights are stated at cost and are According to RR 4 “Accounting for extraordinary income amortized on a straight-line basis over their legal lives. and expense and information for comparison” of the Swedish Financial Accounting Standards Council only quite Leases unique events could result in extraordinary items. The Leases which transfer virtually all benefits and risks incident cumulative effect of applying FAS 109 and FAS 106 as to the ownership of the property to the Group (capital above was accounted for as extraordinary items in 1993. In leases), are capitalized and accounted for as assets and the 1994 Annual Report the shareholders’ equity at January incurrence of obligations. Rentals for other leases (operat- 1, 1993, has been credited with 160 in adjusting prior years’ ing leases) are charged against income over the lease term. figures in accordance with RR 5 “Change in accounting principles”. In applying FAS 106 the shareholders’ equity Research and development was charged with 572 after considering tax of 364 and cred- Research and development expenditures are charged ited with 732 in application of FAS 109. In addition, a gain against income as incurred. of 154 on the sale of Sandvik shares was included in extraordinary income in 1993. This has been reclassified to other

17 operating income. Other extraordinary items have been note 3 – depreciation referred to operation except for write-off of operations in 1994 1993 1992 former Yugoslavia due to war. See note 6. Land improvements 9 10 7 Definitions of key figures Buildings 150 145 128 The majority of the subsidiaries within the SKF Group Machinery and equipment 1 221 1 252 1 089 report their results of operations and financial position ten Leases 27 32 28 times a year. The key figures presented in the Annual Leaseholds 1 11 Report have been calculated using average values based on Revaluations 5 16 43 these interim reports. Therefore, the calculation of these 1 413 1 456 1 296 key figures using the year-end values presented, may give slightly different results. Depreciation related to assets used in manufacturing amounted to 1 223 in 1994, 1 245 in 1993 and 1 125 in 1992. 1. Portion of risk-bearing capital The remainder relates to assets used in selling, administra- Shareholders’ equity plus minority interest and deferred tive and technical areas. taxes, as a percentage of total assets at year-end. 2. Solvency Shareholders’ equity plus minority interest, as a percentage note 4 – financial income and expense of total assets at year-end. 1994 1993 1992 3. Return on total assets Dividend income 6 72 Operating income/loss plus financial income, as a Interest income 521 529 546 percentage of average total assets. Interest expense – 884 – 995 – 896 4. Return on capital employed Financial exchange gains Operating income/loss plus financial income, as a and losses 53 – 307 – 244 percentage of average total assets less the average of non- – 304 – 766 – 592 interest bearing liabilities. The net interest cost component of the pension cost, 5. Return on shareholders’ equity included in the operating income/loss, amounted to 264 in Income/loss after taxes, as a percentage of average 1994, 235 in 1993 and 311 in 1992. See also note 20 – shareholders’ equity. Pensions and other postretirement benefits. 6. Profit margin Financial exchange gains and losses include 23 in 1994, Operating income/loss plus financial income, as a –116 in 1993 and approximately –160 in 1992 referable to percentage of net sales. the Parent Company’s convertible ECU bonds. See note 23 – Convertible bonds. 7. Turnover of total assets Net sales in relation to average total assets. 8. Earnings per share in Swedish kronor note 5 – taxes Income/loss after taxes and minority interest divided by 1994 1993 1992 average number of shares. Taxes on the income/loss after 9. Yield financial income and expense Dividend as a percentage of share price at year-end. Current taxes – 486 – 300 – 134 10. P/E ratio Deferred taxes –55 324 414 Share price at year-end divided by earnings per share. – 541 24 280 11. Average number of employees Deferred taxes for 1994 include an income of 328 related to Total number of working hours of all employees, divided by the net change in the valuation allowance. Of this change, the normal total working time during the year. 192 represents an adjustment of the beginning of the year balance of the part of the valuation allowance that still exists at year end. The adjustment was because of a change note 2 – research and development in circumstances that caused a change in judgement about Research and development expenditures charged against the realizability of the related deferred tax asset in future income were 542 in 1994, 552 in 1993 and 473 in 1992. years. Additionally, the Group enters into research and development contracts to develop or produce prototypes of various products. Expenses under these contracts were 20, 27 and 20 in 1994, 1993 and 1992 respectively, and have been fully reimbursed.

18 Net current and deferred tax assets and liabilities at Corporate income tax December 31, were: The corporate nominal income tax rate in Sweden was 28 percent in 1994 and 30 percent in 1993 and 1992. 1994 1993 1992 The effective tax rate on income/loss after financial Short-term deferred tax assets 606 415 110 income and expense and extraordinary items, but before Long-term deferred tax assets 913 1 166 – minority interest, was –30 percent in 1994, 5 percent in 1993 1 519 1 581 110 and 14 percent in 1992. A reconciliation of the statutory tax to the effective tax in Sweden is outlined below: Income taxes currently payable 271 184 74 1994 1993 1992 Short-term deferred tax liabilities 281 344 – Long-term deferred tax liabilities 1 248 1 194 1 360 Tax calculated on statutory 1 800 1 722 1 434 tax rate in Sweden – 509 155 597 Difference between statutory Gross deferred tax assets and liabilities at December 31 tax rate in Sweden and were related to the following items: foreign subsidiaries’ weighted statutory tax rate – 153 54 83 1994 1993 Permanent differences 20 90 768 Pensions and other Tax loss carry-forwards, postretirement benefits 403 559 net of changes in Tax loss carry-forwards 1 995 2 389 valuation allowance 151 – 228 –1 140 Other 953 1 083 Other, including translation Gross deferred tax assets 3 351 4 031 adjustments –50 – 47 – 28 Valuation allowance – 762 –1 090 Effective tax – 541 24 280 2 589 2 941 Tax loss carry-forwards Pensions and other The Parent Company and certain subsidiaries, principally in postretirement benefits 188 327 Sweden and Germany had, at December 31, 1994, tax loss Inventory 430 454 carry-forwards amounting to 6 319 (7 728 in 1993 and 6 522 Property, plant and equipment 1 544 1 647 in 1992). Such tax loss carry-forwards will expire as follows: Other 437 470 Gross deferred tax liabilities 2 599 2 898 1995 172 1996 263 Net deferred tax 1997 279 liabilities/assets –10 43 1998 544 1999 354 In 1992 deferred taxes mainly resulted from accelerated 2000 and thereafter 4 707 depreciation claimed for tax purposes by certain subsidiaries. As of December 31, 1994, the total tax loss carry-forwards have resulted in deferred tax assets of 1 564, net of valuation allowances. Such assets can be used to reduce future taxable income, but since their benefit has already been realized, their future use will not reduce the total tax charge for the Group.

19 note 6 – effect of reclassification of extraordinary items 1993 1993 1992 1992 Previously Previously adopted After adopted After income reclassi- income reclassi- statement fication statement fication Other operating income 273 427 148 213 Cost of goods sold –21 561 –21 561 –20 369 –20 596 Operating income/loss 97 251 – 1 185 – 1 347 Loss after financial income and expense – 669 – 515 – 1 777 – 1 939 Extraordinary income 886 – 65 – Extraordinary expense – 936 ––279 – 52 Taxes on extraordinary income and expense 364 ––– Net loss – 331 – 491 – 1 704 – 1 704 Loss per share, before extraordinary items, SEK – 5.70 – 4.35 – 13.20 – 14.60

The extraordinary income in 1992 referred to gain on sale of CTT Tools. The purchase price consisted of a directed issue of shares in Sandvik AB. The shares were sold in 1993 and the gain on the sale, 154 net, was included in extraordinary income in 1993. Depending on earnings of CTT Tools during 1994–1995, a supplementary payment may arise. Other extraordinary items reclassified refer to FAS 106 and FAS 109 in 1993 and to discontinued portfolio businesses in 1992.

note 7 – extraordinary expense note 10 – inventories 1994 1993 1992 Inventories at December 31, net of allowance for obsolescence, consists of the following: Write-off of operations in former Yugoslavia due to war – ––52 1994 1993 1992 – ––52 Finished goods 5 133 6 048 6 146 Work in process 2 206 1 958 2 117 Raw materials 735 656 589 note 8 – current financial assets Supplies 532 558 583 1994 1993 1992 8 606 9 220 9 435 Cash and bank accounts 846 784 1 070 Debt securities 557 857 508 note 11 – other current assets Government securities 504 767 384 Other short-term 1994 1993 1992 financial receivables 449 284 1 113 Advances to suppliers 40 36 50 2 356 2 692 3 075 Prepaid expenses 146 202 334 Accrued income 110 125 141 Cash and bank accounts include short-term time deposits of Other current receivables 458 409 415 250 for 1994, 174 for 1993 and 714 for 1992. 754 772 940 Unrealized holding loss on trading securities included in financial net in 1994 amounts to 19.

note 12 – long-term financial assets note 9 – trade accounts receivable 1994 1993 1992 1994 1993 1992 Long-term financial receivables 1 209 1 337 1 222 Debt securities 29 518 Acceptances receivable 634 570 587 1 238 1 342 1 240 Accounts receivable 5 832 5 429 5 002 6 466 5 999 5 589 The majority of the long-term financial receivables is Allowance for doubtful accounts – 309 – 344 – 257 recorded at market value. 6 157 5 655 5 332

Provision for doubtful accounts charged against income note 13 – investments amounted to 66 in 1994, 119 in 1993 and 88 in 1992. Investments include shares in Sandvik AB of 313 in 1992. A complete list of investments is found in note 30.

20 note 14 – property, plant and equipment 1994 1993 1992 Acquisi- Accumu- Acquisi- Accumu- Acquisi- Accumu- tion cost lated depr. tion cost lated depr. tion cost lated depr. Land 384 0 436 0 390 8 Land improvements 296 197 302 191 278 180 Buildings 4 916 2 483 5 024 2 420 4 559 2 118 Machinery and equipment 19 580 11 874 20 059 11 907 18 211 10 372 Capital leases 277 181 352 185 238 135 Leaseholds 30 6 96 96 Revaluations 543 262 598 270 578 246 26 026 15 003 26 780 14 979 24 263 13 065 Net 11 023 11 801 11 198 Advances to suppliers 57 25 29 11 080 11 826 11 227

Capital leases consist of the following: 1994 1993 1992 Land 6 10 5 Buildings 77 116 91 Machinery and equipment 194 226 142 277 352 238

note 15 – other capital assets 1994 1993 1992 Acqui- Accumu- Acqui- Accumu- Acqui- Accumu- sition lated sition lated sition lated cost amort. cost amort. cost amort. Goodwill 881 272 1 030 251 900 155 Patents and similar rights 16 11 15 13 19 15 897 283 1 045 264 919 170 Net 614 781 749 Deferred charges 126 213 195 740 994 944

Special amortization of goodwill in 1994 amounted to 49.

note 16 – short-term loans 1994 1993 1992 age month-end amount outstanding during the year was Bank loans 1 434 1 759 2 430 2 310 in 1994, 2 527 in 1993 and 2 950 in 1992. The weighted Other short-term loans 227 64 302 average interest rate was 7.2 percent, 13.1 percent and 16.4 1 661 1 823 2 732 percent in 1994, 1993 and 1992, respectively, and was 7.1 percent at December 31, 1994. Average amounts outstand- Current portion of ing and weighted average interest rates have been com- long-term loans 386 405 526 puted based on the amounts outstanding at the end of each 2 047 2 228 3 258 month and related interest expense. At December 31, 1994, the Group had unutilized long- The maximum month-end amount of short-term loans out- term lines of credit of 4 020 expiring from 1996 to 2000. standing, excluding the current portion of long-term loans, Commitment fees ranging from 0.05 percent to 0.35 percent was 2 750 in 1994, 3 194 in 1993 and 3 933 in 1992. The aver- are required on these lines of credit.

21 note 17 – trade accounts payable note 20 – pensions and other postretirement benefits 1994 1993 1992 1994 1993 1992 Acceptances payable 267 313 321 Accounts payable 2 368 1 869 1 594 Pensions 5 552 5 433 5 045 2 635 2 182 1 915 Other postretirement benefits 1 021 1 138 – 6 573 6 571 5 045 note 18 – other short-term liabilities Charges against income in 1994, 1993 and 1992 for pension and similar plans were 654, 500 and 472, which include a net 1994 1993 1992 interest cost of 264, 259 and 341 respectively. The interest Accrued expenses and income portion of this net interest cost represents actual deferred income 3 459 4 224 4 387 return on assets in pension funds, whereas the interest Other short-term liabilities 752 746 743 expense portion has been calculated on the average of the 4 211 4 970 5 130 opening and closing balances of the pension obligation. Interest rates used vary by country, and were 7.7, 6.1 and 8.1 Accrued expenses and deferred income include accrued percent in 1994, 1993 and 1992 respectively for indexed vacation pay of 604, 518 and 444 at December 31, 1994, 1993 Swedish pensions and 3.5 percent in 1994, 1993 and 1992 for and 1992 respectively, and accrued social charges (including fixed Swedish pensions. Interest rates of 6.4 percent were payroll taxes) of 486, 618 and 579. used in 1994 and 1993 and 8.1 percent in 1992 for the German companies, which represented 65 percent of the note 19 – long-term loans Group’s total pension obligation in 1994, 63 percent in 1993 and 61 percent in 1992. Long-term loans at the end of the year, excluding the SKF sponsors several defined postretirement benefit current portion are: plans covering most salaried and hourly employees in the 1994 1993 1992 United States. The plans, which are unfunded, provide certain health care and life insurance benefits to eligible retired Debentures (maturing from employees, and include a cost-sharing element for all future 1998 to 2005) bearing interest retirees. from 6.0 to 14.0 percent* 1 596 1 971 980 The Group applies FAS 106, “Employers’ Accounting for Bank loans (maturing from Postretirement Benefits other Than Pensions” since 1993. 1996 to 2008) bearing interest Net periodic postretirement benefit cost includes the fol- from 2.1 to 16.5 percent* 1 463 2 523 3 233 lowing components: Other loans (maturing from 1996 to 2010) bearing interest 1994 1993 from 2.1 to 26.0 percent* 508 1 042 1 031 Service cost 12 15 3 567 5 536 5 244 Interest cost 81 80 * December 31, 1994 Net periodic postretirement benefit cost 93 95 The current portion of long-term loans is included in short- term loans (see note 16). The following table sets forth the accrued postretirement Maturities of long-term loans outstanding at December 31, benefit liability recognized in the balance sheet of the 1994 are as follows: Group at December 31: 1996 731 Accumulated postretirement benefit obligation 1997 705 1998 174 1994 1993 1999 1 000 Retirees 760 829 2000 68 Other fully eligible plan 2001 and thereafter 889 participants 138 195 The terms of certain loan agreements contain various Other plan participants 123 114 restrictions, relating principally to the further pledging of Total accumulated post- fixed assets, additional borrowing and payment of inter- retirement benefit obligation 1 021 1 138 company dividends. Of the long-term loans, amounts totaling 571, 859 and 976 The assumed discount rate used in the calculations is were collateralized at December 31, 1994, 1993 and 1992, 8 percent. respectively. No material differences between carrying amounts and The assumed annual rate of increase in the per capita cost fair values of long-term loans existed at December 31, 1994. of covered health care benefits was 11 percent for 1994 and The fair values of long-term loans were estimated using dis- 12 percent for 1993. The rate was assumed to decline by a counted cash flows and applying the interest rate valid on half to one percentage-point per year to an ultimate rate of the closing day. 6 percent. An increase in the assumed health care cost trend 22 rates by one percentage-point would increase the accumu- note 24 – shareholders’ equity lated postretirement benefit obligation as of December 31 Share capital by 81 in 1994 and 92 in 1993, and the aggregate of the The share capital at December 31, 1994 consisted of the fol- service and interest cost components of the net periodic lowing shares (nominal value SEK 12.50 per share): postretirement benefit by 9 in 1994 and 8 in 1993. Number of shares Aggregate authorized and nominal note 21 – other long-term liabilities outstanding value 1994 1993 1992 A shares 49 256 332 616 B shares 63 743 224 796 Long-term portion of 112 999 556 1 412 capital leases (see note 22) 68 125 82 Other 256 214 290 The designations A and B indicate the voting power of the 324 339 372 shares. An A share has one vote, a B share one-thousandth of one vote. note 22 – leases Option certificates Future minimum rental commitments at December 31, 1994 In 1990, AB SKF issued 11 000 000 option certificates. Each for capital leases and non-cancellable (within one year) option entitles the holder to subscribe for one new B share operating leases were as follows: at the price of 190 Swedish kronor. These certificates are exercisable through June 30, 1995. Capital Operating leases leases Restricted reserves 1995 21 270 In accordance with statutory requirements in Sweden and 1996 18 211 certain other countries in which the SKF Group operates, 1997 16 167 the Parent Company and its subsidiaries maintain restricted 1998 15 142 reserves which are not available for distribution as 1999 15 129 dividends. 2000 and thereafter 13 885 The Swedish Companies Act requires that 10 percent of 98 1 804 net income be transferred to the legal reserve (part of restricted reserves) until the legal reserve amounts to 20 Less: Amount representing percent of the share capital. Premiums paid on new share interest and executory issues must also be transferred to the legal reserve. costs –11 In countries where legal revaluations of assets are made, Present value of minimum lease the revaluation surplus must be transferred to legal payments under capital leases 87 reserves. Tax laws in Sweden and certain other countries permit Less: Current portion –19 allocations to reserves that are deductible for tax purposes. Long-term portion 68 To a certain extent, companies can thus allocate income so that it remains in the business without being taxed immedi- Operating leases also include the leases for those portions ately. In the balance sheet the cumulative value of these of real estate in Göteborg, which in 1990, 1989 and 1987 allocations, less the related deferred tax liabilities, is shown were sold and leased back. under restricted reserves. Differences between statutory Net rental expense related to operating leases was 225 in reporting and reporting for Group purposes are also treated 1994, 239 in 1993 and 283 in 1992. Contingent rentals and as restricted reserves. sublease income were not significant in any of the years presented. Unrestricted equity Unrestricted earnings include earnings distributable by the Parent Company and those net earnings that may be note 23 – convertible bonds remitted from subsidiaries to the Parent Company within In May 1992, AB SKF issued zero coupon convertible one year. The amount has been reduced by accumulated bonds amounting to 145 million ECU after a discount of losses in other subsidiaries. In determining the remittable 8.75 percent. During 1994, the equivalent of 1 177 629 amounts, consideration has been given to legal and shares or 47 million Swedish kronor nominal amount was exchange restrictions, but not to the financial position of the repurchased. Upon full conversion on the due date, the remitting subsidiaries. nominal amount of 291 million ECU will result in the issuance of 7 260 021 B shares. Conversion can be requested up to July 26, 2002. The holder is entitled to request redemption on July 26, 1997. On or after that date the bonds are redeemable at any time at the option of AB SKF, as a whole or in part. 23 Changes in shareholders’ equity note 25 – assets pledged

Re- Unre- The following assets have been pledged to secure loans and Share stricted stricted other obligations: capital reserves equity Total 1994 1993 1992 Opening balance 1992-01-01 1 412 5 466 3 446 10 324 Mortgages on real estate 611 673 1 249 Cash dividend – 480 – 480 Chattel mortgages 215 468 466 Net loss –1 704 –1 704 Other mortgages 65 134 250 Transfer between reserves –2 131 2 131 Total mortgages 891 1 275 1 965 Translation adjustments and Government securities 24 30 26 revaluations 729 61 790 Other assets pledged 0 33 Closing balance 1992-12-31 1 412 4 064 3 454 8 930 915 1 308 1 994 Adjustment due to Mortgages are stated at the nominal value of the mortgage changes in accounting deeds and other pledged assets are stated at net book value. principles (see note 1) 160 160 The pledged assets secured obligations of 895 at December Adjusted opening 31, 1994, 859 in 1993 and 976 in 1992. balance 1993-01-01 1 412 4 064 3 614 9 090 Net loss – 491 – 491 Transfer between reserves 881 – 881 note 26 – contingent liabilities Translation adjustments and 1994 1993 1992 revaluations 552 – 142 410 Closing balance 1993-12-31 1 412 5 497 2 100 9 009 Acceptances receivable discounted 64 89 66 Net income 1 248 1 248 Unrecognized and unfunded Transfer between reserves – 102 102 vested and unvested Translation adjustments and retirement benefits 332 391 466 revaluations – 352 – 33 – 385 Other guarantees and Closing balance 1994-12-31 1 412 5 043 3 417 9 872 contingent liabilities 232 270 275 628 750 807 As described in note 1, translation adjustments arising from the application of the current rate method are transferred directly to shareholders’ equity. Changes in cumulative note 27 – geographical information translation adjustments which are included in both restricted and unrestricted reserves, are as follows: External sales for the Group per geographical area were as follows: 1994 1993 1992 1994 1993 1992 Balance at beginning of year 598 191 -587 Aggregate translation Sweden 1 837 1 415 1 463 adjustments – 490 916 1 505 Europe (excluding Sweden) 16 632 14 419 14 802 Gains/losses from hedges United States and Canada 8 145 7 525 5 832 (net of taxes) of investments Other countries 6 659 5 841 4 552 in foreign subsidiaries 106 – 509 – 727 33 273 29 200 26 649 Balance at end of year 214 598 191 The Group’s identifiable assets (total assets excluding cash, bank accounts, short-term investments, intercompany receivables and shareholdings, but before consolidation eliminations), amounted at December 31, 1994 to 31 016 and to 32 189 in 1993 and 30 260 in 1992. The geographical location of these assets was as follows: 1994 1993 1992 Sweden 4 287 4 376 3 876 Europe (excluding Sweden) 14 987 14 903 15 491 United States and Canada 6 511 7 235 6 256 Other countries 5 231 5 675 4 637 31 016 32 189 30 260

Dividends of 375 in 1994, 353 in 1993 and 753 in 1992 were received by the Parent Company from foreign subsidiaries.

24 note 28 – average number of employees, wages, salaries and remunerations

1994 1993 1992 Operations in Sweden Number of work sites 19 20 23 Total average number of employees 6 282 5 975 6 871 Wages and salaries: Boards and Managing Directors 23 18 17 Other employees 1 420 1 340 1 450 Total in Sweden 1 443 1 358 1 467

Operations abroad Number of countries 61 57 57 Total average number of employees 33 790 33 464 39 801 Wages and salaries: Boards and Managing Directors 121 119 101 Other employees 7 804 7 579 7 129 Total abroad 7 925 7 698 7 230

Total average number of employees 40 072 39 439 46 672 Total wages and salaries 9 368 9 056 8 697

Of the average number of employees in Sweden during addition to his annual fee as board member in AB SKF, a 1994, 1 065 were women and 5 217 were men. The corre- compensation of ITL 225 000 000. Managing Director and sponding figures for 1993 and 1992 were 1 071 women and Group Chief Executive, Mauritz Sahlin, had a salary of 4 904 men, and 1 289 women and 5 582 men respectively. SEK 2 350 000 and a bonus of SEK 940 000, a fee as board Of the average number of employees abroad during 1994, member in a subsidiary of USD 23 000, free housing, a so- 5 466 were women and 28 324 were men. The corresponding called “60-year agreement” (entitling to 70 percent of pen- figures for 1993 and 1992 were 6 034 women and 27 430 sionable income up to 65 years of age at retirement after 60 men, and 6 840 women and 32 961 men respectively. years of age), an old age pension corresponding to 32.5 per- The Chairman of the Board of AB SKF received during cent of pensionable income exceeding 20 basic amounts (an 1994 a fee of SEK 200 000, and an additional yearly index for national social security purposes with a value of compensation of SEK 300 000 for work in addition to the SEK 35 200 in 1994) and a free annual premium of normal board member responsibilities. Giovanni Mario SEK 100 000 for annuity insurance. Rossignolo, chairman of SKF’s Italian subsidiary, had, in

25 Average number of employees, wages and salaries by Average number of employees in Sweden, specified by country: work site:

Average number Wages and salaries Arvika 254 of employees in SEK thousands Danderyd 14 Argentina 534 53 938 Eskilstuna 59 Australia 86 25 799 Göteborg 2 680 Austria 741 226 270 Helsingborg 25 Belgium 226 70 514 Hofors 1 547 Brazil 1 097 126 468 Hällefors 647 Canada 155 44 693 Jönköping 16 Chile 55 11 695 Karlskoga 40 China 25 1 223 Katrineholm 474 Colombia 16 1 999 Landskrona 70 Denmark 87 30 389 Lidköping 379 Eastern Europe 131 11 426 Ludvika 5 Finland 82 19 937 Malmö 10 France 3 507 879 513 Mora 33 Germany 6 834 2 418 487 Mölndal 5 Greece 47 6 572 Stockholm 8 Hong Kong 39 6 742 Sundsvall 14 India 2 623 77 941 Västerås2 Iran 11 1 133 6 282 Italy 5 390 1 165 962 Ivory Coast 2 912 Japan 92 46 667 Jordan 5 698 Kenya 29 1 778 Korea 22 3 859 Malaysia 603 45 730 Morocco 1 374 Mexico 759 81 784 The Netherlands 669 223 819 Nigeria 5 195 Norway 55 16 878 Panama 68 14 876 Peru 37 5 572 Philippines 26 1 804 Portugal 40 6 018 Saudi Arabia 2 443 Singapore 337 54 238 South Africa 491 53 451 Spain 708 156 299 Sweden 6 282 1 443 325 Switzerland 204 91 224 Taiwan R.O.C. 63 10 413 Thailand 72 9 301 Tunisia 1 282 Turkey 56 4 892 United Arab Emirates 2 524 United Kingdom 1 166 235 330 Uruguay 13 1 654 USA 6 407 1 667 928 Venezuela 43 3 014 Zambia 90 2 230 Zimbabwe 36 2 145 40 072 9 368 358

26 U.S. GAAP note 29 – reconciliation to united states ment indemnity plan in accordance with French National generally accepted accounting principles Employer/Employee agreements. Plans in Germany, Spain and the United States are designed to supplement these Accounting policies of the SKF Group that differ signifi- countries’ social security pensions. Only the U.S. plans are cantly from U.S. GAAP are as follows: funded. Benefits are based on a combination of age, salary and service and are available to all employees meeting age, 1. Deferred income taxes service and other requirements. Adjustments for deferred income taxes in the reconciliation to U.S. GAAP are attributable to the differences described The following tables summarize approximate disclosures below. under FAS 87. In 1994, deferred income taxes include an income due to a change in the valuation allowance related to gains on sales Net periodic pension cost for the plans described above, of real estate (see 5. below). The change was due to a included in the Group’s approximate U.S. GAAP income change in circumstances that effected the judgement of the statement includes the following components: realizability of the deferred tax asset in future years. 1994 1993 1992 2. Revaluation of assets Service cost 104 107 110 In certain countries, assets have been revalued at an amount Interest cost 527 532 462 in excess of cost. U.S. GAAP does not permit the Actual return on assets 48 -217 – 115 revaluation of assets in the financial statements. Other – net – 162 50 – 1 Net periodic pension cost 517 472 456 3. Capitalization of interest expense In accordance with Swedish GAAP, the SKF Group has not Assumptions used in the calculations: capitalized interest expense incurred in connection with the 1994 1993 1992 financing of expenditures for construction of property, plant and equipment. Such interest expense is required to be Discount rates 4-9.5% 6.5–8% 7–10% capitalized in accordance with U.S. GAAP. Rates of increase in compensation level 2.5–6% 2.5–5% 2–7% 4. Accounting for early termination benefits Investment return 8.5–10% 8.5–10% 11% The SKF Group has in previous years allocated the costs for early termination benefits between early and normal retire- The following table sets forth these plans’ funded status and ment for certain Group companies. U.S. GAAP requires amounts recognized in the Group’s approximate U.S. costs for early termination benefits to be expensed in the GAAP balance sheet: year when the benefits are accepted by the employees. 1994 1993 1992 5. Gain on sale of real estate Actuarial present value of: In 1990, 1989 and 1987, portions of the real estate in Vested benefit obligation 6 431 6 737 5 052 Göteborg were sold, with gains of 145, 235 and 244 respec- Accumulated benefit obligation 6 662 6 937 5 259 tively. The properties are leased back by SKF with the Projected benefit obligation 7 074 7 339 5 794 option to repurchase them in the future. Plan assets at fair value –2 396 –2 695 –1 877 Under U.S. GAAP, a sale under these terms shall be accounted for as a financial arrangement where the book Projected benefit obligation value of the property is maintained, and depreciation fol- in excess of plan assets 4 678 4 644 3 917 lows the original plan. The proceeds received are recorded Unrecognized net loss 26 15 85 as a liability, and leasing costs paid are regarded as interest Unrecognized net obligation and amortization. at initial application – 457 – 612 – 527 In 1991 real estate in Halmstad, Sweden, was sold and Unrecognized prior service cost – 124 – 149 – 114 partially leased back. During 1994 this commitment was dis- Adjustment required to continued. In accordance with U.S. GAAP, the remaining recognize minimum liability 278 700 414 gain has therefore been realized. Pension liability 4 401 4 598 3 775 6. Pensions Plan assets are invested primarily in securities and bonds. Periodic pension cost and liability are calculated by the Group according to local laws and accounting principles. Under U.S. GAAP, the periodic pension cost and liability should be calculated according to FAS 87, “Employers’ Accounting for Pensions”. The Group sponsors defined benefit plans in several countries, principally Sweden, Germany, France, the United States and Spain. The Swedish plan supplements statutory pensions where benefits are established by national organizations. The subsidiaries in France sponsor a retire-

27 7. Forward exchange contracts 10. Off-balance sheet risk and concentrations of credit risk A forward exchange contract is, according to U.S. GAAP, The Group has a firm policy to hedge its exposure to considered a hedge only when there is a firm commitment. foreign currency exchange rate fluctuations, as well as According to Swedish GAAP contracts hedging forecasted against fluctuations in interest rates, through many different transactions also qualify as hedging. In these cases, a valua- strategies, including the use of various financial instruments tion of the contract is not made. Contracts hedging fore- such as foreign currency and interest rate swaps and for- casted transactions, not covered by firm commitments, are ward exchange contracts. accounted for according to U.S. GAAP, as the difference The instruments are contracted with several well- between the agreed forward rate and the market forward established international financial institutions, therefore rate on the closing day. management believes credit risk to be very low. They serve as hedges of net investments in foreign subsidiaries, com- 8. Statements of cash flow mercial transactions and internal bank activities. The gains The Group prepares the statements of cash flow in and losses on these contracts would partly be offset by gains accordance with Swedish GAAP, which requires a cash flow and losses resulting from the translation of the foreign statement differing from that required by FAS 95, subsidiaries’ financial statements and partly influence the “Statement of Cash Flows”. Additional approximate dis- Group’s result. closures if the Group were to comply with FAS 95 are as Concentration of credit risk is limited, primarily because follows: the Group’s customer base consists of many geographically and industrially diverse customers. 1994 1993 1992 Interest rate swaps serve mainly for swapping interest at Borrowings of long-term loans 399 1 257 2 686 fixed rates on loans in U.S.-dollars into floating rates. The Repayments of long-term loans 1 988 1 711 1 671 interest is included in earnings when accrued. Cash interest paid 780 813 780 The table below summarizes the gross contractual amounts Cash taxes paid 435 186 252 of the Group’s derivative instruments per category and purpose translated according to currency rates on Significant non-cash transactions are deferred tax provisions December 31, 1994. (see note 5) and provisions for pensions and other postretirement benefits (see note 20). Forward exchange contracts – hedge 12 654 The Group considers current financial assets to be cash Cross currency swaps 3 214 15 868 and cash equivalents (see note 8). Forward exchange contracts – trading 96 Currency options 303 9. Discontinued operations Interest rate swaps 2 611 According to U.S. GAAP the discontinuation of portfolio 18 878 businesses should be reported separately on the income statement. Hedge of 1994 1993 1992 – firm commercial commitments 2 379 – forecasted commercial transactions 3 027 Discontinued portfolio – net equity investments 5 833 businesses – net – –– 214 – internal bank activities 4 629 Gain on sales of shares 15 868 in Sandvik AB – net – 154 – – 154 – 214 11. Sale of fixed assets During 1993, the Group recorded the sale of power plants in Italy in accordance with Swedish GAAP. However, since the legal title was only transferred in 1994 the transaction is recognized in 1994 in accordance with U.S. GAAP.

12. Changes in accounting principles Changes in accounting principles are transferred directly to shareholders’ equity according to Swedish GAAP (see note 1). According to U.S. GAAP, changes in accounting principles should be taken to income. An adjustment has therefore been made to net income but not to shareholders’ equity in the reconciliation to U.S. GAAP.

28 13. Summary The application of U.S. GAAP would have the following approximate effect on consolidated net income/loss, shareholders’ equity and earnings per share. 1994 1993 1992 Net income/loss as reported in the consolidated income statements 1 248 – 491 –1 704 Items increasing/decreasing net income/loss: Deferred income taxes 73 143 178 Depreciation on revaluation of assets including effect in connection with sale 21 19 46 Capitalization of interest expense 3 – 13 – 6 Early termination benefits – 13 18 Gains on sales of real estate 17 49 Pensions –18 – 121 – 6 Forward exchange contracts 2 429 – 488 Sale of fixed assets 150 – 154 – Changes in accounting principles – 160 – Net increase/decrease in net income/loss 248 480 – 249 Approximate net income/loss in accordance with U.S. GAAP 1 496 – 11 –1 953

1994 1993 1992 Shareholders’ equity as reported in the consolidated balance sheets 9 872 9 009 8 930 Items increasing/decreasing shareholders’ equity: Deferred income taxes 380 309 167 Revaluation of assets – 275 – 293 – 297 Capitalization of interest expense 61 58 70 Early termination benefits – ––13 Gains on sales of real estate – 622 – 638 – 642 Pensions –83 – 66 55 Forward exchange contracts 24 23 – 406 Sale of fixed assets – – 152 – Net decrease in shareholders’ equity – 515 – 759 –1 066 Approximate shareholders’ equity in accordance with U.S. GAAP 9 357 8 250 7 864

1994 1993 1992 Earnings per share, in Swedish kronor: Earnings from continuing operations 13.25 – 2.90 –15.65 Earnings from discontinued operations – 1.40 – 1.90 Earnings before extraordinary credit 13.25 – 1.50 –17.55 Extraordinary credit: – Changes in accounting principles – 1.40 – – Income tax benefit from utilizing loss carry-forwards – – 0.25 Net earnings per share in accordance with U.S. GAAP 13.25 – 0.10 –17.30 Weighted average number of shares outstanding 112 999 556 112 999 556 112 999 556

29 The following is a summary comparing the reported consolidated balance sheets with the balance sheets after approximate adjustments to U.S. GAAP. As reported in the Approximate amounts after consolidated balance sheets adjustments to U.S. GAAP 1994 1993 1992 1994 1993 1992 Current financial assets 2 356 2 692 3 075 2 356 2 713 3 091 Inventories 8 606 9 220 9 435 8 606 9 220 9 435 Other current assets 6 911 6 427 6 272 6 911 6 427 6 134 Deferred tax assets 1 519 1 581 110 1 777 1 823 110 Investments 110 110 411 107 90 406 Property, plant and equipment 11 080 11 826 11 227 10 901 11 613 11 023 Other capital assets 1 978 2 336 2 184 2 235 2 960 2 506 Total assets 32 560 34 192 32 714 32 893 34 846 32 705

Short-term loans 2 047 2 228 3 258 2 046 2 227 3 258 Other current liabilities 7 117 7 336 7 119 7 095 7 328 7 402 Long-term loans 4 954 7 044 6 517 5 608 7 844 7 178 Pensions and other postretirement benefits 6 573 6 571 5 045 6 913 7 260 5 326 Other long-term liabilities 324 339 372 324 339 371 Deferred income taxes 1 529 1 538 1 360 1 406 1 471 1 193 Minority interest 144 127 113 144 127 113 Shareholders’ equity 9 872 9 009 8 930 9 357 8 250 7 864 Total liabilities and shareholders’ equity 32 560 34 192 32 714 32 893 34 846 32 705

30 note 30 – investments Investments held by Parent Company

Holding Number Nominal value Book value in in percent of shares Currency in thousands SEK thousands Bostadsrättsföreningen Flundran, Stockholm, Sweden 1 SEK – 1 635 Bostadsrättsföreningen Kristinelundsgatan nr 5, Göteborg, Sweden 1 SEK – 2 884 Brukens Nordic AB, Göteborg, Sweden 8.3 1 050 000 SEK 1 050 6 073 Prästgårdsmarkens villaägare, ek. fören., Göteborg, Sweden 60 SEK 60 30 Chalmers Innovation AB, Göteborg, Sweden 4.9 735 SEK 73 255 Fastighets AB Johannebergshus, Göteborg, Sweden 85 SEK 9 2 555 Göteborg-Säve Flygplats AB, Göteborg, Sweden 1 125 SEK 112 114 KB Gösen Gamlestaden 2:5, Göteborg, Sweden 1.0 – SEK 2 935 2 935 Näringslivets Stiftelse för Avfallsbehandling, Stockholm, Sweden 5 SEK 50 0 “Scandinavium”, Göteborg, Sweden 14 SEK 140 41 Stiftelsen Bohus Promotion, Uddevalla, Sweden – SEK 250 0 Svenska Dagbladet Holding AB, Stockholm, Sweden 18 000 SEK 180 180 SwedeChrome AB in liquidation, Malmö, Sweden 44.4 4 218 478 SEK 42 185 0 TIAB Transportköparnas Intresse AB, Göteborg, Sweden 1 000 SEK 100 0 AEC Japan Co. Ltd., Japan 50.0 400 JPY 20 000 820 ADELA Investment Company, Luxemburg 2 080 USD 208 0 SIFIDA Investment Company, Luxemburg 275 USD 137 108 S2M, France 11.9 153 093 FRF 2 570 8 681 The Swedish-American Chamber of Commerce, USA 50 USD 50 318 UNIS-UTL, former Yugoslavia 23.0 – YUD 5 214 0 UNIS-Factory Sokolac, former Yugoslavia 10.0 – YUD 64 0 Svenska skolan, Belgium 20 BEF 400 0 Other shares and securities 27 Investments held by Parent Company 26 656

31 Investments held by subsidiaries

Nominal value Book value in Holdings Currency in thousands SEK thousands Hofors Energi, Hofors, Sweden 2 000 SEK 2 000 2 000 Jernkontoret, Stockholm, Sweden 8 SEK 187 187 Gävle Sjöfarts AB, Gävle, Sweden 270 SEK 27 54 AB Järnbruksförnödenheter, Stockholm, Sweden 225 SEK 23 51 Tampereen Insinööritoimisto Oy, Finland 1 430 FIM 143 646 Suomen Voimansiirto Oy, Finland 417 FIM 417 783 Elma Oy, Finland FIM 78 Industrilink A/S, Denmark DKK 60 237 Nordtransmission A/S, Denmark DKK 111 169 SIMES, Belgium 150 BEF 3 000 703 Gemeinnützige Wohnungsbaugesellschaft, Germany DEM 250 1 202 Gesellschaft z. Beseitigung v. Sondermüll in Bayern, Germany DEM 80 385 Gemeinschaftskraftwerk GmbH, Germany DEM 3 300 15 861 Goetze Elastomere GmbH, Germany DEM 5 006 24 061 Expo 2000 S.p.A., Italy 20 700 ITL 207 000 169 Indesit, Italy 12 775 ITL 128 000 – Technomag AG Bern, Switzerland 100 CHF 100 834 RSS, Austria ATS 412 281 Shanghai SMM Textile Machinery Components Co. Ltd., China CNY 23 500 16 380 Housing Development Finance Corp. Ltd., India 2 500 INR 250 58 United Trust of India, India 3 364 080 INR 33 641 11 135 FAIRSKQ Taiwan Co. Ltd., Taiwan 2 080 TWD 20 800 6 890 Bearhold Philippines, Philippines 400 000 PHP 100 136 Skefko Bearings Newcastle, Australia 12 000 AUD 12 69 CTBC, Brazil BRC 930 Others 437 Investments held by subsidiaries 83 736 Investments held by parent company 26 656 Total investments 110 392

32 Parent Company income statements

Millions of Swedish kronor 1994 1993 1992

Operations Other operating income note 16 23 203 4 Selling, administrative and technical expenses note 16 – 146 – 88 – 180 Depreciation note 1 –5– 5 – 4 Operating loss/income – 128 110 – 180

Financial income and expense Dividend income from subsidiaries 445 364 808 Interest income 345 330 195 Interest expense – 438 – 419 – 198 Financial exchange gains and losses –1– 30 1 Income after financial income and expense 223 355 626

Extraordinary expense note 2 – ––51 Net income 223 355 575

Provisions note 3 338 147 249 Taxes – 2 –

Reported income for the year 561 504 824

33 Parent Company balance sheets

Millions of Swedish kronor 1994 1993 1992

ASSETS Current assets Current financial assets note 4 6 108 332 Trade accounts receivable 0 02 Accounts receivable from consolidated subsidiaries 573 1 390 1 062 Other current assets note 5 47 57 63 626 1 555 1 459 Capital assets Long-term receivables from consolidated subsidiaries 3 826 4 305 2 719 Other long-term receivables 3 16 14 Investments in consolidated subsidiaries note 6 7 065 6 657 6 235 Investments, other note 6 27 42 357 Property, plant and equipment note 7 83 85 83 11 004 11 105 9 408 Total assets 11 630 12 660 10 867

LIABILITIES AND SHAREHOLDERS’ EQUITY Short-term liabilities Short-term loans note 8 12 10 84 Short-term liabilities to consolidated subsidiaries 1 744 1 724 2 265 Trade accounts payable, other 9 85 Short-term tax liabilities – – 2 Accrued liabilities and deferred income 87 110 73 Other short-term liabilities 10 959 1 862 1 861 2 488 Long-term liabilities Long-term loans note 9 1 709 2 337 1 316 Long-term liabilities to consolidated subsidiaries 603 1 455 802 Pensions note 10 342 320 315 Other long-term liabilities 5 65 Convertible bonds note 11 1 387 1 508 1 273 4 046 5 626 3 711 Untaxed reserves note 3 66 78 77 Shareholders’ equity note 12 Restricted equity Share capital (112 999 556 shares, nominal value SEK 12.50 per share) 1 412 1 412 1 412 Legal reserves 455 455 455 Non-restricted earnings Retained earnings 3 228 2 724 1 900 Reported income for the year 561 504 824 5 656 5 095 4 591

Total liabilities and shareholders’ equity 11 630 12 660 10 867

Assets pledged note 13 1 11 Contingent liabilities note 14 1 281 1 456 1 143 34 Parent Company statements of cash flow

Millions of Swedish kronor 1994 1993 1992

Operating loss/income before depreciation – 123 115 – 176 Extraordinary income and expense – net – ––51 Group contribution and allowance for shareholders’ contribution – net 326 148 144 Changes in working capital: Trade accounts receivable 0 21 Trade accounts payable 1 3 – 7 Other current assets and liabilities – net 825 – 878 2 178 Cash flow from operations 1 029 – 610 2 089

Additions to property, plant and equipment –3– 70 Changes in investments – 393 – 107 – 2 308 Cash flow after investments 633 – 724 – 219

Financial income and expense – net 351 245 806 Taxes – 2 – Cash dividends, AB SKF shareholders – ––480 Change in loans – 747 1 182 1 500 Change in other financial assets and liabilities – net – 339 – 929 – 1 529

Change in current financial assets – 102 – 224 78

35 Notes to the Parent Company financial statements Amounts in millions of Swedish kronor unless otherwise stated. For description of accounting principles, see note 1 to the note 4 – current financial assets Consolidated Financial Statements. 1994 1993 1992 Cash and bank accounts 6 86 note 1 – depreciation Other short-term financial receivables 0 100 326 1994 1993 1992 6 108 332 Buildings 3 32 Machinery and equipment 2 22 5 54note 5 – other current assets 1994 1993 1992 note 2 – extraordinary expense Prepaid expenses 1 11 12 Accrued income 0 01 1994 1993 1992 Other current receivables 46 46 50 Write-down of investment 47 57 63 in former Yugoslavia – ––51 – ––51 note 3 – provisions and untaxed reserves Provisions: 1994 1993 1992 Change in development reserve 2 12 Change in accelerated depreciation reserve 2 22 Change in reacquisition reserve for real estate – – 100 Change in other reserves 8 – 41 12 – 1 105 Group contribution 338 174 152 Group contribution paid –8 – 6 – 8 Allowance for shareholders’ contribution –4 – 20 – 338 147 249

Untaxed reserves: 1994 1993 1992 Development reserve 0 23 Accelerated depreciation reserve 60 62 64 Other reserves 6 14 10 66 78 77

The accelerated depreciation reserve relates to the following items: 1994 1993 1992 Land improvement 4 44 Buildings 23 24 26 Machinery and equipment 33 34 34 60 62 64

36 note 6 – investments Investments in subsidiaries are specified below. For a specification of the Parent Company’s holdings of other investments see note 30 to the Consolidated Financial Statements.

Investments in subsidiaries held by the Parent Company on December 31, 1994

Holding Number Nominal value Book value in in percent of shares Currency in thousands SEK thousands Manufacturing Companies SKF Sverige AB, Göteborg, Sweden 100 2 650 000 SEK 265 000 363 300 Ovako Steel AB, Hofors, Sweden 100 135 000 SEK 135 000 0 SKF USA Inc., Pa., USA 99.8 1 444 447 USD 72 222 770 617 SKF Österreich AG, Austria 100 200 ATS 200 000 100 957 SKF GmbH, Germany 0.1 – DEM 218 121 812 SKF Española S.A., Spain 100 10 000 ESB 10 000 0 SKF Specialty Products AB, Göteborg, Sweden 100 1 000 SEK 1 000 0 FlexLink Systems AB, Göteborg, Sweden 100 190 000 SEK 19 000 28 211 SKF de Mexico S.A. de C.V., Mexico 100 40 000 MXN 40 0 SKF do Brasil Limitada, Brazil 99.9 166 750 598 BRC 166 751 183 943 SKF Argentina S.A., Argentina 99.9 499 641 ARS 500 10 587 SKF Bearings India Ltd., India 42.4 1 067 248 INR 106 725 0 SKF Vehicle Parts AB, Göteborg, Sweden 100 115 000 SEK 11 500 13 872 SKF Mekan AB, Katrineholm, Sweden 100 27 500 SEK 27 500 33 348 Lidköping Machine Tools AB, Lidköping, Sweden 100 200 000 SEK 20 000 11 832 Non-cash issue in SKF do Brasil Limitada, Brazil 12 786

Sales Companies SKF Norge A/S, Norway 100 50 000 NOK 5 000 0 Oy SKF Ab, Finland 100 48 400 FIM 12 100 12 378 SKF Portugal Rolamentos, Limitada, Portugal 95.0 – PTE 12 350 0 SKF Lozˇ iska, a.s., Czech Republic 100 42 CZK 4 200 0 Akciová spolecˇnost pro prodej valivych´ lozˇ isek, Czech Republic 100 1 000 CZK 200 0 SKF Svéd Golyóscsapágy Részvenytársaság, Hungary 100 3 000 HUF 600 14 SKF Hellas S.A., Greece 100 2 000 GRD 45 320 0 SKF Canada Limited, Canada 100 50 000 CAD – 0 SKF Colombia S.A., Colombia 13.4 279 148 COP 69 787 0 SKF del Peru S.A., Peru 100 1 255 829 PES 1 256 0 SKF Chilena S.A.I.C., Chile 100 88 192 CLP 467 923 0 SKF Venezolana S.A., Venezuela 100 4 758 VEB 4 758 1 376 SKF Türk Sanayi ve Ticaret Limited Sirketi, Turkey 0.0 50 TRL 250 1 SKF Japan Ltd., Japan 26.0 25 300 JPY 379 500 0 SKF South East Asia (Pte) Ltd., Singapore 100 1 000 000 SGD 1 000 0 SKF Australia Pty Ltd., Australia 100 96 500 AUD 193 0 SKF New Zealand Limited, New Zealand 100 375 000 NZD 750 0 SKF South Africa (Proprietary) Ltd., South Africa 100 1 422 380 ZAR 2 845 0 SKF Zimbabwe (Private) Limited, Zimbabwe 0.0 1 ZWD 0 0 SKF (Zambia) Ltd., Zambia 0.0 1 ZMK 0 0 SKF Kenya Limited, Kenya 0.0 1 KES 0 0 SKF Eurotrade AB, Göteborg, Sweden 100 83 500 SEK 8 350 10 169 SKF Multitec AB, Helsingborg, Sweden 100 29 500 SEK 2 950 4 545

37 Investments in subsidiaries held by the Parent Company on December 31, 1994

Holding Number Nominal value Book value in in percent of shares Currency in thousands SEK thousands Other Companies SKF Holding Danmark A/S, Denmark 100 8 DKK 8 000 0 SKF Bearings Ltd., United Kingdom 100 10 000 GBP 10 0 Trelanoak Ltd., United Kingdom 19.8 2 600 000 GBP 2 600 313 373 SKF Holding Maatschappij Holland B.V., The Netherlands 100 60 000 NLG 60 000 4 735 834 SKF Engineering & Research Services B.V., The Netherlands 13.4 121 NLG 12 7 684 SKF Verwaltungs AG, Switzerland 100 500 CHF 250 0 SKF Holding Mexicana S.A. de C.V., Mexico 98.0 22 934 233 MXN 2 293 180 029 Barseco (Pty) Ltd, South Africa 100 100 ZAR 0 0 SKF Australia (Manufacturing) Pty. Ltd., Australia 100 1 000 000 AUD 2 000 0 Compania SKF Nicaragua S.A., Nicaragua 100 140 NIC 140 0 Latinoamericana de Administracion S.A., Panama 100 50 USD 5 0 Nordic Distributor Supply AB, Göteborg, Sweden 100 150 000 SEK 3 000 0 ScanDust AB, Landskrona, Sweden 100 480 000 SEK 48 000 46 619 Nordiska Kullager Aktiebolaget, Göteborg, Sweden 100 500 SEK 50 51 AB SKF-Agenturer, Göteborg, Sweden 100 100 SEK 100 0 SKF Distribution AB, Göteborg, Sweden 100 80 000 SEK 6 400 9 760 AB Compania Sudamericana SKF, Göteborg, Sweden 100 300 SEK 300 0 AB S.A. des Roulements à Billes Suédois SKF, Göteborg, Sweden 100 100 SEK 100 0 The Chinese SKF Co. AB, Göteborg, Sweden 100 1 000 SEK 100 0 SKF Treasury Centre AB, Göteborg, Sweden 100 20 000 SEK 20 000 19 995 Återförsäkringsaktiebolaget SKF, Göteborg, Sweden 100 30 000 SEK 30 000 30 200 The Indonesian SKF Corporation AB, Göteborg, Sweden 100 1 000 SEK 100 0 SKF Fondförvaltning AB, Göteborg, Sweden 100 2 500 SEK 250 248 AB Svenska Kullagerfabriken, Göteborg, Sweden 100 500 SEK 50 51 SKF Dataservice AB, Göteborg, Sweden 100 500 SEK 50 0 SKF Nova AB, Göteborg, Sweden 100 500 SEK 50 0 AB Transmatic, Göteborg, Sweden 100 500 SEK 50 51 AB SKF Etthundratjugoett, Göteborg, Sweden 100 500 SEK 50 51 AB SKF Etthundratjugotvå, Göteborg, Sweden 100 500 SEK 50 51 AB SKF Etthundratjugotre, Göteborg, Sweden 100 500 SEK 50 51 AB SKF Etthundratjugofyra, Göteborg, Sweden 100 500 SEK 50 51 AB SKF Etthundratjugofem, Göteborg, Sweden 100 500 SEK 50 51 SKF Bearing Industries AB, Göteborg, Sweden 100 500 SEK 50 51 Byggnadsaktiebolaget Åsen, Göteborg, Sweden 100 500 SEK 50 60 SKF Real Estate AB, Göteborg, Sweden 100 350 000 SEK 35 000 39 621 SKF Fastighetsförvaltning AB, Göteborg, Sweden 100 2 000 SEK 200 245 SKF Support AB, Göteborg, Sweden 100 2 000 SEK 200 245 Ovako Comptech AB, Hofors, Sweden 100 500 SEK 50 48 Ovako Ring AB, Hofors, Sweden 100 1 000 SEK 100 99 Ovako Metallurgy AB, Hofors, Sweden 100 500 SEK 50 60 Ovako Tube AB, Hofors, Sweden 100 5 000 SEK 500 600 Ovako Metech AB, Hällefors, Sweden 100 500 SEK 50 27 NASAB Nordisk Analysservice AB, Danderyd, Sweden 100 2 000 SEK 200 200 7 065 154

38 note 7 – property, plant and equipment 1994 1993 1992 Acquisi- Accumu- Acquisi- Accumu- Acquisi- Accumu- tion cost lated depr. tion cost lated depr. tion cost lated depr. Land 6– 5 – 5 – Land improvements 21 21 21 Buildings 109 70 107 67 107 64 Machinery and equipment 71 34 71 32 64 30 188 105 185 100 178 95 Net 83 85 83

Land, land improvements and buildings have been assessed note 10 – pensions for tax purposes on December 31, 1994 as follows: Charges against income in 1994, 1993 and 1992 for pensions Cost less and similar plans were 54, 35 and 44 respectively. 269, 253, Assessed accumulated 246 of the total pension liability in 1994, 1993 and 1992 tax value depreciation respectively, are referable to pensions in the FPG-PRI (Pension Registration Institute) system. Land and land improvements 41 7 Buildings 151 39 192 46 note 11 – convertible loans See note 23 to the Consolidated Financial Statements. note 8 – short-term loans 1994 1993 1992 note 12 – shareholders’ equity Current portion of long-term loans 12 10 84 The distribution of the share capital between share types is 12 10 84 shown in note 24, to the Consolidated Financial Statements.

Changes in shareholders’ equity: note 9 – long-term loans Unre- Long-term loans at the end of the year, excluding the Share Legal stricted current portion were: capital reserve equity Total 1994 1993 1992 Opening balance 1992-01-01 1 412 455 2 380 4 247 Bonds 1 441 1 795 828 Cash dividends, AB Other borrowings 268 542 488 SKF shareholders – 480 – 480 1 709 2 337 1 316 Reported income for the year 824 824 The above loans were denominated in the following Closing balance 1992-12-31 1 412 455 2 724 4 591 currencies: Reported income 1994 1993 1992 for the year 504 504 Closing balance 1993-12-31 1 412 455 3 228 5 095 Swedish kronor 155 270 265 U.S.-dollars 1 441 2 067 1 051 Reported income Spanish pesetas 113 ––for the year 561 561 1 709 2 337 1 316 Closing balance 1994-12-31 1 412 455 3 789 5 656

Maturities of long-term loans as at December 31, 1994 are as follows: 1996 11 1997 10 1998 10 1999 826 2000 9 2001 and thereafter 843 1 709 The terms of certain loan agreements contain various restrictions, relating principally to further pledging of fixed assets. 39 note 13 – assets pledged note 14 – contingent liabilities 1994 1993 1992 1994 1993 1992 Mortgages in leasehold, land 1 11Guarantees in respect of 1 11SKF companies’ obligations 1 232 1 385 1 011 Other guarantees and contingent liabilities 49 71 132 1 281 1 456 1 143 note 15 – average number of employees, wages, salaries and remunerations Number of employees, wages and salaries per country:

Number of employees Wages and salaries Women Men Total in SEK thousands Sweden (Göteborg) 43 88 131 70 729 * Belgium 3 5 8 6 214 Total employees, wages and salaries 46 93 139 76 943

* The amount includes wages, salaries and remunerations to the Board of Directors, Managing Director and Deputy Managing Directors of the Parent Company, amounting to 9 967 thousands of SEK, of which 2 630 are bonus payments. For specific information regarding salaries and remuneration to the Chairman of the Board, the Managing Director and others see note 28 to the Consolidated Financial Statements.

For a definition of average number of employees see note 1 to the Consolidated Financial Statements. note 16 – effect of reclassification of extraordinary items 1993 1993 1992 1992 Previously adopted After re- Previously adopted After re- income statement classification income statement classification

Other operating income 41 203 4 4 Selling, administrative and technical expenses – 87 – 88 – 80 – 180 Operating loss/income – 51 110 – 80 – 180 Income after financial income and expense 194 355 726 626 Extraordinary income 336 – 152 – Extraordinary expense – 27 –– 159 – 51 Net income 503 355 719 575 Provisions – 1 147 105 249

After reclassification the only item referable to extraordinary expenses is the write-down of investment in former Yugoslavia (see note 2). Group contribution and allowance for shareholders’ contribution are included in provisions (see note 3). Other reclassified extraordinary items are included in operating loss/income.

40 41 42 Bearings and seals

Rolling bearings and seals constitute the SKF Group’s core business and Germany. There, lead time was cut accounted for 93 percent of total Group sales in 1994. from 35 to 26 days during 1994. The product program includes a large variety of ball and roller bear- Important cornerstones in this work include focusing on the elimination of ings, special bearings, seals, tools for the mounting and dismounting of bear- bottlenecks in the production flow, ings, lubricants, measuring and monitoring instruments, as well as engineering standardization and simplification of advisory services and training. materials and processes and integration The manufacturing of these products is conducted at approximately 50 with supplier channels. facilities in 15 countries. The global sales organization consists of a large The productivity increases contrib- number of wholly owned sales companies and more than 7 000 distributors. uted by the Channel concept, which reached double-digit levels in 1994, meant that production could be Channel concept – an asset increased by approximately 20 percent Bearings and seals The Channel concept, upon which all from the beginning of the year to its (SEK m) 1994 1993 1992 manufacturing in the SKF Group is end, with a minimum of new hirings. In Net sales...... 30 873 27 199 22 690 now conducted, was put to the test dur- 1995, SKF expects to meet demand Income/loss after ing the year and confirmed its competi- without hiring any new employees. financial income tive advantages. The greater flexibility Reduced resetting times and increased and expense ...... 1 617 –167 –1 363 provided by the reduced lead times, availability in the production area are a Additions to meaning the time taken from when the couple of the factors that are enabling property, plant and equipment .... 1 216 847 1 022 plant ordered the raw material to the SKF to increase its capacity without delivery of the finished bearing, en- new employees or additional invest- Number of employees abled SKF to rapidly adapt to customer ment. registered ...... 38 326 38 203 41 523 needs. In several instances, SKF was able to secure new business by offering Increased market shares shorter delivery times than its competi- The trend in the automotive industry emand for rolling bearings tors. favored SKF. Sales to the passenger car accelerated during 1994. The Several of the results deriving from and trucks segments accounted for D recovery was unexpectedly the Channel concept, such as shorter approximately 25 percent of the strong, particularly in Europe, follow- lead times and resetting times and a Group’s total sales and therefore gener- ing the prolonged deep recession. The reduction in the number of hours lost ated substantial volumes in the plants. greatest volume increases were through unplanned stoppages, have The total automotive after-market accounted for by the passenger cars been continually improved since the accounted for an additional eight per- and trucks sector, whose growth during concept was implemented in 1989. cent. the year significantly exceeded the Car production in Europe, which at SKF’s sales to the automotive indus- automotive industry’s own expecta- the beginning of 1994 was forecast to try increased more than the industry as tions. Demand also increased in the increase by about three percent, rose a whole, which means that SKF cap- machinery industry and after-market. by nearly 12 percent. In the U.S., car tured market share within this cus- However, demand in the after-market production increased by around eight tomer segment. was somewhat weaker than in the other percent. two customer segments. Since SKF’s delivery commitments In the U.S., demand for rolling bear- vis-á-vis major automotive customers ings continued to grow for the fourth are closely linked to the customers’ consecutive year, an unusually pro- actual production volumes, the rapid sales by longed period of growth by American upturn in the automotive industry application field 1994 standards. The pattern was similar to placed SKF and other suppliers under that of Europe in that the greatest extreme pressure. Thanks to close Industrial distributors Vehicle 27% growth was experienced in the automo- cooperation with customers and signifi- replacement tive and machinery segments, while cantly greater production flexibility, 8% Cars 16% there was less movement in the after- SKF was able to handle these issues. market. End- For the SKF Group this trend Continued improvement users 6% resulted in a sales increase of approxi- A good example of shorter lead times mately 14 percent, compared with 1993. is found in the manufacturing of spheri- During the year, the rate of production cal roller bearings at the SKF plant in Electrical Trucks in the plants was gradually adjusted to Göteborg, Sweden. In September 1989, industry 9% demand. Growth varied from segment the lead time was 110 days. In 5% Railways Aero- 2% to segment. The automotive industry September 1994, it was down to 29 days space Heavy and its suppliers experienced a signifi- and the goal now set for the end of 3% industry 7% cantly larger upturn than other seg- 1995 is 20 days, or four weeks. General ments. Another example relates to the man- machinery ufacture of taper roller bearings in 17% 43 Bearings and seals

The Group’s gains were attributable the Volkswagen Golf in 1996. Volks- Fastening elements strengthened to the higher content of SKF bearings wagen’s current wheel bearing arrange- Fastening elements form another SKF in several customers’ car models and to ments consist of two taper roller bear- product group which to a large extent is the success of those car models in ings. The new model will be equipped dependent upon the automotive indus- which the Group already had a high with integrated Hub Units that have try. The Seeger-Orbis group has manu- bearings content. The Fiat Punto is a been specially developed for Volks- facturing facilities in Germany, the good example. This car was voted “Car wagen in a joint cooperation program U.K., the U.S. and Brazil. of the Year” in Europe in 1994 and is a between SKF and Volkswagen develop- The growth of the automotive indus- very good seller. The Punto has a large ment engineers. try in 1994 had a positive effect on all proportion of SKF bearings in its SKF also increased its market share four units, leading to increases in both wheels, gearbox, engine and suspen- in the European after-market for cars sales and earnings. Germany and the sion. through the launch of new products. A U.K. accounted for the strongest devel- The new Lancia K (replacing the range of Replacement Bearing Kits, opment. Lancia Thema) is being equipped with which include timing belt kits and com- the latest generation of SKF Hub Units plete water pumps were introduced New models featuring SKF products with integrated speed sensors. In addi- during the year in a number of markets. In 1994, SKF commenced delivery of tion to Hub Units, SKF bearings are SKF also signed an agreement with its Hub Units to two important new used for other applications in the new GM Opel regarding 100-percent cover- cars in the U.S. One of these is Ford’s Lancia. During the year, SKF also age of their Replacement Bearing Kits new “world car,” called Mercury entered into an agreement with requirements for the after-market. Mystique and Ford Contour, produc- Volkswagen for the delivery of Hub tion of which was started in the U.S. in Units for a new model that will replace 1994. This car has been produced in

44 Europe for the past two years under the Ford Mondeo name. The other is Chrysler’s new car, which is being made in two versions, the Cirrus and the Stratus, both of which are to be equipped with SKF Hub Units produced at the Group plant in Glasgow, Kentucky. The Asian automotive market is becoming increasingly important and showed growth of more than 15 percent during 1994. The Group’s focus on the Chinese market is described in more detail in the Board of Directors’ report. Two other important car-manufacturing countries are Argentina and Brazil. Vehicle production in both countries broke earlier records in 1994, favoring SKF which is a major supplier to both. Also in the Mexican market, where SKF sells to both Volkswagen and Nissan, volumes increased more than market growth.

Stronger trend within the machinery industry Demand from export markets acted as the driving force behind the recovery of the European machinery industry during 1994. Growth in the industrial production of the major European markets was about three percent, or slightly higher. SKF’s sales developed most favorably in Italy, Sweden, Belgium, Spain and Germany, while it was weaker in France and the U.K. In Germany, which is the largest individual market in Europe, industrial production rose by approximately three percent. Growth within the machinery sector stopped at two percent. SKF’s sales increased by more than this figure, however. A customer segment which developed particularly well for SKF was printing presses. All major producers of printing presses in Germany now select SKF as their prin- cipal supplier. The Italian market showed a higher growth rate within the machinery segment than the German market. The increase is estimated at approximately 12 percent. In this area too, the increase in SKF sales was larger than market growth. SKF was favored by the high percentage of export sales among many of its Italian customers. In Italy, as in other European countries, a

45 certain build up in inventory was noted these efforts started to generate results Increased sales of precision bearings among customers. and sales of spherical roller bearings Sales to machine tool manufacturers manufactured in Sweden, Malaysia and accelerated again for SKF in 1994, with Success in Japan the U.K. increased by more than 60 significant volume increases. Demand SKF has deliberately cultivated a num- percent. One example is Sumitomo was driven particularly from within the ber of key customers within the Heavy Industries, which after two years U.S., where car producers are carrying Japanese machinery industry for a of studies, tests and trials decided to out extensive investment programs in number of years. The aim has been to equip the transmissions manufactured new manufacturing methods and new create a close relationship with these by the company at its plants in Tokyo technologies. In Europe, a similar pat- customers, in order to be able to offer and Nagoya with SKF bearings. The tern was noted in Italy. Japan was also a SKF’s range of technical expertise, Nagoya plant is the largest transmission major driving force in this respect. The products and services. During 1994, production facility in Asia. result was a marked increase in demand 46 Bearings and seals for high-precision bearings. The users sales by CR, which occupies a leading posi- of machine tools require high speeds, geographical area 1994 tion in the American market, continued very high precision and high perfor- to develop favorably during 1994. Sales mance. SKF’s solution is high-precision Europe excl. Sweden 50% volumes both to OEM and after-mar- bearings with rolling elements made ket customers increased significantly from ceramic materials produced at the and exceeded market growth. Colebrook plant in Connecticut, U.S. Two important new customers contributed to the company’s successes. At New railway orders the beginning of 1994, CR signed a Sales of bearings to manufacturers of delivery agreement with NAPA, the railway rolling stock reached an all- largest distributor in the U.S. after- time peak in 1993, but weakened dur- Sweden market for cars, with 75 distribution ing the 1994 fiscal year. 4% centers and more than 6 000 sales out- North Two important new agreements were Rest of America lets throughout the U.S. the world 26% signed during the year. In Slovakia, 20% Towards the end of the year, CR was SKF obtained an order from a manu- also selected as a supplier to one of the facturer of freight wagons. These bear- largest groups in the U.S. specializing in ing units will be equipped with cylindri- the purchase and distribution of spare cal roller bearings from the SKF plant auto parts to independent dealers. in Germany. in line with that achieved in 1993. During the year, CR opened a new In Canada, SKF secured an order Extensive programs are in progress distribution center in Hebron, from a manufacturer of railway freight within the company to reduce manufac- Kentucky, which replaces a number of and tanker wagons. These units will turing costs and lead times. earlier facilities. This concentration feature taper roller bearings produced Despite the tough competition result- process is resulting in reduced costs and by SKF’s Italian plants. Deliveries com- ing from the weak market, MRC improved service levels. mence in the beginning of 1995. secured a number of large contracts from Pratt & Whitney and General Strong growth for linear products Large plain bearings to China Electric, among other companies, for Demand for linear products, meaning China’s focus on the expansion of its bearings for various aircraft engines. linear bearings, ball and roller screws hydro power industry is creating good Notable among these was a four-year and linear and rotary actuators, devel- opportunities for SKF’s large plain agreement for the delivery of bearings oped positively during the year. Sales bearings. A key application is the sup- for the main shaft of GE’s CF6-80C increased, as did earnings. The coordi- port of dam gates, an area in which engine and a ten-year contract whereby nation of the various operations, which SKF holds a strong position. During MRC will deliver 100 percent of the are located in France, Germany and the year, SKF Gleitlager in Germany main shaft bearings for the engine for Sweden – in addition to nine sales com- received its third major order for this the new Boeing 777, production of panies – resulted in better service lev- type of bearing from China. The prere- which will commence in 1995. els. The trend is towards further syner- quisites for additional business in this MRC Bearings also produces balls in gies and reductions in costs. area are considered highly favorable. steel and in ceramic materials. Sales of SKF continued to increase its market these products more than doubled dur- FlexLink expansion continues shares in South Africa. The resumed ing 1994. This rapid increase was Sales of FlexLink Systems continued to sale of Swedish produced bearings in caused by customers building up their increase in 1994 and totaled SEK 400 the country served to strengthen SKF inventories and because certain com- million. Growth was low in Europe, South Africa’s position. An investment petitors ceased to manufacture balls. while the rate of increase in Asia was program to modernize the plant in The increase in sales of ceramic balls approximately 70 percent. A strong rise Uitenhage was commenced following was due to greater use of hybrid bear- in sales was also noted in the U.S. the lifting of sanctions. The plant was ings, meaning bearings with rings of During the year, efforts focused on the given responsibility for manufacturing steel and balls of ceramic materials. construction of a solid platform from the Group’s special bearings for the which to secure additional growth. A mining industry. Strengthened positions for seals sales office was opened in Singapore Through the acquisition of Goetze and representational offices were Aircraft industry remains weak Elastomere GmbH in Germany, SKF established in Argentina and Brazil. A The aircraft industry suffered another was able to advance its position in the newly developed system to assure that recessionary year in 1994. In order to European seals market. In addition to particularly high demands for clean and counter the negative effects, rational- new markets and a broadened range of static-free transportation are met was ization measures continued. The num- products, the acquisition provided SKF successfully introduced. Customers ber of employees was reduced, costs with access to new manufacturing tech- include manufacturers of computer were cut and the number of subsuppli- nology. SKF’s American seals company, hard disks. ers was reduced. CR, was able to gain immediate bene- For SKF’s American producer of fits from the injection of new products bearings for aircraft engines – MRC by securing an order from GM in the Bearings – the level of sales was largely U.S. on the basis of Goetze’s products. 47 Special steels

Ovako Steel is Europe’s leading manufacturer of rolling bearing steel and a sales by application field 1994 major producer of other special steels. Its manufacturing program includes hot-rolled steel and cold-finished steel products in the form of bars, tube and End-users Industrial wire. In addition, the company produces rolled rings, forged components, 1% distributors 7% hard chrome-plated bars and tube as well as OK couplings. The most im- Electrical industry 2% Cars portant customer segments are the rolling bearing industry, the automotive 14% industry – including its suppliers – and general machinery industries. Ovako Steel has manufacturing units in Sweden, France, the Netherlands, the U.K. and the United States. Steel production operations are Trucks confined to Hofors, in Sweden. 8%

General Heavy uct range, thereby enhancing produc- machinery industry 17% Special steels tivity gains. 51% (SEK m) 1994 1993 1992 Higher sales volumes during 1994 led Net sales...... 3 758 2 891 3 076 to a gradual increase in steel produc- Income/loss after tion at the Hofors plant to the maxi- financial income mum level permitted by authorities. and expense ...... 188 –351 –569 Ovako Steel in Hofors has permission Additions to to produce 400 000 tons per year and property, plant has applied for licensing to increase its sales by and equipment .... 129 80 55 production to 550 000 tons. geographical area 1994 Number of Coordination of the Channel concept employees Europe excl. Sweden 46% registered ...... 3 330 3 112 3 545 between the SKF Group’s bearing production plants and Ovako Steel’s manufacturing channels continued to yield igher demand for rolling bear- significant benefits during 1994 in the ing and engineering steel, first form of shorter lead-times. From 1992 H noted during the second half to 1993, lead-times at Ovako Steel were of 1993, continued to rise sharply from cut in half and a further reduction of 50 the beginning of 1994. Deliveries percent was considered feasible. For increased during the year between 25 some products, this objective was North Sweden America and 50 percent, depending on product achieved already in 1994. 30% 21% type. Improved demand and a growing Rest of the world Stronger demand came mainly from trend toward shortages of rolling bear- 3% SKF’s bearing production plants, which ing steel and low-alloy special steel had have increased their purchases of steel a positive impact on prices, which rose from Ovako Steel continuously since gradually during the second half of 1992, and from the automotive industry 1994. Further price increases are antici- and its suppliers. Ovako Steel supplies pated this year. about 80 percent of all steel used by A new hot scarfing plant was SKF’s bearing production plants. At installed in Hofors during the latter year-end 1992, the corresponding figure part of 1994. The new facility has was about 40 percent. increased surface quality and thereby As a result of Ovako Steel’s strategic the quality of finished products. focus on rolling bearing steel, its per- A decision was reached last year to centage of other special steel produc- transfer production of heavy bars from tion will decline. However, the com- Hällefors to Hofors in order to improve pany will continue to supply these steel throughput efficiency. New roughing grades. Ovako Steel already buys spe- stands for the medium rolling mill at cial steel grades on the open market for Hällefors will also be installed this year refinement in its own rolling mills. as well as another line for surface The company has specific know-how removal wire. in certain demanding applications for customers in the machinery and automotive industries. Skills in these niche markets will be intensified and are now part of the business concept. The focus on rolling bearing steel and special efforts in niche markets enables the company to further streamline its prod- 48 Special steels

49 Parent Company Board of Directors

Board of Directors anders scharp, Stockholm Born 1934. Chairman. Board member since 1992. Chairman AB Electrolux, Saab-Scania AB and Incentive AB. Vice Chairman Investor AB and Atlas Copco AB. Board member Email Limited gösta bystedt, Stockholm giovanni mario rossignolo, (Australia), The Swedish Employers’ Born 1929. Board member since 1982. Turin, Italy Confederation, The Association of Chairman Kalmar Industries AB. Born 1930. Board member since 1987. Swedish Engineering Industries and The Vice Chairman AB Electrolux and Axel Chairman Industrie Zanussi, Atlas Copco Federation of Swedish Industries. Johnson AB. Italia, Perstorp Italia and Sanitari Pozzi. Shareholding in SKF: 10 000 Board member Atlas Copco AB, Vice Chairman and member of the Förvaltnings AB Hasselfors and The Ericsson S.p.A. Executive Committee. göran johansson, Göteborg Federation of Swedish Industries. Board member Consortium (Italy), Born 1945. Employee representative. Electrolux España S.A. (Spain) and Board member since 1975. per-olof eriksson, Sandviken Schroder Bank. Chairman Executive Committee of the Born 1938. Board member since 1987. City Council of Göteborg. Chairman Svenska Kraftnät (Swedish sune carlsson, Kilchberg, Chairman Liseberg AB. National Grid). Switzerland Board member Götaverken Miljö AB Board member Sandvik AB, Handels- Born 1941. Board member since 1991. and Statens Vattenfallsverk. banken, SSAB Swedish Steel Executive Vice President of the ABB Shareholding in SKF: 100 Corporation, AB Volvo, Skanska AB, Group. AB Custos, OK Petroleum, N. V. mauritz sahlin, Göteborg Koninklijke Sphinx and The Federation claes dahlbäck, Stockholm Born 1935. President and Group Chief of Swedish Industries. Born 1947. Board member since 1991. Executive. Board member since 1976. President Investor AB. Board member Saab-Scania AB, Investor Chairman Vin & Sprit AB. AB, Sandvik AB, The Federation of Board member ASEA AB, AB Astra, Swedish Industries and The Swedish Incentive AB, AB Electrolux, Stora Employers’ Confederation. Kopparbergs Bergslags AB (STORA), Shareholding in SKF: 46 492 plus 2 000 Saab-Scania AB, ABB Ltd. and Telefon warrants AB LM Ericsson (Ericsson). 50 Parent Company Board of Directors

anders sjöberg, Kungälv Deputy Board members michael treschow,Drottningholm Born 1935. Board member since 1992. Born 1943. Deputy board member since Professor. President of Chalmers lennart alverå, Göteborg 1992. University of Technology, Göteborg. Born 1952. Employee representative. President and Chief Executive Officer Board member Chalmers University of Deputy board member since 1987. Atlas Copco AB. Technology, Handelsbanken Västra Chairman Metalworkers’ Union, Board member Saab Automobile AB. Sverige and SSPA Maritime Consulting AB SKF, Göteborg. Shareholding in SKF: 800 AB. Shareholding in SKF: 20 stig blomberg, Bollebygd clemens karlsson, Lidköping Auditor Born 1935. Employee representative. Born 1934. Employee representative. Board member since 1993. Deputy board member since 1987. mats fredricson Chairman SIF (The Swedish Union of Board member SIF (The Swedish Union Arthur Andersen AB. Clerical and Technical Employees in of Clerical and Technical Employees in Industry), AB SKF, Göteborg. Industry), Lidköping Machine Tools AB. Shareholding in SKF: 500 Shareholding in SKF: 32 melker schörling, Lidingö marcus wallenberg, Stockholm Born 1947. Board member since 1993. Born 1956. Deputy board member since President and Group Chief Executive 1988. Skanska AB. Vice Chairman AB Astra and Saab-Scania Chairman Euroc AB, Securitas AB and AB. JM Byggnads och Fastighets AB. Board member Investor AB, Saab Board member Skanska AB, AB Custos, Automobile AB and Incentive AB. Assa Abloy AB and The Federation of Shareholding in SKF: 6 000 Swedish Industries. 51 Group organization

Group Chief Executive Mauritz Sahlin*

Finance & Information Systems Kaj Thorén Public Affairs Lars G Malmer Treasury Tore Bertilsson Corporate Planning Sten Malmström Legal Krister Peil Manufacturing & Development Rolf Jacobson Personnel & Quality Olle Ranäng Research Henning Wittmeyer

SKF International Bearing Divisions Peter Augustsson SKF North America Ray Langton

SKF Overseas Manufacturing Companies Peter Kaschner SKF Sales Companies Asia Pacific Dale Campkin-Smith

SKF Seals Ray Langton SKF Specialty Components Tommy H Karlsson

SKF Aerospace Ray Langton Ovako Steel Gunnar Gremlin

* from April 27, 1995, Peter Augustsson

52 Quality

Quality may involve something exciting such as a precision-manufactured ceramic bearing for the next generation of jet engines. It may also be something mundane, such as keeping a machine meticulously clean, so that the first trickle of oil can be interpreted as a warning signal. SKF has always been regarded as a hallmark of quality. But quality is not something to be taken for granted and, given the global competition now prevail- ing, leadership must constantly be defended, strengthened and renewed. As a consequence, the entire Group is, since more than a year, undergoing the most comprehensive process of change since the 1970s. By focusing on quality, SKF’s position as a world leader in bearings and seals shall be secured and widened. The tool being applied in these transition efforts is Total Quality Management, TQM.

SKF implements quality enhancement measures on an ongoing basis, such as through Quality Audit Systems’ annual quality reports and Total Preventive Maintenance. The latter SKF program has reduced the number of unplanned production stoppages by half since being introduced in 1988. The ISO 9000 certification program continues, with some 40 units now in compliance with this international standard, and another hundred to qualify within two years. The capacity of the certifying bodies is the limiting factor. Formerly, the term quality largely pertained to product quality. TQM means much more. TQM actually encom- passes all of the company’s vital functions – production, products, service, people, attitudes. Quite simply, it is nothing less than the creation of a new SKF corporate culture.

People most important People – the Group’s 42 000 employees – are the most vital parameter in this process. Accordingly, the attitude towards people also becomes fundamental. SKF’s stated position is that all employees want to do a good job, have a sense of professional pride and accept responsibility. If the right prerequisites for this are established, the necessary commitment and motivation to attain superior quality will be created. The overall goal of meeting increasing customer requirements and reducing costs is thereby attained. • Total quality is the firm foundation on which SKF now Corporate management must formulate these prerequi- stands. To ensure that this message is received and under- sites in their broadest context. A great deal depends on stood, all management meetings throughout the Group being able to manage through know-how and commitment, begin with “quality” matters. and by setting relevant demands. It is however just as important, when required, to be able to delegate authority • In a top-down strategy, the 10 to 15 fundamental business to others in the form of individual responsibility and free- processes are described, analyzed and adapted to the new dom of action within a given framework. requirements. These processes cut across many levels and In numerous ways, Group management has indicated the divisions, with the goal of thoroughly increasing effi- decisive importance of TQM for SKF. At the overall level, ciency. three important innovations have been introduced:

• Since people are central to quality work, a new manage- Attitude surveys ment function, Personnel and Quality, has been estab- During 1995, SKF will also conduct attitude surveys among lished. It is from here that TQM work is directed, as is all employees. This is being done primarily to enable man- Quality Assurance work, which measures the extent to agement groups at division and subsidiary level to assess which changes contribute to total quality. quality of their own management efforts.

53 Quality

Such surveys are relatively uncommon within the business However, in the reality of the industrial world, nothing is community. One of several possible explanations is the risk self-generating, as is well known. Accordingly, all SKF that negative attitudes may become self-reinforcing when employees are to receive quality know-how training at a published. But total quality is based, among other factors, cost of approximately SEK 150 m. At year-end 1994, 80 per- on straight-forward communication between management cent of the work force had undergone such training, with the and employees. Consequently, the survey results serve as a remainder to be completed during the first quarter of 1995. further control on how successfully the process of change is proceeding. Such surveys will continue on a recurring basis. Constant training In the TQM process, clear language is essential as a Moreover, training will be a constantly recurring aspect of means for creating prerequisites for improved communica- TQM work. The Group had previously allocated about two tions within the company. Another requirement is a reduc- percent of work time to training, which is in line with the tion in the number of management levels. As with most international standard. Now, however, the goal is for train- companies of this type, the company’s divisions and subsidi- ing to comprise four to five percent of work time. This rais- aries formerly had seven to eight levels. The goal of the ing of expertise shall take place throughout the Group and TQM process is to remove at least a couple of these. at all levels. SKF will recoup these costs many times over in However, good communications must also exist between the form of increased efficiency and improved quality. If individual employees. The two questions which must always things are done right from the beginning, the costs of “fixing be asked – Are we making the right things? Are we making mistakes” are avoided. them the right way? – must, primarily, be answered by each With TQM work, it is obviously important to involve the individual employee. But one becomes blind to the defects customer. The term “customer” is meant to encompass all of familiar surroundings. For this reason, one must be able internal and external receivers of goods or services pro- to rely on, and accept, that a co-worker is prepared to speak duced by SKF employees, including rolling bearings, ser- his mind. Such unrestricted communication is the basis for vice, telephone services or anything else. the necessary team spirit.

54 Quality

Closer relations with customers work-force participated actively and, by 1996, all will partic- In addition, relationships with external customers are to be ipate. cemented. Customer feed-back can be an important source In order to quickly demonstrate tangible changes, the of tangible impulses for SKF employees. When outside the Group set in motion a number of so-called Quick Start pro- work context, everyone is, in many respects, a customer and jects, usually two to three in each company. Most of these has, as such, experienced the frustration arising from goods projects are now complete, many with excellent results. being missing or defective – not to mention encountering lack of service-mindedness. Not just “a project” Accordingly, each plant and production channel must The development of the corporate culture is steadily pro- have one or more key customers with whom personal con- ceeding. When the work first began, it sometimes was tact is maintained. The customer is encouraged to visit SKF regarded as “a project.” and SKF employees to visit the customer, all in order to This attitude is now disappearing. Management, union form an insight into what they mean to each other. organizations and a constantly growing number of employ- Clearly, many of the goals set by Group management in ees demonstrate, through consistent, tangible measures, that autumn 1993 are ambitious, for example, that process qual- this is not a project but a continuous, ongoing process that is ity be raised so that only three to four components per mil- here to stay. lion produced are defective. SKF will attain this goal during Each goal is defined in time and, as soon as it has been 1996. achieved, the next goal must have already been clearly The costs of quality shortcomings, “money spent on fixing defined. mistakes,” are to be reduced by 50 percent during 1994/95, The ultimate cost of applying the TQM process remains above all through fewer rejects and customer complaints. an open question. However, SKF management is prepared The anticipated reduction of 25 percent during 1994 was to accept all costs where the return is greater than the initial achieved. All signs indicate that the time schedule will be expenditure and if the results are attainable within a reason- met. able period of time. In addition, all employees will be involved in quality- enhancement activities. At year-end 1994, one third of the

major quality awards/approvals received 1994

abb service caterpillar nissan alfa laval clarke-hurth nissan mexicana atlas copco tools conrail psa autolatina ford rockwell bell helicopter logan fenmac scania boeing mcdonnell douglas sncf british rail melco valeo bwb mercedes benz volvo westland helicopters

55 Shares and shareholders

Distribution of shares as per 31 December, 1994 London Geneva Zürich (1928) (1935) (1985) Stockholm Paris Basel New York (1916) (1929) (1985) (1985) A shares 49 256 332 • B shares 63 743 224 ••••••• Total 112 999 556 Year of introduction on respective stock exchange is indicated within brackets.

The designations A and B indicate the voting power of the share. An A share has one vote and a B share has one-thousandth of one vote. The SKF share is traded in the USA through the NASDAQ system via American Depositary Receipts (ADR).

Changes in share capital 1982–1994 Amount paid Share capital Number of shares SEK m SEK m in millions 1982 Bonus issue 1:4 1 350 27.0 1989 Split 4:1 1 350 108.0 1990 Conversion of debentures 62 1 412 113.0

Trading in SKF shares Number of shares Year Stockholm London Stockholm, SEK m 1990 13 845 000 10 226 000 1 727 1991 27 212 000 38 896 000 2 659 1992 44 497 000 81 900 000 4 064 1993 69 120 000 92 532 000 6 940 1994 94 423 000 99 666 000 13 129 Source: Stockholm Stock Exchange, London Stock Exchange

PRICE DEVELOPMENT OF THE SKF B SHARE Swedish price index according to Affärsvärlden Maximum and minimum purchase prices per month SEK SEK 200 200

180 180

160 160

140 140

120 120

100 100

80 80

60 60

40 40 1990 1991 1992 1993 1994

56 Shares and shareholders

Option certificates Financial objectives and dividend policy In 1990, AB SKF issued 11 000 000 option certificates. Each SKF’s overall financial objective is to provide shareholders option entitles the holder to subscribe for one new B share with a return that satisfies market expectations. Long-term, at the price of 190 Swedish kronor through June 30, 1995. this should exceed the risk-free interest rate by some percentage units. Convertible bonds SKF’s objective for solvency is 35 percent during an In May, 1992, AB SKF issued zero coupon convertible bonds economic cycle. amounting to 145 million ECU after an 8.75 percent dis- It is the Board’s view that approximately one third of net count. At full conversion, 7 260 021 B shares will be issued. income should be available for distribution as a share- (See note 23 – Convertible bonds.) holders’ dividend.

Share savings fund for employees SKF Allemansfond, a savings fund in which SKF employees in Sweden can save, was started in April 1984. Most of the means of the fund have been invested in SKF shares. On December 31, 1994, the SKF Allemansfond had 860 members and assets amounting to 50 million Swedish kronor.

Distribution of shareholding Number of shareholders Percent Number of shares Percent 1– 1 000 34 615 91.9 7 912 722 7.0 1 001– 10 000 2 591 6.9 6 896 240 6.1 10 001– 100 000 328 0.9 11 506 350 10.2 100 001– 124 0.3 86 684 244 76.7 37 658 100.0 112 999 556 100.0 Source: VPC AB’s public share register as of 1994-12-30

Ten largest shareholders Number of Number of In percent of In percent of shares votes share capital voting rights 1) Investor AB 12 562 244 12 562 244 11.1 25.5 2) Skanska AB 9 870 000 9 870 000 8.7 20.0 3) Export-Invest AB 2 392 808 2 392 808 2.1 4.9 4) Abu Dhabi Investment Authority 2 000 000 2 000 1.8 0.0 5) Fjärde Allmänna Pensionsfonden 1 976 800 1 976 800 1.7 4.0 6) Försäkringsbolaget SPP 1 975 336 1 583 728 1.7 3.2 7) Kammarkollegiet 1 225 372 1 225 372 1.1 2.5 8) AMF Pensionsförsäkrings AB 1 005 000 1 005 000 0.9 2.0 9) SEGA Schweizerische Effekten-Giro AG 915 916 915 916 0.8 1.9 10) Vanguard Group 870 000 870 0.8 0.0 30.7 64.0 Source: VPC AB’s public share register as of 1994-12-30 The proportion of institutional ownership is 58 percent.

Per-share data (Definitions see note 1) Swedish kronor/share 1988 1989 1990 1991 1992 1993 1994 Earnings per share 8.80 13.50 9.00 – 10.40 – 14.60 – 4.35 11.05 Dividend per A and B share 3.50 4.25 4.25 4.25 ––4.25 1) Total dividends in millions of Swedish kronor 378 459 480 480 ––480 Purchase price of B shares at year-end on the Stockholm Stock Exchange 99 157 66 94 74 132 122.50 Shareholders’ equity per share 91 101 108 91 79 80 87 Risk-bearing capital per share 103 116 126 107 92 80 89 Yield in percent (B) 3.5 2.7 6.4 4.5 ––3.5 P/E ratio, B 10.9 11.6 7.3 – 9.0 – 5.1 – 30.3 11.1 1) Dividend according to the Board’s proposed distribution of surplus. The above data has been adjusted to reflect the 1989 stock split and the conversion of debentures into shares in 1990. 57 Seven-year review of the SKF Group

Amounts in millions of Swedish kronor unless otherwise stated 1988 1989 1990 1991 1992 1993 1994

Income statements * Net sales ...... 21 248 25 066 27 766 26 302 26 649 29 200 33 273 Sweden ...... 1 042 1 143 1 137 969 1 463 1 415 1 837 Other operating income ...... 177 540 309 238 213 427 151 Operating expenses ...... –19 865 –23 002 –26 052 –26 596 –28 209 –29 376 –31 303 Operating income/loss...... 1 560 2 604 2 023 – 56 – 1 347 251 2 121 Financial income and expense – net...... – 41 – 129 – 165 – 165 – 592 – 766 – 304 Income/loss after financial income and expense ..... 1 519 2 475 1 858 – 221 – 1 939 – 515 1 817 Taxes ...... – 543 – 1 008 – 685 – 66 280 24 – 541 Equity in loss/income of associated companies ...... 37 78 – 133 – 907 ––– Income/loss after taxes ...... 1 013 1 545 1 040 – 1 194 – 1 659 – 491 1 276 Extraordinary expense – net of taxes ...... –––––52 – – Minority interest ...... – 34 – 32 – 26 17 7 – –28 Net income/loss ...... 979 1 513 1 014 – 1 177 – 1 704 – 491 1 248

Balance sheets Current financial assets ...... 3 611 3 417 3 812 3 823 3 075 2 692 2 356 Trade accounts receivable ...... 4 348 4 941 4 976 4 973 5 332 5 655 6 157 Inventories ...... 7 130 8 382 9 954 9 426 9 435 9 220 8 606 Other current assets ...... 672 662 931 1 126 1 050 1 187 1 360 Property, plant and equipment ...... 7 032 7 504 9 057 11 327 11 227 11 826 11 080 Other capital assets ...... 1 796 2 019 2 574 2 002 2 595 3 612 3 001 Total assets ...... 24 589 26 925 31 304 32 677 32 714 34 192 32 560 Short-term loans ...... 2 890 2 417 3 469 4 978 3 258 2 228 2 047 Other short-term liabilities...... 5 052 5 765 6 107 6 571 7 119 7 680 7 398 Long-term loans (including convertible loans) ...... 1 989 1 940 3 769 4 443 6 517 7 044 4 954 Other long-term liabilities ...... 4 461 5 213 5 564 6 189 6 777 8 104 8 145 Minory interest ...... 125 146 240 172 113 127 144 Shareholders’ equity ...... 10 072 11 444 12 155 10 324 8 930 9 009 9 872 Total liabilities and shareholders’ equity ...... 24 589 26 925 31 304 32 677 32 714 34 192 32 560

Key figures (in percentages unless otherwise stated) * Return on total assets ...... 8.8 11.9 8.0 1.9 – 2.6 2.3 7.8 Return on capital employed ...... 14.3 20.0 13.3 3.0 – 4.4 4.2 14.7 Return on shareholders’ equity ...... 10.1 14.0 8.5 – 10.3 – 17.5 – 5.6 13.3 Profit margin...... 10.0 12.3 8.7 2.2 – 3.1 2.7 8.0 Turnover of total assets, times...... 0.89 0.97 0.92 0.84 0.84 0.86 0.98 Share of risk-bearing capital...... 46.8 48.7 44.6 36.4 31.5 26.6 30.8 Solvency...... 41.5 43.0 39.6 35.9 27.6 26.7 30.8 Earnings/loss per share, kronor...... 8.80 13.50 9.00 – 10.40 – 14.60 – 4.35 11.05 Shareholders’ equity per share, kronor ...... 91 101 108 91 79 80 87

Investments and employees Additions to property, plant and equipment ...... 1 119 1 290 1 589 1 778 1 121 933 1 356 Sweden ...... 88 76 98 129 140 238 293 Research and development expenses ...... 414 465 534 538 473 552 542 Average number of employees * ...... 43 331 46 667 49 305 45 285 46 672 39 439 40 072 Sweden ...... 5 125 5 305 4 996 4 500 6 871 5 975 6 282 Number of employees registered at December 31 .... 47 178 49 413 53 995 52 469 45 151 41 394 41 732 Salaries, wages and social charges ...... 8 468 9 658 11 142 11 279 11 845 12 277 12 869 Sweden ...... 1 318 1 438 1 519 1 488 2 377 1 979 2 117

Product areas ** Net sales Bearings and seals ** ...... 20 115 23 754 26 476 24 347 22 690 27 199 30 873 Tools ...... 1 165 1 246 1 332 1 978 1 731 – – Special steels ...... ––––3 076 2 891 3 758 Other and eliminations **...... – 32 66 – 42 – 23 – 848 – 890 – 1 358 21 248 25 066 27 766 26 302 26 649 29 200 33 273 Income/loss after financial income and expense Bearings and seals ** ...... 1 399 2 404 1 854 – 135 – 1 363 – 167 1 617 Tools ...... 142 127 40 – 103 – 117 – – Special steels ...... ––––– 569 – 351 188 Other and eliminations **...... – 22 – 56 – 36 17 110 3 12 1 519 2 475 1 858 – 221 – 1 939 – 515 1 817

* For definitions, see note 1. Items no longer to be accounted for as extraordinary have been reclassified. ** Previously published amounts from 1988 through 1991 have been restated to conform to the current Group structure.

58 Graphic Design/Production: Wezäta Information AB, Gothenburg. Printed in Sweden 1995.